August 1, 2025

Private Credit Markets – Q2 2025 Update

H1 2025 REVIEW

CROSS-ASSET BACKDROP: RISK ASSETS STAY RESILIENT, BUT CAUTION LOOMS

Well, that was interesting. If you only caught the start and the end of Q2, you missed quite the show.

The U.S. tariff regime was the big story in Q2. The “Liberation Day” tariff announcement triggered sharp declines, with the Nasdaq hitting, and S&P 500 nearly hitting, bear market territory — down close to 20% from their highs. High-yield spreads widened by over 100 basis points in the chaos.

Yet, by the end of June, global risk assets bounced back. The S&P 500 gained 6.2%, and the Nasdaq climbed 8.9%, powered by large-cap tech and AI names. European equities notched modest gains, while emerging markets were uneven, weighed down by currency fluctuations and mixed growth in Asia. Credit spreads, after the initial shock, settled down.

Commodities told a varied story. Oil prices stayed range-bound, with Brent in the mid-$70s, as geopolitical tensions balanced weaker global demand. Industrial metals, like copper and aluminum, softened due to sluggish Chinese activity. Gold, however, held steady near $2,300/oz, supported by central bank purchases and macro hedging.

Volatility was low for much of the first half, but it picked up in late Q2 as markets grappled with new U.S. tariff proposals. While the tariffs haven’t yet disrupted the economy significantly, they’ve cast a shadow over corporate sentiment, slowing capital investment and M&A activity. Sectors with global supply chains are feeling the pressure, and both sponsors and lenders are now factoring tariff risks into their underwriting. This has led to slightly wider spreads in some areas and more conservative deal terms.

CREDIT MARKETS SHINE, BUT SIGNS OF STRAIN APPEAR

Credit markets performed strongly in the first half of 2025. High-yield spreads tightened by roughly 100 basis points, with CCCs outperforming BBs by a wide margin. Favorable technicals drove the rally: negative net supply, steady retail inflows, and consistent CLO issuance.

However, fundamentals started to show cracks. Earnings growth in high-yield and leveraged loans stalled, leverage ratios edged higher, and cash-to-debt ratios dipped slightly. Interest coverage held steady, but tail risk indicators, especially in CCCs, began to flash warning signs.

Private credit also showed strength. Direct lending and asset-based finance remained active, though underwriting grew more selective. Pricing in the core middle market stayed firm at SOFR+475–500bps, with tighter covenants than in larger deals. Continuation funds gained popularity as a way to manage older portfolios, reflecting slower exits and longer hold periods.

PRIVATE CREDIT KEEPS MOMENTUM, BUT STRESS SIGNALS EMERGE

Private credit continued to capitalize on public market volatility, but challenges are surfacing. About $17 billion in private credit debt was taken over by lenders in the past six months, mostly from 2021–2022 vintages. Spread compression at the higher end is intensifying competition, while liquidity mismatches are driving the use of continuation funds and secondary solutions.

Direct lending for buyouts hit $22 billion in Q2, the highest since mid-2022, despite a drop in deal count. Sponsors value private credit’s flexibility, including features like delayed-draw term loans, which are increasingly common. Healthcare and AI infrastructure remain hot, with deals like Curia Global’s $1.3B refinancing and Crusoe’s $750M AI data center facility highlighting strong sector demand¹.

Private credit seized opportunities during the 15-day freeze in broadly syndicated loans after the April tariff shock, offering fast and reliable financing. Major LBOs, including Clearlake’s Dun & Bradstreet take-private and Thoma Bravo’s Boeing asset acquisition, leaned on private credit, underscoring its growing role in large-cap deals. That being said, we expect the dogfight on the bigger deals to continue with each side claiming territory from the other depending on the quarter.  We’d rather continue to hunt for the less competitive deals.

2H 2025 OUTLOOK: TIGHT VALUATIONS, RISING UNCERTAINTY

The macro picture is mixed. The soft-landing narrative holds: we see inflation is easing, labor markets remain steady so far , and consumer confidence has improved in June after a mixed quarter. But policy uncertainty is stirring things up.

The Federal Reserve remains unpredictable. Some expect rate cuts in the second half, while others see sticky inflation keeping rates steady. This split is driving rate volatility and a more cautious stance in credit markets.

Across public and private markets, the message is clear: spreads are tight, and the path ahead is less certain.

PUBLIC CREDIT

Some see room for further spread compression, but most view BB valuations as stretched. Compression trades (CCC vs. BB) remain viable but require careful credit selection. Cyclical sectors like autos, retail, and energy face skepticism, while dispersion offers opportunities for alpha.

STRATEGIC POSITIONING: FOCUS ON QUALITY AND LIQUIDITY

Heading into the second half of the year, a few themes stand out. With spreads tight and macro risks rising, we observe investors favoring shorter spread duration in public credit and high-carry, short-dated paper in private markets. There’s a clear preference for higher-quality issuers, particularly in loans and private credit, where tail risk and dispersion are increasing.

Compression trades remain attractive but demand rigorous credit analysis, given growing fragility in lower-rated names. Liquidity is a growing focus, with continuation funds and secondary solutions helping manage aging portfolios.

PRIVATE CREDIT

Our market continues to gain ground against broadly syndicated loans (BSLs), thanks to its speed and flexibility. However, the rise of continuation funds and secondary solutions points to liquidity pressures and slower DPI (Distributed to Paid-In) realization.

Sponsors prefer private credit for its reliability, even when BSL pricing is competitive. Deal documentation is under scrutiny, with a focus on EBITDA definitions and leverage metrics. We continue to see this as being less of an issue in the low-to-middle market. Covenants are holding steady in the smaller-sized deals.

1 – Pitchbook US Private Credit & Middle Market Quarterly Wrap Q2 2025

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