January 16, 2026
Private Credit Markets & Beyond – 2025 Year in Review & 2026 Outlook
Well, who would have thought it. 2025 evolved to be a year of resilience for risk assets. Despite macro volatility and policy uncertainty, global equities posted double-digit gains, credit markets delivered strong returns with spreads near historic tights, and commodities—especially precious metals—surged to record highs.
Private credit continued to offer compelling yield premiums and structural protections, making it a standout allocation for disciplined investors.
MACRO BACKDROP: 2025 REVIEW
The macro narrative began with elevated rates and tightening financial conditions carried over from late‑2024, but the tone shifted quarter by quarter as the policy mix—trade, fiscal, and monetary—recalibrated with uneven effects on growth, inflation, and market psychology.
Through it all, risk assets repeatedly absorbed headline shocks, with investors leaning into carry and attractive all‑in yields, even as spreads hovered near cycle tights and the margin for error narrowed.
The year opened with a surge of executive action and the early scaffolding of a ‘trade‑as‑security’ framework, setting the stage for tariff escalations that would culminate in April’s ‘Liberation Day.’ Market reactions oscillated between optimism about deregulation and tax policy, and caution over stagflation risks as tariff threats broadened to multiple partners. While labor data remained resilient into late winter, the distribution of macro outcomes widened: investors began to hedge for simultaneous pressures—cooling growth and firm price levels—even as the Federal Reserve held its policy rate steady and reiterated data dependence.
April’s tariff shock was the year’s first true test of market nerves. Equities registered the steepest weekly decline since the pandemic, Treasury yields whipsawed, and credit spreads gapped wider before retracing as volatility receded. By mid‑year, however, the Fed continued to signal patience, resisting premature easing against the backdrop of sticky core inflation and a labor market that was beginning to soften at the margin.
The twelve‑day Middle East flare‑up in June, with attendant energy price spikes, reinforced how event risk could be treated as episodic rather than regime‑changing; markets recalibrated quickly as de‑escalation took hold and oil retraced.
Through Q2, the policy interplay of tariffs, fiscal messaging, and cautious monetary posture left markets trading a narrow path: carry remained attractive, but underlying fundamentals—especially for lower‑quality credits and rate‑sensitive pockets of the economy—demanded tighter risk control.
The inflection arrived in Q3. With unemployment edging up and payroll momentum slowing, the Federal Reserve cut the policy rate by 25 bp in September—the first step in a gradual pivot toward accommodation as labor conditions took precedence over lingering inflation risks. This move, telegraphed over the summer, was modest in size but meaningful in signal: policy was now oriented toward cushioning growth, even as the committee remained divided on how far and how fast to proceed.
The cut supported risk sentiment, especially in rate‑sensitive sectors, and helped extend the year’s technical tailwinds—light net supply, persistent demand for income, and an investor base increasingly comfortable with tight spread regimes—while the Fed’s forward guidance held the door open to additional easing into year‑end.
October and November layered on a different kind of uncertainty. The longest U.S. government shutdown on record disrupted data flow and heightened focus on central‑bank independence and funding‑market plumbing. Chair Powell’s tone oscillated—from hawkish caution to a more dovish posture ahead of December—while the Fed announced the end of quantitative tightening effective December 1, a decision that acknowledged both market functioning and the evolving balance of risks.
By late November and into December, easing expectations were once again in the ascendant, and with the September cut already in place, the broader policy stance had shifted to ‘gradual support,’ consistent with a softening labor market and inflation that had moderated but remained above target.
Across the Atlantic and globally, the macro context rhymed with the U.S.: growth proved more resilient than feared, inflation moderated, and central banks steered toward slower, steadier easing cycles.
In aggregate, this backdrop favored credit demand—curves steepened from deeply inverted levels, real rates remained elevated versus the post‑GFC norm, and carry-dominated total‑return math. Yet valuation tightness left public credit exposed to any deterioration in technicals or macro sentiment
Strategists framed the year as one where the economy and technicals were ‘not in a terrible place,’ but where spreads, by virtue of their levels, required either benign volatility or a positive growth surprise to avoid a drift wider. The base case into 2025 remained one of small underweights, carry via volatility‑selling rather than delta‑one risk, and vigilance on geopolitical and fiscal catalysts that could tip markets from compression to decompression.
In summary, 2025’s macro ledger reads as a transitional year: trade policy shocks, episodic geopolitical spikes, and a historic government shutdown were countered by steady, if uneven, monetary recalibration and a labor market that weakened enough to justify measured easing but not enough to trigger a credit‑cycle relapse. Attractive all‑in yields and strong technicals helped credit deliver solid total returns, yet the year ended with spreads near cycle tights and fundamentals beginning to soften at the margin—especially in lower quality cohorts—setting a prudent tone for 2026.
RISK ASSET PERFORMANCE AND MARKET DYNAMICS IN 2025
The year began with investors leaning into attractive all‑in yields and a broad appetite for risk, and that posture held through repeated headline shocks—executive‑order blitzes, tariff threats, and episodic geopolitical flare‑ups. Leadership remained concentrated in large‑cap technology and AI‑linked names early on, but the rally broadened as the year progressed: cyclicals, small and mid‑caps participated, and Europe posted modest but steady gains while emerging markets were more uneven, reflecting currency volatility and pockets of weaker growth.
The “Liberation Day” tariff episode in April delivered the sharpest equity drawdown of the year, yet the retracement was just as swift. By mid‑year, the market was back to rewarding durable earnings and balance‑sheet strength over headline sensitivity.
Into Q3, the Fed’s first 25 bp cut helped rate‑sensitive segments and extended the technical tailwind. Late‑year data vacuums during the shutdown posed a different challenge, but once resolved, equities resumed their upward grind.
The year closed with U.S. equities up solidly and global equities delivering another double‑digit print, a result achieved not by a single narrative but by markets repeatedly normalizing after policy‑induced volatility.
The S&P 500 finished the year up 17.7%, while the Nasdaq Composite outperformed with a gain of over 23%, driven by the continued strength in technology and AI-related sectors.1
Internationally, the MSCI EAFE index (tracking developed markets outside the U.S. and Canada) returned 18.4%, slightly ahead of the S&P 500 for the first time since 2017. The MSCI Emerging Markets Index posted a more modest gain of around 10%, weighed down by currency volatility and uneven regional growth.1 This relative outperformance by international developed markets was a notable shift from the prior years, reflecting both sector rotation and the impact of global policy normalization.
Currencies reflected the market’s tussle between policy shock and normalization. The dollar saw periods of safe-haven demand during tariff and shutdown headlines, but ultimately ended the year little changed as the Fed’s measured pivot toward easing and the end of quantitative tightening contributed to a more benign rates backdrop.
EM currencies tended to fare better in risk‑on interludes and weaker in tariff‑intensified stretches; Europe’s currency moves were more policy‑rate‑path driven.
Commodities told an uneven tale. Energy led the mid‑year headlines: the Twelve‑Day War between Israel and Iran forced a sprint higher in crude, only to retrace as ceasefire talks took hold and the market quickly treated the spike as episodic rather than regime‑changing.
Industrial metals lived under the shadow of softer Chinese activity and supply‑chain realignments. Copper’s demand from EVs and data‑center infrastructure was a notable support, but not enough to deliver a unilateral surge across the complex. The standout, decisively, was precious metals: gold and silver broke higher—gold repeatedly setting new highs—underpinned by central‑bank buying, inflation hedging, and persistent geopolitical risk.
Into year‑end, energy softened on surplus expectations and moderating demand while precious metals’ bid endured, a pattern that neatly captured the year’s “policy shock, then normalization” rhythm with a risk‑hedge premium layered on top.
Credit markets delivered another year of strong total returns, but with spreads that told a story of resilience and caution. Investment grade (IG) spreads began the year near 82 basis points, hovered at or near multidecade tights for much of the year, and ended virtually unchanged, tightening by just 1 bp to 81 bps. High yield (HY) spreads started at 292 bps, widened to over 350 bps during the April tariff shock, then retraced to finish the year at 299 bps, only 7 bps wider than where they began.2
The April tariff shock and the government shutdown in October and November were the main sources of spread volatility, but both proved temporary as the Fed’s September cut and subsequent policy posture re‑centered the market on carry and technicals.
Loans delivered another carry‑driven year, with repricing activity continuing to grind coupons tighter. Index returns remained mid‑single‑digit as dollar prices held in a narrow band for much of 2025. The market’s center of gravity stayed anchored in single‑B exposure, with B2/B3 paper preferred where discounts remained available. Collateralized Loan Obligation (CLO) demand was robust.
Across public markets in 2025, resilience and rotation were the constants. Equities absorbed policy shocks and resumed leadership; FX transmitted those shocks without redefining the regime; commodities split between episodic energy spikes and a persistent precious‑metals bid; and credit delivered on carry with spreads tight enough to keep late‑cycle risk management squarely in focus.
PRIVATE CREDIT: EVOLUTION, RESILIENCE, AND MARKET STRUCTURE IN 2025
Private credit’s journey through 2025 was defined by its ability to adapt and thrive amid shifting macro, policy, and technical crosscurrents.
The year began with sponsors and borrowers increasingly turning to private credit for flexibility and reliability, especially as public markets contended with policy shocks and episodic volatility. The lower middle market (LMM) stood out as a resilient haven, offering premium yields and robust structural protections, while the broader private credit landscape navigated both opportunities and challenges.
Deal flow in private credit was strongest in sectors with stable cash flows and growth potential—healthcare, technology (notably AI infrastructure and data centers), and specialized industries such as sports media and events. LMM direct lending deals commanded spreads ranging from SOFR+450 to SOFR+475, a 100–150 basis point premium over syndicated markets. This yield advantage was complemented by stronger covenants, including maintenance covenants and restrictions on additional debt, providing lenders with enhanced control over borrower behavior. Transactions typically involved sponsor-backed companies with EBITDA between $10–50 million, allowing private credit providers to negotiate bespoke terms directly with sponsors and management teams. These deals often included not only higher yields but also equity kickers and success fees, enhancing risk-adjusted returns.2,3
The resilience of the LMM was underscored by its relative insulation from competitive pressures impacting larger deals. As syndicated lenders aggressively targeted large LBOs, capturing market share from private credit in deals exceeding $1 billion, LMM lenders faced less encroachment. This dynamic allowed LMM-focused funds to maintain pricing discipline and secure terms that mitigated risks, such as those exposed by recent consumer and specialty finance bankruptcies. Rigorous underwriting and ongoing monitoring helped mitigate vulnerabilities like opaque financing structures and double-pledged assets, which plagued weaker segments of the credit market.
While the LMM thrived, the broader private credit market wasn’t without its challenges. Deal volume declined, with estimated direct lending volume dropping from $75 billion in Q3 2024 to approximately $60 billion in Q3 2025. This decline was driven by a scarcity of large LBOs, compounded by an increase in loan repayments and exits. Among the top 12 public business development companies (BDCs), new investment fundings fell by 11.6% in the first half of 2025 compared to 2024, while repayments rose by 13.7%, slowing portfolio growth to a trickle. The absence of robust M&A pipelines, disrupted by Q2 tariff shocks and market volatility, further constrained deal flow.2,3
Despite these headwinds, private credit remained a vital source of capital for sponsors and borrowers seeking flexibility.
High-profile transactions, such as ABC Technologies’ $2.3 billion private credit refinancing led by HPS and Apollo, highlighted the asset class’s ability to address complex liquidity needs. This deal, which refinanced hung bank debt from a failed syndicated loan attempt, underscored private credit’s role as a reliable alternative when syndicated markets falter.
Continuation funds and secondary solutions gained traction, enabling sponsors to manage liquidity mismatches and extend holding periods for high-performing portfolio companies. Demand for private credit outstripped supply, creating borrower-friendly conditions that pressured spreads downward. The share of private credit loans priced below SOFR+500 increased in Q3, reflecting competition from an aggressive syndicated loan market.3
Private credit’s structural advantages—customized terms and the ability to hold loans to maturity—allowed funds to maintain attractive risk-adjusted returns. Funds targeting healthcare and technology sectors benefited from fee structures and equity participation, boosting returns beyond public market equivalents. However, recent bankruptcies in the consumer and specialty finance sectors exposed significant risks, especially around fraud and collateral management. Opaque financing structures and double-pledged assets highlighted the dangers of insufficient transparency and oversight. The fallout prompted lenders and investors to tighten standards, reassess risk controls, and pay closer attention to collateral arrangements. Increased regulatory scrutiny and federal investigations signaled a shift toward stricter compliance and higher costs for market participants.
The year also saw a notable evolution in market structure. Sponsors and borrowers increasingly favored private credit for its speed, certainty of execution, and ability to tailor solutions to complex capital needs. The rise of continuation funds and secondary transactions reflected both the liquidity mismatches in private portfolios and the growing sophistication of the market. Investors were rewarded for navigating illiquidity and complexity, with spreads meaningfully above those available in public markets and the potential for equity upside in select deals.
As the year closed, the risk/reward profile for adding credit risk in public markets was increasingly asymmetric, with spreads hovering at or near historic lows and technical factors supporting tight spreads well understood. In contrast, private credit continued to offer a substantial pick-up in yields. Direct lending and bespoke private transactions benefited from less competition, tighter covenants, and a more favorable supply/demand dynamic. Investors willing to navigate the complexity and illiquidity of private credit were rewarded with spreads meaningfully above those available in public markets. The opportunity set in private credit remained robust, with sponsors and borrowers turning to nonbank lenders for flexible capital solutions.
Looking ahead, allocators should focus on relative value within sectors and ratings, maintaining discipline on credit quality, and being prepared for volatility should the tide turn. For those able to access private credit, the yield premium and structural protections make LMM direct lending a standout allocation in today’s environment. The lessons of 2025—adaptability, rigorous underwriting, and vigilance in transparency and risk management—will remain essential as competition intensifies and the market continues to evolve. The sector’s ability to innovate and respond to changing borrower needs, regulatory scrutiny, and macro headwinds will be central to its continued success in 2026 and beyond.
OPPORTUNITIES AND CHALLENGES: FORWARD-LOOKING TRENDS FOR 2026
As we move into 2026, the investment landscape is defined less by the resilience of the past year and more by the evolving set of opportunities and risks that lie ahead. The market’s ability to absorb shocks in 2025 has set a high bar for expectations, but the margin for error is narrowing as technical tailwinds fade and fundamentals begin to shift.
Public Markets
The outlook for public credit and equities is shaped by several crosscurrents. On one hand, the Federal Reserve’s pivot toward easing and the prospect of continued rate cuts provide a constructive backdrop for risk assets. Carry remains attractive, and technicals—while not as robust as last year—still support demand for income. However, spreads in both investment grade and high yield remain tight by historical standards, leaving little room for disappointment. Any reversal in sentiment, whether driven by macro data, policy surprises, or geopolitical events, could prompt a swift repricing.
Equities face their own set of challenges. Valuations in key sectors, especially technology and AI, are elevated, and the rotation into cyclicals and international markets may continue if global growth surprises to the upside. However, the risk of policy missteps, trade disruptions, and renewed volatility remains high. Investors will need to be selective, focusing on quality, balance sheet strength, and sectors with durable earnings power.
Private Credit
Private credit enters 2026 with momentum, but also with new complexities. The lower middle market remains a standout, offering premium yields and robust structural protections. Direct lending in this segment continues to benefit from less competition, tighter covenants, and the ability to negotiate bespoke terms. Sponsors and borrowers are increasingly turning to private credit for speed, certainty of execution, and tailored solutions—especially as public markets become more volatile and banks remain cautious on lending.
However, the broader private credit market faces several challenges. Deal flow is likely to remain constrained by a scarcity of large LBOs and a slower M&A pipeline, while increased repayments and exits could pressure portfolio growth. The rise of continuation funds and secondary transactions reflects both liquidity mismatches and the need for more flexible capital solutions. Investors will need to navigate a more competitive environment, with spreads under pressure and regulatory scrutiny on the rise.
Risk management will be paramount. Recent bankruptcies in consumer and specialty finance have exposed vulnerabilities in collateral management and transparency. As regulatory oversight intensifies, lenders will need to tighten standards, reassess risk controls, and pay closer attention to documentation and monitoring. The ability to innovate—whether through new structures, fee arrangements, or equity participation—will be critical for maintaining attractive risk-adjusted returns.
KEY OPPORTUNITIES
- Private credit in the lower middle market: Continued premium yields, strong covenants, and bespoke deal structures.
- Healthcare, technology, and specialized industries: Sectors with stable cash flows and growth potential remain favored for direct lending.
- Continuation funds and secondary solutions: Growing sophistication in managing liquidity and portfolio transitions.
- Selective public credit and equities: Relative value, single-name selection, and a preference for secured structures are likely to outperform broad risk-taking.
KEY CHALLENGES
- Spread compression and tight valuations: Limited room for error in both public and private markets.
- Regulatory scrutiny and operational risk: Higher compliance costs and the need for more rigorous monitoring.
- Macro and policy uncertainty: Geopolitical risks, trade disruptions, and the potential for policy missteps.
- Liquidity management: Navigating repayments, exits, and the evolving structure of private credit portfolios.
In sum, 2026 will require a more nuanced approach. The lessons of adaptability and vigilance learned in 2025 will be essential as investors navigate a market that is both more competitive and more complex. Investors will need to keep an eye on fiscal, geopolitical, and policy‑rate catalysts that could flip the narrative from compression to decompression, and balance the pursuit of yield and income with discipline, selectivity, and a heightened focus on risk management.