April 13, 2026
Private Credit Markets – Q1 2026 Update
If there was one theme that defined the first quarter, it was adjustment.
We came into 2026 with markets feeling fairly comfortable. Growth was holding up, inflation looked manageable, and returns were still being driven largely by carry. That tone lasted into January. Then February and March reminded everyone how quickly things can change.
Geopolitics moved back to center stage. The escalation involving Iran and the disruption of traffic through the Strait of Hormuz pushed oil prices sharply higher, complicated the inflation picture, and cooled enthusiasm around near-term rate cuts. Volatility picked up. Leadership shifted. Markets became more selective. This wasn’t a panic-driven selloff. It was a reset in expectations.
THE MACRO PICTURE: WHY THE MOOD SHIFTED
At the start of the quarter, the macro backdrop was still supportive. U.S. growth was steady, labor markets were easing only gradually, and inflation appeared to be drifting in the right direction. GDP estimates hovered around 2%, earnings were holding up, and markets expected central banks to stay patient.
Energy changed that calculus quickly. Once oil prices surged, inflation expectations followed, and confidence around the timing of rate cuts faded.
This shift wasn’t driven by recession fears. It was driven by uncertainty. If you are old enough to remember previous oil shocks, you may realize that it might be a mistake for the Fed to raise rates to combat energy-driven inflation. The shock itself already tightens financial conditions—through higher costs, reduced purchasing power, and weaker sentiment. Piling rate hikes on top of that would risk compounding the damage. As a result, the Fed finds itself stuck between the proverbial rock and a hard place.
As a result, investors began pulling back from areas that rely heavily on stable financial conditions and rotating toward cash flow, balance-sheet strength, and tangible value.
EQUITIES: WHAT ACTUALLY HAPPENED
U.S. equities finished the quarter modestly lower, but the surface-level numbers hide an important shift. The S&P 500 fell roughly 4–5%, and the Nasdaq dropped closer to 6–7%, largely due to weakness in mega-cap technology and AI-related stocks.
Under the hood, though, things looked different. Market breadth improved. Equal-weight indices held up better than cap-weighted benchmarks. Small-caps outperformed large-caps. Value stocks finished the quarter positive, while growth lagged meaningfully.
Sector performance told the same story. Energy benefited directly from higher oil prices. Utilities, materials, consumer staples, and industrials also held up well. Technology, consumer discretionary, and financials were the weakest areas.
Global markets largely followed the same pattern. International equities saw slightly less downside overall, helped by commodity exposure and currency moves earlier in the quarter. Emerging markets were more mixed, with higher energy costs offsetting early optimism.
PUBLIC CREDIT: STILL OPEN, JUST TIGHTER
Credit markets remained open throughout Q1, but conditions clearly tightened.
High-yield bonds held up reasonably well thanks to elevated coupons. Leveraged loans were more volatile. Prices moved lower through the quarter, with software-exposed credits under particular pressure as investors revisited assumptions around growth durability and recurring-revenue models.
New-issue loan spreads widened sharply in February and March, execution risk increased, and refinancing activity slowed as borrowers found fewer easy opportunities to extend maturities or improve pricing. CLO issuance helped provide demand, but managers became more selective.
We believe the message was clear: capital is available, but not on the same terms as last year.
PRIVATE CREDIT: A SLOWDOWN THAT MAKES SENSE
Private credit activity slowed during the quarter, and frankly, that felt healthy.
Sponsors became more cautious. Bigger transactions were delayed. Lenders took a closer look at risk, especially in growth-oriented sectors like software. At the same time, public BDCs and some non-traded and interval vehicles experienced elevated redemption requests, which brought renewed focus to liquidity, structure, and transparency. A lot of headlines were generated, and a lot of finger-pointing ensued.
Importantly, though, this pressure has not meaningfully spilled into the lower-middle market. LMM strategies typically rely less on retail flows, use more conservative leverage, and focus on smaller, cash-flow-positive businesses with tighter documentation. Those structural differences have helped insulate activity and performance even as sentiment shifted elsewhere.
Against that backdrop, deal economics began to move back in lenders’ favor. New private credit deals cleared at wider spreads, equity cushions increased, and structures tightened. The lower-middle market continued to stand out as a more balanced and rational part of the market.
PUTTING IT ALL IN CONTEXT
Q1 wasn’t the start of a downturn. But it was a reminder that conditions can change quickly when macro risks re-emerge.
Markets have moved away from easy carry and tight spreads toward a more selective environment where fundamentals and structure matter more. Volatility may stick around as the year progresses, but periods like this often create opportunity — just not all at once.
In a market that’s no longer one-size-fits-all, patience and discipline tend to matter far more than speed.
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