Investment Insights Beyond the Roar May 2026

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May 2026 4 minute read Christopher A. Sheldon Tal Reback Sign up to subscribe to the latest insights from KKR For nearly seven centuries, the Roman arena stood at the center of public life. It was not merely a venue for combat but became an economy of perception. Gladiators were classified, trained, and matched according to a system far more deliberate than the spectacle suggested. Some were heavily armored, built for endurance. Others were agile and lightly equipped, designed to dazzle but often structurally exposed. The crowd rarely understood the distinction – a reminder of how powerful perception versus reality can be. What earned applause was typically what appeared dominant in the moment, but not always what was engineered to last. Contrary to popular belief (and Russell Crowe’s best efforts), most bouts were carefully managed. The system was designed to preserve its most valuable assets, and it was done with intention. The principle of designing for durability rather than spectacle is not unique to ancient Rome. As we highlighted in our 2026 outlook, CTRL + ALT + CREDIT, we argued that outcomes in the credit markets this year will be designed, not discovered, and that the market would increasingly reward selectivity over reach. Our thesis has not changed. Today’s credit markets carry more than a passing resemblance to the dynamic of the Roman arena in our view. Sign up to subscribe to the latest insights from KKR A lot of capital, much of it through the wealth channel, has flowed toward what has been most visible, most accessible, and most immediately rewarding, particularly direct lending. Strong income, stable performance, and growing investor access have drawn significant flows into areas that appear to deliver both yield and consistency. The crowd, in effect, is cheering. But as in any arena where perception and structure coexist, what wins applause is not always what proves most resilient when conditions shift. Today, there are two dynamics at play that determine a gladiator’s fate in the arena: the fundamentals themselves, and the gap between those fundamentals and investors’ perception of them. As we reflect on the first quarter of 2026, the distinction between spectacle and substance has become harder to ignore, and increasingly important to understand. That is not to say this tension is new. We would argue it has been building for some time. But for many, Q1 was the quarter it became impossible to ignore. At the start of the year, we emphasized portfolio construction would be a defining differentiator and that the margin for error was narrowing. If anything, the first 90 days of the year reinforced that conviction with more urgency. The macro backdrop has grown more complicated, not less. Geopolitical tensions, most notably the evolving conflict involving Iran, have moved from tail risk to central market driver, roiling energy prices and reshaping inflation expectations in real time. The fervor around AI’s anticipated disruption continues to reverberate across an increasingly wide range of sectors, compressing equity valuations for businesses once considered structurally durable and often focusing more concern about the credit underpinning them. And the narrative around private credit, which had been building beneath the surface for over a year, broke into the open in a way that demanded attention from everyone. Against that backdrop, it is worth stepping back to acknowledge something fundamental. The extension of credit is one of the oldest practices in civilization. The infrastructure has changed, the instruments have multiplied, and the participants have diversified, but the core function has endured: connecting capital with opportunity, and pricing risk along the way. In 1989, the leveraged finance market was predominantly high yield bonds and totaled approximately $189 billion. Today, U.S. high yield alone stands at roughly $1.5 trillion, a figure that has been largely flat for several years. We think that

The first quarter of 2026 tested the resolve of credit markets in ways that felt both sudden and, for those paying attention, desired. What had been a relatively constructive start to the year, with disinflation progressing, a pent-up M&A pipeline, and rate easing expectations building, gave way to a more complex and less forgiving environment. In February, Anthropic’s release of Claude Cowork ignited a global selloff in publicly traded software and IT companies, fueling investor fears that AI-driven automation would undermine the subscription-based revenue models that had made software the darling of many markets. Shares of Salesforce, Oracle, Intuit, Adobe, and Workday were among those punished. The narrative quickly extended into credit, where the absence of hard assets in software borrowers’ capital structure combined with the use of leverage in recent vintages, drove an even more pronounced repricing in the debt of highly leveraged software borrowers across both public and private markets. That shock collided with an already shifting macro backdrop: the escalating conflict involving Iran pushed oil prices above $100 a barrel, the disruption to the Strait of Hormuz introduced supply risks extending well beyond energy, and what had previously been a higher-end energy scenario became effectively the base case. EXHIBIT 1: Global Credit Markets Endured a Tough Q1, But Have Since Snapped Back (Ex-CCC Leveraged Loans) Against that backdrop, both the U.S. and European leveraged loan market slipped into negative territory for Q1, posting -0.55% loss and -1.05%1 loss respectively. This was the weakest first-quarter reading for the U.S. since the COVID-driven sell off in March 2020 when the leveraged loan index fell 13%. U.S. and European high yield also posted losses for the quarter, returning -0.55% and -1.72%2 respectively, with high yield funds experiencing one of the worst monthly outflows in March before recovering modestly in April. Repricings dried up in March making it the first month without a single repricing since June 2023 outside of the Liberation Day disruption. As we pen this note, the global selloff has proven short-lived, but the macro backdrop is shifting again. Global bond markets sold off sharply on May 14-15, with 10-year Treasury yields rising to 4.58% and the 30-year Treasury topping 5.1%, their highest level in a year, and Japan’s 30-year yield touching 4% for the first time since those bonds were issued in 19993. April CPI came in at 3.8%, above consensus, with energy the primary driver, but the more concerning signal was the reemergence of sticky services inflation with core CPI rising to 2.8%. As Henry McVey and our global macro team have noted, acute energy inflation may moderate but services inflation will be harder to unwind. All the while Credit markets have snapped back from the Q1 lows, driven in no small part by the same rules-based and technical capital flows we discuss later in this note, even as the rate backdrop grows more complex. Valuations remain largely unchanged despite elevated uncertainty, indicating that little additional risk premium is currently being priced in for quality assets. Overall, deteriorating investor sentiment was a defining theme of the quarter, and it predated the software selloff, even as that selloff deepened it. But as we have noted in prior letters, markets that appear uniformly stressed on the surface often tell a more nuanced story underneath. You have heard us say before: the same yield does not mean same risk. The same asset class does not mean the same resilience. The same strategy does not mean the same portfolio construction. In a market like this one, that distinction is key to the equation. The crowd saw a quarter of noise and reacted accordingly. But underneath that noise, the market was doing what markets are supposed to do: repricing risk, rewarding quality, and testing who was prepared. EXHIBIT 2 U.S. Leveraged Loan Market Experience First Negative Quart