What’s next for private credit?

Banks returned aggressively to leveraged lending in 2025, refinancing nearly $34 billion¹ in private credit facilities. However, the movement was not one-way; direct lenders recaptured $36.9 billion of syndicated loans, as many borrowers continue to prefer private credit for its flexibility and execution certainty¹.

Notably, bank-private credit partnerships have emerged as a defining trend, exemplified by the Citi-Apollo $25 billion programme². These hybrid arrangements allow banks to maintain client relationships while freeing capital for regulatory compliance—a dynamic likely to accelerate as Basel III implementation approaches.

This shifting dynamic marks the start of a more collaborative era. While competition is heating up, the middle market’s core value proposition remains intact, providing the foundation for the regional and structural opportunities ahead.

Future opportunities: Regional growth and M&A rebound

The private credit market is no longer just a US-centric story. Regional expansion and a resurgence in deal-making provide a robust outlook for capital deployment.

Regional opportunities: US dominance, European growth, Asian emergence

The United States remains the dominant market at approximately 70% of global private credit AUM³. Direct lending captured 90% of middle market leveraged buyout financing in 2024, up from just 36% a decade ago⁴. The market's depth, sponsor ecosystem, and established legal frameworks continue to attract the lion's share of capital.

The European private credit market has grown to approximately €450-500 billion in AUM, with record deal volume of €68.7 billion deployed in 2024 alone. Yet European banks still control 76% of corporate lending versus just 21% in the US.⁵ This structural gap suggests substantial runway for continued penetration. European documentation also tends to be more lender-friendly, with stronger covenant packages than comparable US transactions.

Asia-Pacific remains nascent but fast-growing. According to the Alternative Credit Council's 2025 report, APAC private credit stands at approximately $59 billion, projected to reach $92 billion by 2027⁶. Australia leads as the most mature regional market, while India shows the fastest growth trajectory. Infrastructure financing gaps across emerging Asia—estimated at $1.7 trillion annually—create structural demand for private credit solutions.⁷

The M&A engine and market momentum

M&A activity has rebounded significantly, providing a robust pipeline for direct lenders entering 2026. Private capital firms held approximately $2.0 trillion in dry powder as of October 2025, creating intense pressure to deploy capital after a period of stagnation. This urgency drove a 38% year-over-year increase in global deal value through late 2025, fueled by a resurgence in large-cap transactions and narrowed valuation gaps, particularly in the North American market⁸.

Spread trajectory appears to be stabilising. With substantial dry powder competing for deals, dramatic spread widening seems unlikely absent a significant credit event. However, increased deal supply should prevent further meaningful compression, creating a more balanced pricing environment.⁹

Navigating risks: The refinancing wall and sentiment

While opportunities abound, the transition to a higher-for-longer (relative to 2021) environment creates specific pressure points for existing portfolios.

The refinancing wall and interest rates

The refinancing wall presents the most immediate challenge. Approximately $104 billion in middle market debt matures in 2025, rising to $162 billion in 2026.¹⁰ The 2021 vintage—issued during the "golden era" of cheap financing—faces refinancing at rates roughly double original levels. Companies with weak coverage ratios and imminent maturities warrant close monitoring.

Interest rate trajectory will significantly impact returns. If the Fed delivers gradual cuts totaling 100-150 basis points, investing in private credit should continue generating attractive risk-adjusted returns even as floating-rate income declines.¹¹ Default rate expectations have moderated; industry forecasts suggest direct lending defaults reaching 2.75-3.0% by year-end 2025—elevated but manageable and well below the 6%+ threshold that would threaten portfolio returns.¹²

Read more: As the Fed cuts rates, what can we expect from private credit?

The reality of liquidity risk vs. asset health

While credit fundamentals remain strong, the maturation of unlisted Business Development Companies (BDCs) has brought a crucial nuance to the forefront: liquidity risk. The structural mismatch between illiquid underlying loans and the retail demand for periodic cash withdrawals means that semi-liquid funds can, and will, utilize redemption gates during periods of elevated outflows.

We have seen this dynamic play out recently across the industry, with managers like Blue Owl executing large-scale secondary loan sales to meet heightened redemption requests in their tech-focused vehicles. While hitting these liquidity caps can trigger investor anxiety, the mechanics of these secondary sales actually provide a powerful validation of the asset class's underlying health. When tested, these loan portfolios were successfully sold to highly sophisticated institutional buyers—including major public pension funds—at near-par values (above 99%). Their willingness to pay top dollar confirms that the portfolio companies are performing and internal Net Asset Value (NAV) marks are highly accurate. For long-term investors, the takeaway is clear: while the BDC vehicle itself may experience temporary liquidity constraints, the underlying credit quality and loan valuations remain robust.

Read more: Beyond the rate cuts: The resilience of private credit in 2025

How Endowus selects resilient private credit funds

The risks outlined—interest coverage deterioration and covenant erosion—are real concerns for the market at large. However, for investors concerned about the headlines, the data suggests that well-managed, large-cap focused funds have navigated this environment with credit quality intact.

Robust interest coverage & low defaults

Despite higher interest rates, the funds available on the Endowus platform exhibit better risk metrics than industry averages meaningfully.

• Healthy Cushions: Core private credit offerings on the platform report weighted average interest coverage that sits comfortably above the ~1.2x market average.
• Minimal Defaults: Non-accrual rates (loans at risk) across our platform have been substantially better than the BDC industry average of 1.6% and public leveraged loan default rates of 4–5%.¹³

Structural protection: First-lien & equity buffers

We prioritise funds that stand first in line for repayment.

• Senior Secured Focus: Platform funds maintain high first-lien concentrations compared to peers.
• Equity Cushions: With Loan-to-Value (LTV) ratios around 36–40%, a borrower’s business value would need to fall by more than half before the loan principal is at risk.

Active preservation vs passive liquidation

When a borrower faces challenges, top-tier managers don't just sell the debt at a loss. They intervene.

• Restructuring Teams: Managers like Oaktree use in-house restructuring capabilities to take operational control and restructure balance sheets to ensure a full recovery of value.
• Cash-Flow over Assets: Unlike recent high-profile failures in "Asset-Based Lending" (ABL), our funds focus on Cash-Flow Lending—underwriting based on stable, recurring revenue rather than volatile physical inventory.

Forward return expectations

As the market normalises from the "golden era" of 2022, investors should expect moderated returns over the next 2-3 years. The combination of spread compression and anticipated base rate declines suggests net returns in the range of 7–9% annually, compared to the 9–11% enjoyed recently. While this represents a normalisation, it remains highly attractive relative to public fixed-income alternatives and the asset class's long-term historical average.

Invest with clarity: Access private credit fund solutions with Endowus Hong Kong

At Endowus Hong Kong, our investment philosophy is built on the pillars of transparency, conflict-free advice, and evidence-based wealth management. We believe that professional investors deserve the same institutional-grade access and fair fee structures traditionally reserved for the ultra-wealthy.

Ready to enhance your portfolio's income potential? Contact privatewealth.hk@endowus.com and verify yourself as Professional Investor (PI) to learn more about our Private Wealth Solutions, exclusive to PIs only.

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Sources

1. PitchBook “Private credit activity stays strong in 2025, buoyed by LBO deals”, "Syndicated Loan Market Strikes Back"

2. Citi-Apollo: Citigroup Press Release (September 2024)

3. Preqin; Morgan Stanley Investment Management, "Private Credit Outlook 2025"

4. LSTA, "2024 Direct Lending Review: Volume Surges Amid Favorable Market Conditions"

5. Deloitte Alternative Lender Deal Tracker; European Central Bank data

6. Alternative Credit Council (ACC) / AIMA, "Private Credit in Asia 2025" (co-authored with Simmons & Simmons, EY, Broadridge)

7. Asian Development Bank infrastructure investment estimates

8. Preqin Global Report 2025; PitchBook

9. PitchBook; Hamilton Lane, "Has Private Credit Lost its Shine?"

10. Morgan Stanley; LSEG LPC middle market debt maturity analysis

11. Morgan Stanley, "Outlook: Private Credit"

12. KBRA Direct Lending Deals (DLD) 2025 Default Forecast

13. Non-accrual rates from respective fund SEC filings and quarterly reports, Q4 2024–Q3 2025. BDC peer average from Blackstone analysis of peer filings as of December 2024.

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Risk Warnings

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