The outlook for transaction activity in private credit for 2025 has brightened, market participants say. But the ability to source assets is top of mind for next year in what’s become a crowded playing field within the asset class, marked by a growing number of major partnerships.
PitchBook LCD’s inaugural quarterly Global Private Credit Survey, published last month, found “sourcing assets” and “geopolitical uncertainties” were leading concerns for private credit players next year in response to a question on expected headwinds in the coming months. Respondents included credit providers, banks, private equity shops and advisory firms from the US and Europe.
Driving this trend is demand from private equity investors to return capital. This demand is expected to boost M&A and LBO deal activity in 2025.
“The backlog for the first quarter, as we sit here in early December, is as high as we’ve seen in a while coming into a new year. More evidence that unrealized exits are starting to come to market,” said Randy Schwimmer, vice chairman of Churchill Asset Management.
“These new deals are planes on the runway waiting to take off. And there are planes looking to land that have been circling the airport for a while,” said Schwimmer.
Deal volume
Last year, the private credit market captured deal flow handily from the broadly syndicated loan (BSL) market. The seemingly endless one-directional move that dominated in 2023, with deals migrating from the BSL market into private credit, stopped in its tracks in the first quarter of 2024 when the BSL market reopened for lower-rated credits. The lower spreads available in the BSL market proved difficult to ignore.
But private credit lenders are not giving up the fight. They are looking at near-term maturities in the BSL market for opportunities.
Interest-rate cuts have been another hallmark of 2024. Debt issuers in both markets have been able to lock in lower borrowing costs, alleviating the strain on levered companies. These lower borrowing costs are expected to spur deal activity, brightening prospects for transaction volumes in 2025.
“We’ve seen a leveling off of inflation. We’ve seen interest rates actually be a nice tailwind. I think the environment is going to be more supportive than I’ve seen it in the last few years,” said Spyro Alexopoulos, co-head of direct lending at Golub Capital.
Many market participants have expressed optimism that a second Trump term will further “grease the skids” for M&A through policies promoting less regulation, tax cuts and relaxed antitrust oversight. The removal of “election uncertainty” was cited as a win for improved deal activity.
“We certainly think the first half of next year is going to be busy. We view the second half as more of a question mark because of the potential for inflation to flare up again,” said Michael Ewald, Global Head of Bain Capital’s Private Credit Group.
It makes sense then, if M&A activity picks up, the volume of dividend and repricing activity will likely decline. Repricing existing deals and paying out dividends are usually prominent when other types of deal making are quiet.
“It’s possible that 2025 is a more predictable environment than it has been over the past couple of years. The economy appears to be in good shape, and rates should come down. The market is more accommodative to risk-on,” said Tom Newberry, Sound Point’s chief credit officer and portfolio manager.
Newberry added that he doesn’t expect to see a dramatic pick-up in private credit defaults, but rather thinks they will be more or less “sideways.”
“There is some stress in portfolios, and there has been quite a bit of kicking the ball down the road with some situations still percolating. But I don’t expect the level of defaults to be crazy,” Newberry said.
In one closely watched measure of private credit defaults, Proskauer said the overall private credit default rate in the third quarter increased to 1.95%, from 1.41% in the year-ago equivalent period, and the default rate for borrowers in the core part of the market rose to 3% in the latest period. That rate trailed the 4.21% dual-track default rate (including distressed exchanges) of syndicated loans in the Morningstar LSTA US Leveraged Loan Index as of Sept. 30.
In contrast to many market participants, Bank of America has forecast the private credit default rate rising as high as 4% in 2025, approaching or converging with default statistics for public credit.
“We think that a lot of 2021 vintage deals, which are creating the overhang in these portfolios, will have to reach some sort of their end game over the next one to two years, forcing some event-driven activity in the private credit space,” said Neha Khoda, head of global loan strategy at Bank of America Global Research.
The link between the competitive landscape, activity levels and portfolio stress will be in focus next year.
“As a new entrant, the odds are stacked against you right now as your only option for deployment is in overly competitive auctions,” said Tyler Gately, head of North America private credit at Barings, in response to a question about what to expect in private credit in 2025.
“Between that dynamic and the gradual deterioration of current portfolios due to overly aggressive behavior in recent years, we think returns are inevitably going to start diverging. In private markets you are often able to kick the can down the road, but it doesn’t work in perpetuity, so sooner or later conservatism wins,” Gately said.
Partnerships: More to come
In December, BlackRock announced it would acquire HPS Investment Partners in a $12 billion all-stock transaction, combining their private credit capabilities into a new $220 billion private financing business. Banks have moved to partner with private credit firms that have origination capabilities in order to be able to offer a full suite of products to borrower clients.
“You will continue to see the players that have scale take market share over time. As PE firms consolidate, our premise is that they are going to need scaled lenders to meet their needs. That trend will continue. Not just in 2025, but as a multi-year phenomenon,” said Golub’s Alexopoulos.
“We’re still in the early innings with consolidation,” said Barings’ Gately.
Indeed, 2024 saw the announcements of Citigroup’s $25 billion private credit partnership with Apollo, Webster Bank’s venture with Marathon and Wells Fargo’s $5 billion partnership with Centerbridge Partners. JPMorgan Chase and Co. announced in October it will allow a select group of private credit lenders to invest side-by-side on its deals in exchange for fees.
“The dam has really broken in working with the banking system,” said Dan Sullivan, financial markets and real estate assurance leader at PwC US. “I use the term capitulation. Banks said, ‘Can I do it myself? Do I really have to partner?’ But now they’re recognizing that this model of putting assets in a place with lower liquidity risk is a better model.”
“I absolutely think it’s likely we see more announcements over the coming months,” said Sullivan.
The shifting nature of the relationship between private lenders and banks comes as private credit looks to make good on its aspirations to finance even more of the credit landscape. Large lenders describe a $40 trillion total addressable market for private credit, encompassing asset-backed finance opportunities, for starters.
This push into new asset classes, away from the sponsor finance that has been the bread and butter of private credit firms, is expected to continue in 2025.
“We expect private credit could tap into as much as $3 trillion in assets moving off bank balance sheets in the next five years, including residential mortgages, higher-risk commercial real estate, project finance, and asset-backed finance like auto loans, aircraft leasing and student loans,” Moody’s said in a Dec. 5 outlook report for 2025.
Insurance companies are expected to drive demand for private credit investments, especially higher-quality assets.
Alongside the parade of partnerships between banks and private credit, private credit lenders are pairing up with insurance companies such as through the creation of Blackstone Credit and Insurance (BXCI). Apollo Global Management, Brookfield and KKR & Co. have also each bought all or part of insurance companies.
Insurers bring to the market large pools of illiquid capital, serving as fodder in the market’s “plan to finance everything.” In 2025, private credit providers will also make an attempt to raise more capital from retail investors, as lenders launch private credit ETFs and look to attract investments from 401k retirement accounts.
Covenant line in the sand: $50M in EBITDA
PitchBook LCD’s inaugural quarterly Global Private Credit Survey found that private credit spreads are expected to tighten next year even after new-issue spreads declined significantly in 2024. Covenants will also be under watch.
“The fast-growing private credit market is being squeezed by narrowing credit spreads and increasing competition from banks even as the 2025 outlook for deployment brightens,” S&P Global Ratings wrote in its 2025 outlook. “Heightened competition between bank and nonbank lenders is tightening credit spreads, eating into returns for private credit investors.”
At a recent Bloomberg Intelligence panel, Moody’s Head of Private Credit Ana Arsov put it more bluntly.
“Profitability is going to go down,” Arsov said of the coming year. “It’s peaked in the second quarter of this year, and the third quarter numbers show maybe 30 basis points less.”
PitchBook LCD’s Q4 Global Private Credit Survey found that the majority of survey respondents expect covenants to stay the same on lower middle market deals, defined as loans to companies generating $5-30 million in annual EBITDA. Erosion of covenants has been most extreme for the upper part of the middle market that competes with the BSL market.
“The line used to be $100 million [of EBITDA] or below, there’d be a covenant. Then it was $75 million or below. Then it got to $50 million or below. The line’s held pretty firmly for a number of years now, but it’s sort of an unofficial line. You’ll find the occasional lender being aggressive and offering [cov-lite] below that,” said Bain Capital’s Ewald.
https://pitchbook.com/news/articles/2025-us-private-credit-outlook-more-m-a-larger-lenders-bigger-market
