February 12, 2025

Private Credit Markets – 2024 in Review & Outlook for 2025

2024 REVIEW

A STRONG YEAR FOR RISK ASSETS

2024 was another positive year for risk assets, with the U.S. stock market leading the way. The S&P 500 and Nasdaq both posted impressive 25% gains¹, reinforcing strong investor sentiment.

In fixed income, Global High Yield and U.S. High Yield bonds delivered solid returns of 9% and 8%, respectively, even as the Global Aggregate Bond Index ended the year in negative territory¹.

Commodities saw divergent performance, with gold rallying as an inflation hedge. Natural gas surged due to a fundamental supply-demand imbalance—a notable move given that crude oil declined during the same period. Additionally, Bitcoin reached an all-time high, marking another milestone in its evolution as a mainstream asset class.

MONETARY POLICY SHIFT: THE FED PIVOT

One of the most significant market catalysts in 2024 was the Federal Reserve’s shift from a rate-hiking cycle to rate cuts. After determining that significant progress had been made on inflation, the Fed:

• Lowered interest rates by 25 basis points at its final meeting of the year².
• Cut rates by a total of 100 basis points in 2024².
• Signaled a slower pace of cuts in 2025 as inflation risks remain².

This shift in policy provided tailwinds for equities, high-yield credit, and alternative assets, contributing to strong market performance.

GLOBAL GROWTH: A THIRD YEAR OF SLOWING EXPANSION

The global economy grew by 2.6% in 2024, marking the third consecutive year of growth below pre-pandemic levels (which averaged 3.2% between 2015 and 2019)³.

A key driver of economic resilience was private consumption, which expanded by 4%, significantly outpacing total income growth of 2.6%³. However, this trend may not be sustainable in 2025.

Looking ahead, global inflation is expected to continue its gradual decline, but risks remain:

• Trade protectionism and geopolitical tensions could lead to supply chain disruptions.
• Wage pressures and sticky services inflation may complicate the Fed’s path forward.

PRIVATE CREDIT FUNDRAISING HITS RECORD HIGHS, BUT MARKET CONCENTRATION GROWS

Private credit continued its strong momentum in 2024, finishing the year with $209 billion in final closes—a 5% increase over 2023⁴, making it another blockbuster fundraising year for the asset class.

Despite this record-breaking capital raise, a growing trend is emerging: capital is increasingly concentrated in a handful of mega-funds. In 2024, five private credit funds each raised $10 billion or more, accounting for $89 billion combined—which represented two-thirds of all direct lending fundraising and over 40% of total private credit fundraising⁴.

This capital concentration trend has created a barbell effect, where the largest funds continue to scale, competing for big-ticket, low-spread deals, while niche and lower middle market lenders maintain pricing power and stronger deal terms.

This backdrop suggests that the Fed will have to carefully balance its response to economic conditions, avoiding both overtightening and reigniting inflation.

OUTLOOK FOR 2025

LABOR MARKET & FEDERAL RESERVE CHALLENGES IN 2025

The U.S. labor market is expected to decelerate further in 2025, with job growth slowing from the strong post-pandemic rebound. Key trends include:

• Historically strong labor force growth is unlikely to continue, creating a drag on potential GDP expansion.
• Slower labor demand combined with persistent inflation puts the Fed in a difficult position.
• The central bank must also navigate risks from potential tariff hikes, which could increase consumer prices and complicate future rate decisions.

PRIVATE CREDIT: RESILIENT AND A STABLE ALLOCATION FOR 2025

The asset class remains a highly attractive investment opportunity, offering yield, potential for downside protection, and diversification in a more uncertain macroeconomic environment.

There are a few possible trends to look out for in 2025:

1.  Capital allocations to direct lending expected to remain strong

Investor appetite for private credit remains robust heading into 2025, with three-quarters of Limited Partners (LPs) planning to allocate further to direct lending.

However, while demand for private credit remains high, the flow of capital increasingly favoring the largest, most established firms, leaving fewer opportunities for mid-sized and emerging managers.

In contrast, the lower middle market remains an attractive place for specialized lenders that can source deals outside of the highly competitive mega-deal landscape.

2.  Spread compression in large deals vs. attractive pricing in lower middle market

The theme of spread compression in large deals was one of the defining challenges of 2024, and it is likely to continue in 2025.

• Mega-Fund Driven Competition: The influx of capital into large-cap direct lending has driven significant spread tightening, with some unitranche loans pricing as low as S+450.
• Banks Regaining Market Share: Traditional banks have re-entered the leveraged loan market more aggressively, increasing competition for deals $50M+ EBITDA, further squeezing private credit returns.

In contrast, lower middle market deals ($5M–$30M EBITDA) continue to offer spread premiums, with most deals pricing above S+500. Additionally, lenders in this space retain stronger covenant protections, reducing downside risk.

This dynamic makes the lower middle market a much more attractive place to allocate capital in 2025, where lenders can still command strong pricing and maintain structural discipline. environment.

3.  M&A activity should rebound, driving private credit demand

One of the biggest tailwinds for private credit in 2025 could be a potential resurgence in M&A activity.

• Private equity firms have a backlog of portfolio companies ready for exits, but 2024’s uncertain macro environment delayed many transactions.
• With interest rates stabilizing and public market valuations improving, deal flow should pick up, providing strong opportunities for direct lenders.

While large sponsor-backed deals will remain highly competitive, we believe that lower middle market transactions will continue to provide a more stable and profitable lending.

4.  Market concentration: why we believe that niche lenders have an advantage

As mega-funds dominate fundraising, fewer new private credit managers are launching. This means that smaller, specialized lenders that can source proprietary deals will be in a prime position to capitalize on market inefficiencies.

LPs remain interested in specialty finance and opportunistic credit strategies, but allocations are increasingly being concentrated in established players. This makes it more difficult for mid-sized and emerging managers to compete unless they are focused on niche, high-value lending opportunities—a key advantage for lower middle market lenders.

THE BEST RISK-ADJUSTED RETURNS WILL BE IN THE LOWER MIDDLE MARKET

While private credit remains a strong asset class, large direct lending deals are becoming more competitive, lower yielding, and structurally weaker.

In contrast, the lower middle market offers better return potential, stronger loan structures, and reduced competition from banks and mega-funds.

For investors looking to deploy capital in 2025, the most attractive risk-adjusted opportunities will be in direct lending to companies with $5M–$30M of EBITDA, where pricing remains firm, covenants are intact, and lender protections remain robust.

In a year where capital concentration is favoring the biggest players, niche lenders in the lower middle market will have a clear edge in generating alpha.

CONCLUSION

2024 was a year of strong risk asset performance, a Fed pivot to rate cuts, and a global economy still growing but at a slower pace. Looking ahead to 2025, key themes to watch include:

• The Fed’s ability to balance rate cuts against inflation risks.
• The impact of trade protectionism and wage pressures on global inflation.
• Slowing labor market dynamics and their effect on economic growth.
• The continued expansion of private credit, with lower middle market direct lending remaining a stable allocation choice.

With these factors in play, 2025 will require a more nuanced approach to risk-taking, as markets digest shifting monetary policy, labor market adjustments, and global economic uncertainties.

Sources:

1. Bloomberg.
2. FED.
3. World Economic Forum.
4. Preqin, PitchBook Data, Inc