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Abu Dhabi sovereign investor Mubadala is making another foray into private credit investing with a roughly $2.5 billion joint venture.

The $284 billion sovereign wealth fund, partnered with investment firm Alpha Dhabi, formed a joint venture to co-invest up to 9 billion UAE dirham (about $2.5 billion) in credit opportunities over the next five years, according to a joint statement on Thursday. Mubadala will hold 80% of the venture, and Alpha Dhabi will control the remaining 20%.

The group will leverage Mubadala's relationship with Apollo Global Management to access "high quality private credit investment opportunities," the statement said.

The joint venture partners said private credit is an asset class that can "generate strong returns while providing effective downside protection" in the current market environment, characterized by "rising rates and inflationary pressures."

The move is the latest in a series by Mubadala to expand its presence in the private credit market. The fund is the lead backer of Apollo's $12 billion direct lending platform launched in 2020. It also formed a $3.5 billion private credit partnership with Barings in 2020 to target the European middle market. Last year, Mubadala and KKR co-invested in performing private credit opportunities in the Asia Pacific region.

The new partnership comes as investors hunting for high-yielding assets pour billions of dollars into private credit, attracted by the asset class's ability to generate higher returns over public securities in a rising-rate environment.

The changes in market conditions will bring about an asset-allocation shift from equities into alternative assets like private credit, some investors anticipate.

Global investors are considering shifting money out of equities and allocating it into alternatives and credit assets, said John Zito, partner and deputy CIO of credit at Apollo, in an interview with Bloomberg TV in October.

"Almost every investor that I have met with in the last ten years has been trying to get out of credit. … You flash forward to today, … every single global investor is trying to figure out the complete opposite of the last 15 years: How do I get money out of equities, out of private, into credit, into alternatives, into direct," he said.

"It's likely that that's going to be a big asset allocation pivot, which is a big regime shift for the markets over the last 14, 15 years," he added.

A group of KKR's analysts also suggested in a midyear outlook report that investors increase allocations to alternative investments, including private credit, real estate and infrastructure, as they navigate through a "new macroeconomic regime" in 2023.

Still, whether the promising outlook for private credit will help bolster capital raising for private debt managers remains in doubt.

Fundraising among private debt managers slowed last year, according to PitchBook's data through Q3 2022.

Global private debt managers closed 105 funds totaling $130.5 billion during the first three quarters of 2022. If that pace is sustained, last year's fundraising pace will be well below 2021, when global private debt funds hauled in a total of $228 billion across 303 vehicles.

Featured image of Mubadala CEO Khaldoon Khalifa Al Mubarak by Matt McNulty/Getty Images

This article originally appeared on PitchBook News