Private Credit Market Update: Q2-2025
The second quarter of 2025 introduced significant uncertainty in the global economy as the US government dramatically shifted its trade policy under the new administration and positioned for a potential reset on global trade and tariff policies.
Trade policy tension in the wake of tariff announcements issued by the US administration on April 2 drove several weeks of market volatility, including short-term repricing of risk across credit markets. The market also experienced a temporary pullback in new issue activity, most notably in the liquid markets.
Investor confidence rebounded swiftly in early May following the announcement of a 90-day tariff implementation pause. New issue spreads narrowed back to Q1-25 levels, and deal flow began to increase in May and June. The Leveraged Loan Index (“LLI”) ended the quarter modestly higher compared to the first quarter of the year, with the average bid price of the US LLI up 0.8% over Q2-25 (see Figure 1).
Figure 1. Weighted Average Bid Price of US Leveraged Loans
Source: Pitchbook/LCD; Morningstar LSTA US Leveraged Loan Index. As of June 30, 2025.
Against this backdrop, we have observed a few trends in the private credit market during the second quarter of 2025:
Private credit volumes were relatively stable quarter-over-quarter, while volumes in the broadly syndicated market were more volatile with an early pull-back and a late-quarter rebound.
Credit spreads widened in the weeks following tariff announcements on April 2, but ended the quarter largely unchanged from pre-announcement levels as investor confidence improved throughout the quarter.
Europe continues to present attractive opportunities for lenders given favourable market dynamics.
Borrower performance generally remained resilient, with a modest quarter-over-quarter increase in defaults.
Softer deal volumes given market volatility, with positive momentum in M&A/LBO activity.
Q2-25 transaction volumes in the US leveraged loan market were down year-over-year and relative to Q1, primarily driven by a pullback in the broadly syndicated market in the first half of the quarter. During periods of market turbulence, banks and liquid credit markets tend to retrench, paving the way for private credit solutions to gain market share. Q2 was no exception, and private credit transactions continued to move cautiously through the pipeline with refinancings and add-on capital to support existing borrower growth (see Figure 2).
M&A/LBO transaction volume remained below investor expectations. However, the second half of the quarter showed some signs of re-emerging momentum as volatility subsided. New issue activity supporting M&A/LBO volumes was up 26% year-over-year, though still below Q1 volumes1 (see Figure 3). Activity has been concentrated in service-based businesses with recurring and predictable revenue streams, and with limited direct impacts from tariffs.
Figure 2. Private Credit is a Preferred Source of Financing
Source: Pitchbook/LCD. Data through June 30, 2025. Count is based on transactions covered by LCD News. There can be no assurance that any of the trends highlighted above will continue in the future. Excludes repricing and extension amendments; includes LBOs, refinancings and follow-ons.
Figure 3. M&A/LBO Volumes Remain Below Expectations
Source: Pitchbook/LCD. Data through June 30, 2025. Count is based on transactions covered by LCD News. There can be no assurance that any of the trends highlighted above will continue in the future. Excludes repricing and other amendments.
Credit spreads across the market remain low while overall yields are attractive.
Private credit new issue spreads widened by ~50 bps for certain mid-market loans in early April but stabilized by quarter-end as risk sentiment improved across the market. A similar trend was seen in the public markets, with broadly syndicated loan spreads roughly unchanged by quarter-end and high yield bond spreads up modestly.
As shown in Figure 4, spreads across credit markets have generally narrowed over the past several quarters, although private credit continues to offer investors a healthy return premium of ~150-200 bps compared to broadly syndicated loans and high yield bonds. Overall yields continue to remain attractive with senior secured loans generating high single-digit returns on an unlevered basis2.
Figure 4. Private Credit Provides an Attractive Return Premium
Direct Lending Source: Cliffwater LLC. All Rights Reserved. Reproduced with permission. Broadly Syndicated Loans and High Yield Source: Pitchbook. Data through June 30, 2025. Quarterly figures calculated as a 3-month average.
Attractive private credit opportunities in Europe.
While the US continues to represent a dominant share of total private credit volumes, Europe is a substantial and increasingly attractive market, offering strong relative value and diversification within a global portfolio.
From a financing volumes standpoint, there has been more positive momentum in M&A/LBO activity in Europe relative to the US. European M&A/LBO volumes were up 58% quarter-over-quarter (see Figure 5), to the highest level since 2021, while US M&A/LBO volumes were down 31% quarter-over-quarter1. European loans have also been providing ~25 bps of credit spread premium relative to comparable US loans.
Several macro and market themes are playing out in Europe that support these dynamics. Supportive fiscal policy and easing monetary policy, with EUR base rates sitting ~2.3% lower than in the US as at Q2-253, has helped support M&A/LBO volumes due to a lower cost of capital, while the fragmented nature of regional markets and the need for customized structures (e.g., multi-currency facilities) has supported a pricing premium.
In addition, NAV lending is currently more prominent in Europe compared to the US due to greater adoption by mid-market European private equity managers. NAV lending can provide attractive risk-adjusted return potential with strong collateral coverage from an underlying diversified asset portfolio (i.e., multiple private equity-backed portfolio companies).
Figure 5. Increased M&A/LBO Volumes in Europe
Source: Pitchbook/LCD. Geography: Europe. Data through June 30, 2025. There can be no assurance that any of the trends highlighted above will continue in the future. Excludes repricing's.
Resilient borrower performance, with some softness in certain sectors.
Overall borrower performance remained resilient, although the market has seen a modest increase in defaults quarter-over-quarter. The trailing 12-month default rate of the US Leveraged Loan Index remained stable at a headline default rate of 1.2% quarter-over-quarter. However, including distressed Liability Management Exercises (“LMEs”), the metric has edged up from 4.3% at Q1-25 to 4.5% at Q2-25 (see Figure 6). LMEs have so far remained concentrated in the broadly syndicated market with less prevalence in the private credit mid-market.
The market also continues to experience a dispersion in performance across sectors. Areas that are seeing the most weakness are healthcare (specifically physician practice management businesses), consumer (specifically discretionary businesses) and in highly levered businesses given the structurally higher cost of capital environment. From a direct tariff perspective, mid-market private credit borrowers remain relatively well-insulated given that these borrowers are typically regional or national centric with more limited exposure to cross-border trade in goods.
Mid-market private credit continues to provide investors with strong downside protection through well-documented covenant packages, including maintenance covenants. Maintenance covenants continue to be more prevalent in the lower and core mid-market (EBITDA <$100M), while covenant-lite structures are more common for larger borrowers (EBITDA >$100M) that operate in defensive industries (see Figure 7). The existence of maintenance covenant(s) allows the lender to engage early with a borrower in the event of weakening performance.
Figure 6. 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.
Figure 7. Covenant-Lite Deals by Borrower EBITDA Size
Source: Cliffwater LLC. All Rights Reserved. Reproduced with permission. Cov-Lite Deals by Borrower EBITDA Size. As of May 31, 2025
Private credit continued to provide investors with attractive risk-adjusted returns and contractual cash yield in Q2-25. Given its defensive characteristics, private credit has performed well through periods of market volatility and has historically delivered lower loss rates relative to leveraged loans and high yield debt.
Endnotes:
Unless otherwise indicated, all figures and metrics are in USD and as at June 30, 2025.
“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.
- Source: Pitchbook/LCD. Data through June 30, 2025. Count is based on transactions covered by LCD News. There can be no assurance that any of the trends highlighted above will continue in the future. Excludes repricing and other amendments.
- Represent gross yields in USD.
- Source: 3-month EURIBOR and 3-month SOFR as at June 30, 2025.
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