The State of Private Credit in 2025
A quick summary on where the market stands today...
OLB readers, first and foremost it’s been far too long since our last post. As you might expect, OLB is a passion project and life got in the way. Going forward, I plan to prioritize getting back into a weekly/bi-weekly cadence of posts to the best of my ability. OLB was started because having spent the majority of my career in private credit, I wanted to demystify what that career looks like and hopefully open doors for others along the way. I find it personally frustrating how often these topics are made overly complicated for whatever reason (I suspect to justify high comp), and how little practical, hands-on information there is out there to actually learn about credit. So in keeping with that theme, let’s ease back in with a debrief on the private credit market today, and outlook for the remainder of 2025.
Private Credit in 2025 - Where Does it Stand?
From the 10,000 foot view, 2025 kicked off with strong demand from credit managers for deals. SOFR rates came down from a peak of 5.4% in Q3 2023 - Q2 2024 and are sitting at a cool 4.3% as of Q1 2025. Rates are still elevated relative to the post-COVID, QE-fueled years of near-zero rates, but lower to the point where credit managers are getting a bit more aggressive on leverage now that there’s more cushion on the P&I front. Remember that interest payments are an important component of both fixed charge coverage and debt service coverage ratios, which are used extensively in the industry to inform the appropriate leverage level at close (i.e., if a business has a <1x FCCR at close, it doesn’t generate enough cash to cover its obligations - that’s a clear indicator there’s a liquidity crunch coming in the near-term). Direct lending firms are seeing some of their most attractive risk-adjusted returns in history in 2025, writing S+450-525bps paper yielding 9-10% for 4-6x First Lien risk. This is why they are calling it the “Golden Age”, people.
Sure yields were higher in 2023/2024, but there was uncertainty on how high rates would ultimately go and whether we had reached the peak - hence risk-adjusted returns. A lot of that uncertainty has subsided in 2025, which is why credit managers have shifted to “risk on” mode.
The flip side is that on the PE front, new auctions have remained low as PE sellers are holding onto their portfolio companies for longer in the hope that lower rates and a more positive economic outlook revives demand and pushes up purchase multiples. They also haven’t forgotten the crazy purchase multiples that PE buyers were paying in 2021 and are hesitant to sell their 12-15x platforms for 10-12x multiples in today’s market. The lack of new auctions is bad news for private credit - overall deal quality has come down, we’re seeing hairier deals, and when a quality deal comes to market it’s generally very competitive (multiple lenders eager to deploy capital into a limited number of quality deals = basic supply and demand which pushes pricing down and leverage up). Lenders are also getting creative in terms of structuring - adding a PIK component to the coupon, more instances of amortization deferrals/holidays for a few quarters post-close - anything that offers cash flexibility to the Borrower while rates are higher.
What Does the Remainder of 2025 Look Like?
I’ll caveat this section that a lot of this is my personal view, which is informed by what feels like endless calls with various capital markets teams, PC managers, and industry calls. Right now the uncertainty around tariffs has upended markets and caused spreads to both widen and tighten 50+ bps over the course of a few days. One deal I was working on cleared at S+500, and the next day the Agent said their committee was only comfortable at S+550bps (this was the day after Trump announced his list of reciprocal tariffs). A few days later the 90-day pause went into effect, and the Agent called and said they were good at the original S+500bps. These are truly unprecedented times.
Until there’s more clarity on the tariff/policy front, it’s hard to see new sale processes being launched or buyers leaning in on valuation in an unstable environment. Meanwhile inflation remains elevated, the 10-year treasury rate has rocketed higher over the last 6 months, and it’s clear at this point that interest rates will remain “higher for longer”. The Fed is in no rush to cut rates, since inflation is still elevated and they expect tariffs to add fuel to the fire. It would take some real recessionary alarm bells to go off to shift the Fed from QT to QE, and recessions obviously don’t bode well for M&A volume either. So what does that mean for credit managers? The same as it’s been for the last six months - more competition, tighter pricing, higher leverage, and looser credit agreements for the quality deals that do come to market.
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-OLB