Private Credit Market Update: Q3-2025
Q3-2025 Market Update
The third quarter of 2025 featured further evidence of broadly resilient performance from the private credit market, despite many economists pointing to mixed economic indicators and a growing sense of uncertainty within the market. In line with expectations, the Federal Reserve continued its rate-easing cycle with a 25 bps cut in September following a 9 month pause since the prior cut. Further expected rate reductions over the next twelve months and projected rate stability thereafter (Figure 1) could help to reinvigorate M&A/LBO deal volumes, which have been disappointing relative to market expectations year-to-date.
Figure 1: Projected US Base Rates
October 2025 to December 2028
Source: Chatham Financial. 3-month SOFR forward curve as of September 19, 2025, and Fed projections as of September 17, 2025. There can be no assurance that any of these projections will be validated by actual events.
Against this backdrop, we have observed a few trends in the private credit market during Q3-2025:
Private credit loan volumes were relatively stable quarter-over-quarter, though easing interest rates, greater market confidence and pent-up private equity dry power should drive higher M&A/LBO volumes in 2026.
Private credit spreads remain tight, although the mid-market continues to demonstrate healthy return premiums relative to public debt investments and yields remain attractive.
Borrower performance generally remains resilient with modest sector-specific challenges.
Volumes have fallen short of expectations for this year, albeit moving positively for 2026.
2025 was anticipated to be a strong year for M&A/LBO volumes driven by pent up private equity demand and longer hold periods. However, trepidation around market volatility and uncertain macroeconomic conditions led sponsors to adopt a “wait-and-see” approach.
Global private equity buyout funds have significant capital to deploy (see Figure 2) with 2024 dry powder of over $1 trillion. Private credit remains a preferred financing source for private equity sponsors, and the combination of significant dry powder and longer asset holds should drive a busy 2026 from a volume perspective.
The European private credit market continues to offer attractive opportunities for lenders. In Q3-25, European M&A/LBO deal flow was stronger due to supportive fiscal policy and easing monetary policy.
Figure 2: Global Buyout vs Direct Lending Dry Powder
Source: Preqin. Dry powder as of December 2024. There can be no assurance that the trends highlighted above will continue in the future.
Despite spread compression, private credit continues to offer a healthy yield premium relative to public credit markets and yields remain attractive.
With the market anticipating that base rates will remain elevated relative to long-term averages, senior secured mid-market loans continue to provide investors with high single digit gross returns on an unlevered basis (Figure 3).
We continue to observe attractive spread premiums for European loans and asset-based specialty finance, specifically in specialized asset verticals. European loans have typically seen pricing premiums of 25-50 bps relative to comparable US loans, in large part due to the fragmented nature of the regional markets which require customized structures and a relatively more limited pool of private credit capital. In a similar vein, niche asset-based specialty finance typically requires significant asset specialization and bespoke structuring, and consequently has less coverage from traditional capital providers.
Figure 3: Gross Asset Yield on New Senior Secured Loans
9.5%
Base rate: 3M SOFR as of September 30, 2025. Fee-adjusted spread: Cliffwater LLC. All Rights Reserved. Reproduced with permission. Sponsored Direct Lending New Issue 1L All-in Yields. Fee-adjusted spread represents spread and 3-year amortized OID figures averaged over YTD Q3-25. There can be no guarantee of future performance.
Borrower performance generally remains resilient with modest sector-specific challenges.
Overall borrower performance remained resilient, although the market has seen a modest increase in defaults quarter-over-quarter. It has been observed that deals underwritten within the 2021 vintage have seen weaker performance, likely due to the impact from post-COVID-19 elevated earnings in specific sectors as well as liquidity pressures due to elevated leverage levels and rates. The trailing 12-month default rate of the US Leveraged Loan Index increased slightly quarter-over-quarter to a headline default rate of 1.5%. Including distressed Liability Management Exercises (“LMEs”), the LLI default rate is 4.3% at Q3-25 (Figure 4). LMEs have so far remained concentrated in the broadly syndicated market with less prevalence in the private credit mid-market.
Divergent borrower performance across certain segments of the market continues to persist, with specific industries, such as healthcare and consumer discretionary, showing weaker performance. In healthcare – specifically within the physician practice management space – long-term demand drivers remain constructive, though both the cost and availability of labour have put short-term pressure on margins and cash flow. Within the consumer segment, it has been observed that borrowers are starting to experience more pressure from lower consumer spending. Looking ahead, expected base rate reductions and relatively lower credit spreads will reduce borrowers’ cost of financing, which should enhance liquidity and provide more capital to fund investments and growth.
Figure 4: US Leveraged Loan Index (“LLI”) Trailing 12-month Default Rate
Source: Pitchbook/LCD; Morningstar LSTA US Leveraged Loan Index. Trailing 12-month default rate is based on number of defaults divided by total issuers. As of June 30, 2025.
Private credit remains resilient and has provided investors with attractive risk-adjusted returns and contractual cash yield. In particular, mid-market private credit has historically delivered lower loss rates relative to leveraged loans and high yield debt due to conservative structures and strong lender protections.
Endnotes:
Unless otherwise indicated, all NSPC figures and metrics are in USD and as at September 30, 2025.
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- Northleaf analysis and market consensus as at September 30th 2025.
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