Private Credit Market Update: Q3-2026
Q3-2026 Market Update
Market volatility persisted throughout the third quarter, weighing on new issuance volumes as M&A/LBO activity remained subdued and lenders remained selective. Within private credit, borrower performance remained broadly resilient, and the continued retrenchment of retail-oriented capital supported attractive economics and transaction structures for disciplined, well-capitalized lenders. With higher base rates and stable spreads, we believe investors will continue to benefit from strong all-in yields and attractive risk-adjusted returns despite the expectation that market defaults will increase modestly in 2026.
Against this backdrop, the following key trends shaped the private credit market in Q3-2026:
- In line with expectations, the Federal Reserve (the “Fed”) raised rates by 25 bps at its September meeting, the first increase in more than three years1.
- Credit spreads in the U.S. remained stable after widening in the first half of 2026, while gross asset yields increased due to higher base rates.
- New issuance volumes remain soft, reflecting subdued M&A/LBO activity, heightened lender selectivity and lower activity from retail-oriented lenders facing continued redemption pressures.
- Borrower performance remains broadly resilient, with stress largely concentrated among select companies, sectors and vintages, as well as business models more exposed to AI disruption.
In line with expectations, the Fed raised rates by 25 bps at its September meeting, the first increase in more than three years.
In Q3-2026, the Fed raised the target range for the federal funds rate to 3.75% to 4.00% and signaled that a further increase is expected in the near-term to address persistent inflationary pressures. While officials continue to differ on the pace of further tightening, the September projections converged within a narrower range in the near term than at previous meetings. Current market projections now imply an average base rate of ~4.65%2 from the remainder of 2026 through year-end 2029 (see Figure 1), approximately 70 basis points higher than projected last quarter, reflecting expectations that rates will remain higher for longer than previously anticipated. Private credit floating rate loans benefit directly from rising base rates through higher contractual cash yields.
Figure 1: Projected U.S. Base Rates
September 2026 to December 2029
Source: Chatham Financial. 3-month SOFR forward curve as of September 30, 2026 and Fed projections as of September 16, 2026. There can be no assurance that any of these projections will be validated by actual events.
Credit spreads in the U.S. remained stable following a period of widening in the first half of 2026, while gross asset yields increased due to higher base rates.
In early 2026, heightened market volatility and a pullback in lender supply drove U.S. sponsor-backed middle-market private credit spreads approximately 25 basis points wider than comparable transactions executed in 2025. Spreads have since stabilized at these levels, holding steady through Q3-2026, while gross asset yields have increased due to higher base rates. Private credit continues to provide a ~150 bps premium to public credit (see Figure 2).
Figure 2: Gross Asset Yields
HY Debt and Leveraged Loans Source: Pitchbook/LCD as of September 30, 2026. Direct Lending Source: Cliffwater LLC. All Rights Reserved. Reproduced with permission. Direct Lending Calculated as the fee-adjusted spread (comprised of commitment weighted cash spread, impact of floor benefit, commitment weighted original issue discount or purchase discount amortized over a 3-year period and assumes debt investments remain outstanding for 3 years, and other fees) averaged over the last 12 months plus 3-month term SOFR (4.1%). The High Yield Debt and Leveraged Loans figures may be comprised of debt with features materially different than Direct Lending. As such, a direct comparison might not be meaningful. Past performance is not a guarantee of future results.
New issuance volumes remain soft, reflecting subdued M&A/LBO activity, heightened lender selectivity and lower activity from retail-oriented lenders facing continued redemption pressures.
Consistent with volumes in the first half of the year, direct lending activity remained soft as private equity sponsors stayed highly selective in bringing new M&A/LBO transactions to market. As a result, activity during the period remained focused on existing borrowers, with many sponsors focusing on add-on acquisitions rather than new platform investments. Lender appetite has moderated in industries perceived to have greater AI disruption risk, with capital increasingly directed toward areas viewed as more resilient. Software, for example, represented 15% of new originations in YTD Q3-2026, compared to 22% in 2025.
At the same time, retail-oriented credit managers continue to face liquidity pressures from persistent redemption requests. In Q3-2026, redemption requests from 11 of the largest 14 U.S. non-traded business development companies (“BDCs”) averaged ~13% (see Figure 3), well above the typical quarterly redemption limit of 5%3. In light of these redemption pressures, realizations have exceeded new investments across several of the largest BDCs. This shift in supply dynamics has supported attractive economics and favourable transaction structures for disciplined, well-capitalized lenders.
Figure 3: Elevated Non-Traded BDC Redemption Requests
Source: Valuations Research Company (“VRC”). Data through September 30, 2026 and compiled by VRC from various data sources including, but not limited to PitchBook, Bloomberberg, Reuters. Calculated as a simple average of the reported BDC redemption requests.
Borrower performance remains broadly resilient, with stress largely concentrated among select companies, sectors and vintages, as well as business models more exposed to AI disruption.
While overall borrower fundamentals remain broadly resilient, performance is becoming more bifurcated. Heightened risk persists in certain industries (particularly consumer-facing), vintages (particularly 2021) and business models, with stress typically concentrated among select borrowers, which we believe is not indicative of systemic weakness across the asset class.
Private credit default rates have increased modestly in 2026 but remain in line with long term averages, with KBRA forecasting a 2026 direct lending default rate of 2.5%, compared to 3.5% for broadly syndicated loans (see Figure 4). Defaults remain concentrated in a limited number of sectors rather than indicating widespread credit deterioration. This bifurcation reinforces the importance of disciplined sector selection throughout different market environments. We remain focused on investing in more resilient industries, including financials, business services and industrials, areas that have seen comparatively lower default rates, with a cautious outlook for consumer-oriented industries (see Figure 5).
To date, we have not observed material AI-related credit deterioration. Rather, many borrowers are increasing investment in AI to drive productivity gains, enhance customer service and improve cost efficiency. As the pace of technological change accelerates and its impact on business models continues to evolve, lenders have increased underwriting scrutiny to new investments, particularly around people-intensive business models, capital expenditure requirements and emerging competitive threats, including AI-native business models.
Figure 4: Market Default Rates
Source: KBRA DLD Default Research. Data as of August 31, 2026.
Figure 5: Market Default Rates by Industry
Source: Cliffwater LLC. Data as of June 30, 2026. All Rights Reserved. Reproduced with permission.
We believe private credit continues to deliver attractive risk-adjusted returns and contractual cash yield to investors. As a long-term portfolio allocation, it offers floating-rate exposure that supports strong gross yields in an elevated base rate environment, along with historically lower volatility than public debt instruments, and diversification benefits. As performance becomes more bifurcated, we believe selectivity and underwriting discipline will increasingly differentiate outcomes for investors.
Endnotes:
Unless otherwise indicated, all NSPC figures and metrics are in USD and as at September 30, 2026.
“Cliffwater,” “Cliffwater Direct Lending Index,” and “CDLI” are trademarks of Cliffwater LLC. The Cliffwater Direct Lending Indexes (the “Indexes”) and all information on the performance or characteristics thereof (“Index Data”) are owned exclusively by Cliffwater LLC, and are referenced herein under license. Neither Cliffwater nor any of its affiliates sponsor or endorse, or are affiliated with or otherwise connected to, Northleaf Capital Partners, or any of its products or services. All Index Data is provided for informational purposes only, on an “as available” basis, without any warranty of any kind, whether express or implied. Cliffwater and its affiliates do not accept any liability whatsoever for any errors or omissions in the Indexes or Index Data, or arising from any use of the Indexes or Index Data, and no third party may rely on any Indexes or Index Data referenced in this report. No further distribution of Index Data is permitted without the express written consent of Cliffwater. Any reference to or use of the Index or Index Data is subject to the further notices and disclaimers set forth from time to time on Cliffwater’s website at https://www.cliffwaterdirectlendingindex.com/disclosures.
Source: Board of Governors of the Fed. Rsrv. Sys., Federal Reserve Issues FOMC Statement (Sept. 16, 2026).
Source: Chatham Financial. Represents simple average of 3-month term SOFR forward curve as of October 13, 2026. Data from October 2026 through to December 2029.
Source: Valuation Research Corporation (“VRC”). Private Market Trends: Q3 2026 Private Credit & Equity Update. As of October 8, 2026.