1.2025 in the rearview mirror
2025 was an eventful year for the U.S. economy, filled with both challenges and opportunity. Businesses and investors navigated unprecedented tariff measures and a prolonged government shutdown, which introduced uncertainty into prior projections and transaction planning. At the same time, the continued expansion of artificial intelligence – supported by favorable policy actions by the current administration – drove substantial investment in new and innovative startups, data centers, and related industries.
Against this backdrop of disruption and innovation, private equity market dynamics continued to be affected. According to PitchBook, median private equity hold periods increased to approximately 3.9 years (the longest in more than a decade) as exit activity remained muted, with exits averaging approximately six to seven years depending on industry. As a result, dealmakers increasingly focused on areas where deal opportunities were available and less exposed to current macroeconomic conditions, including sports acquisitions, home services, and other asset-light or cash-generative strategies designed to return capital to investors. In parallel, private credit evolved into a presumptive source of portfolio-level financing, including through fund-finance solutions and continuation vehicles, enabling liquidity and capital recycling in the absence of traditional exits.
In 2025, demand for capital remained robust despite elevated uncertainty, and participants in the leveraged loan market – across both private credit and syndicated lending – moved quickly but cautiously to maintain momentum from 2024. Supporting this demand were the Federal Reserve’s continued incremental reductions to the federal funds rate and recent regulatory actions that expanded the ability of banks, insurers, and retirement-adjacent vehicles to invest in loans, allowing fresh capital to enter the market. At the same time, high-profile bankruptcies such as First Brands and Tricolor heightened concerns around credit portfolios and increased scrutiny of business fundamentals, diligence, and borrower transparency.
The dynamic economic circumstances throughout the year were also reflected in market activity. Following a strong first quarter, deal activity slowed materially in the second quarter, with the first half of 2025 dominated by refinancings and repricings. Momentum returned in the third quarter, when primary syndicated loan activity surpassed the prior quarterly volume record set in the second quarter of 2024, reaching approximately $404 billion, before moderating again in the fourth quarter. Overall, 2025 ranked as the third-highest year for gross new-loan issuance over the past nine years, trailing only 2024 and 2017. Market expectations entering 2026 remain constructive, supported by continued anticipation of increased M&A activity and improving sentiment carried over from late 2025.
Continuing trends from recent years, both the private credit and broadly syndicated loan (“BSL”) markets continued to grow and further institutionalize in 2025, interacting in complementary ways that enhanced flexibility, execution certainty, and access to capital for borrowers, sponsors, and other market participants. In the BSL market, 2025 saw spreads tighten to their lowest levels since the 2008 Global Financial Crisis, prompting a wave of repricings and refinancings aimed at reducing debt-service costs. In transactions such as the refinancing of Finastra, savings reached approximately 300 basis points. At the same time, private credit lenders continued to expand into sectors beyond traditional private-equity-sponsored buyouts, including data-center development driven by AI demand, sports investments, commercial real estate, and certain asset-based lending structures.
The convergence of the two markets also continued to grow, with banks expanding their private credit and direct lending capabilities (as reflected in the February 2025 announcement by JPMorgan of a $50 billion expansion of its direct lending business), while private credit lenders increasingly participate alongside arrangers in complex syndicated transactions, and borrowers often evaluate both markets in parallel when structuring transactions. Heading into 2026, the private credit and BSL markets may be best understood as interconnected components of a broader financial ecosystem rather than as discrete alternatives.
2. Market Growth and Dynamics
Private credit has matured into a core component of the leveraged finance landscape, offering borrowers a scaled and institutionalized alternative characterized by bespoke structuring, fewer ratings requirements, lower execution risk, and more efficient timelines to close. As a result, borrowers and sponsors increasingly assess private credit alongside the BSL market when evaluating financing options.
The BSL market, in turn, has retained its core strengths – a significantly larger pool of capital, generally less onerous terms for borrowers who are able to access it, and greater liquidity and pricing transparency. Importantly, available data continues to reflect growth across both markets rather than a simple substitution effect. Public estimates placed private credit assets above $3 trillion in 2025, with projected growth to approximately $5 trillion by 2029, while outstanding U.S. BSL volumes increased to approximately $1.55 trillion in 2025.
3. Recent market developments
Macroeconomic uncertainty, asset-valuation gaps, and higher interest rates slowed leveraged buyout activity and constrained the loan market in recent years, particularly in the BSL market, which has traditionally been more sensitive to broader market conditions. During this period, private credit expanded beyond its traditional middle-market focus into larger transactions. Participation by private credit lenders in larger scale financings (alongside BSL lenders) continued through 2024 and into 2025, including ABC Technologies’ approximately $2.3 billion refinancing. While spreads compressed in response to competitive dynamics and evolving rate conditions, the market has a positive outlook moving into 2026.
BSL activity sustained momentum in 2025 despite periods of volatility, supported by a lower-rate environment, marquee M&A transactions, and continued refinancing, repricing, and dividend recapitalization activity. A notable transaction was the PIF, Silver Lake, and Affinity Partners’ approximately $55 billion take-private of Electronic Arts Inc., supported by an approximately $20 billion credit facility. At the same time, the bankruptcies of First Brands and Tricolor heightened market focus on diligence, data quality, and borrower transparency, reinforcing expectations (particularly in the direct-lending context) for more robust and ongoing access to financial and operational information.
Direct lenders also continued to play a leading role in sourcing new deal opportunities. Private equity expanded its interest in sports-related investments, with high-profile transactions involving the Buffalo Bills, Miami Dolphins/Formula 1 Miami Grand Prix, and Los Angeles Chargers making headlines, private equity sports deal values reached an eight-year high exceeding $6 billion. Against this backdrop, private credit has increasingly supported the sector, whether by financing sports infrastructure, providing acquisition capital, or offering liquidity solutions. Ares previously closed a $3.7 billion sports-focused fund, and Apollo Global Management launched Apollo Sports Capital in September 2025. Apollo has publicly noted that financing opportunities remain significant, citing that many franchises remain under-levered at approximately 10% loan-to-value and that traditional lenders have been slower to engage, leaving meaningful whitespace for private credit and hybrid financing solutions.
According to market reporting, AI-related data-center and project-finance activity surged to approximately $125 billion in 2025 from roughly $15 billion in 2024, with further growth anticipated into 2026. Morgan Stanley estimates that private credit markets could supply more than half of the approximately $1.5 trillion required for data-center development through 2028. Recent transactions illustrate this trend, including Blue Owl’s approximately $30 billion joint venture with Meta to support data-center construction, which was financed with more than $27 billion of debt arranged by Morgan Stanley through a Rule 144A offering with PIMCO as the anchor investor, as well as Blackstone’s provision of over $1 billion in credit facilities to Aligned Data Centers.
Across both markets, terms and processes continued to evolve to meet borrower needs while playing to each of their strengths: private credit’s speed and customization alongside BSL’s depth of capital, liquidity, and scale. These developments through late 2025 reflect a resilient financing environment. As sponsors and borrowers seek reliable execution, enhanced transparency and tailored covenant packages, we expect this interplay to deepen in 2026.
4. Sources of Funding for Private Credit
Private credit’s funding base has continued to diversify, with two channels becoming particularly consequential in 2025: (i) the expanding role of banks as lenders to private credit vehicles and (ii) policy-driven avenues facilitating a future influx of retirement savings capital. Together, these sources reinforce private credit’s ability to finance larger and more bespoke transactions alongside the BSL market.
Banks have become key liquidity and enablement partners to private credit funds through revolving credit facilities, warehouse lines, and selective term loans that support origination pipelines and execution certainty. These facilities are particularly important given that private credit funds would otherwise be required to rely more heavily on capital calls to raise funds, which can introduce timing and execution constraints. As of late 2024, committed credit from large U.S. banks to private credit vehicles had reached approximately $95 billion, with utilization levels near historical norms and low delinquency rates. This exposure generally remains investment-grade under internal bank metrics, and supervisory stress analyses suggest that even full draws on undrawn commitments would have limited aggregate impact on regulatory capital. Taken together, these dynamics underscore the extent to which bank-provided financing has become an important facilitator of private credit’s ability to deploy capital at scale, particularly in transactions where speed, certainty, and flexibility are critical.
Beyond balance-sheet lending to funds, banks and private credit managers have continued to deepen strategic partnerships through co-origination arrangements, risk-transfer structures, and anchor participation in challenging syndications, with private credit funds (and, in certain cases, affiliated CLO vehicles) increasingly taking allocations in BSL transactions. Together, these structures extend banks’ originate-to-distribute capabilities while enabling private credit funds to retain a growing share of originated assets.
In parallel, policy and product developments in 2025 have expanded retirement‑adjacent channels for private credit market exposure. The August 7, 2025 Executive Order signed by President Trump directs the Department of Labor and encourages the Securities and Exchange Commission to facilitate access by defined‑contribution plans (such as 401(k) plans) to “alternative assets”, which may include private credit, through professionally managed, diversified vehicles (such as target-date fund sleeves and other asset-allocation structures), framed within fiduciary standards and potential safe harbors.
For borrowers and sponsors, these funding developments will continue to enhance private credit’s ability to deliver speed, certainty, and scale while complementing BSL market depth and liquidity in the coming years.
5. PIK interest still on the rise
One feature that has made private credit attractive to certain borrowers is the willingness, in appropriate circumstances, to accommodate payment-in-kind interest (“PIK”), which allows all or a portion of an interest payment to be capitalized and added to principal for payment at maturity. PIK is most commonly structured as a toggle, giving the borrower discretion to elect PIK, often alongside a required cash-pay component and a margin premium (commonly 25 to 50 basis points) during periods when PIK is used. Many transactions also incorporate a defined “sunset” period, frequently two years or less, after which interest reverts to an all-cash pay structure. Recent market examples include Soho House, where interest on the term loan was set at 10.75%, with the borrower permitted to PIK half of the interest, stepping down to an all-cash pay rate of 7.5% if EBITDA exceeded $400 million.
The appeal of PIK is most evident in higher-rate or transitional environments, where borrowers seek to preserve near-term liquidity while addressing operating plans or executing growth initiatives, and lenders receive enhanced yield in exchange for deferral risk. According to Lincoln International, more than 9% of private credit deals in 2024 included PIK options, and data through 2025 point to broader usage across the market. In particular, an increasing share of PIK features have been added post-closing in underperforming credits (often referred to as “amend-to-add” or “bad PIK”). Lincoln International observed PIK features in approximately 10–11% of deals by late 2025, with a majority of those provisions introduced after origination as borrowers encountered cash-flow stress.
Relatedly, some market participants view the prevalence of “bad PIK” as a practical indicator of underlying credit stress. One such measure places this “shadow default rate” at approximately 6%, even as headline private credit default rates remain comparatively lower. Public BDC disclosures further reflect this trend, with PIK income as a share of investment income increasing steadily since 2022, underscoring the growing incidence of PIK elections across private credit portfolios.
Outside of distressed situations, PIK continues to be used as a structuring tool to align capital with business plans, particularly where borrowers seek near-term flexibility to fund growth or acquisitions. In response, private credit lenders have increasingly calibrated PIK availability through leverage governors, performance triggers, partial-toggle mechanics, and tighter sunset provisions to manage compounding risk.
In contrast, BSL transactions rarely feature PIK, reflecting the cash-income preferences and mandate constraints of large syndicated investor bases, including CLOs, as well as the pricing, valuation, and trading frictions that PIK toggles introduce in active secondary markets.
6. The Allure of Portability
Portability provisions (permitting a change of control without triggering an event of default or mandatory prepayment) continue to be of interest to private equity-backed borrowers across both private credit and syndicated loan markets. Portability offers sponsors greater flexibility in executing an exit by allowing an existing credit agreement, including favorable pricing and terms, to remain in place following a sale. In some transactions, portability has also been paired with delayed-draw term loans (“DDTLs”), which may be made available to a purchaser upon the exercise of portability to facilitate re-levering or post-acquisition financing flexibility. Portability received renewed attention during active refinancing and dividend recapitalization cycles, where preserving documentation continuity could meaningfully facilitate future exit execution. In 2025, LFI tracked approximately 16 U.S. loans that added a portability feature.
Despite increased sponsor pressure to include these provisions, both markets have remained cautious. In the BSL market, portability proposals in transactions such as Potters Industries were ultimately removed following investor pushback during syndication. Private credit lenders have similarly been selective, emphasizing the relationship-based nature of direct lending and the importance of underwriting future ownership over the life of the facility. While portability is generally uncommon in lower middle-market private credit transactions (often due to investment committee constraints) it has appeared more frequently in larger-cap private credit deals as a competitive differentiator.
Through 2025, strong buy-side demand and oversubscribed new-money processes increased borrower leverage in negotiating portability, even as investors scrutinized the scope and guardrails of such provisions. Market participants increasingly view portability as one of several aggressive terms that may clear in competitive processes, underscoring both the convergence of documentation and the overlap in borrower bases between the private credit and BSL markets.
Deal practice has evolved to balance flexibility with control. Where a near-term sale is anticipated, sponsors increasingly request portability at origination, while lenders calibrate conditions such as leverage thresholds, sponsor qualifications, no-default requirements, and pro forma financial tests to align risk with expected ownership transitions. Where DDTLs are included, lenders have focused on conditioning draw availability on additional leverage, use-of-proceeds, and financial performance requirements. Lenders have also focused on related economics, including prepayment protections, adjusting call protection windows and triggers to remain competitive while mitigating early take-out risk when a portability-enabled sale materializes.
Looking ahead to 2026, portability is expected to remain a negotiated, credit-specific tool rather than a market standard. Private credit’s relationship-driven underwriting and control rights will continue to influence when portability is offered, while receptivity in the BSL market will depend on investor demand and the strength of accompanying protections. In both markets, the steady convergence of terms and the increased willingness to partner across private credit and BSL suggests portability will persist in appropriate cases where it supports execution certainty without compromising underwriting discipline.
7. Highwater marking is back
EBITDA high-water marking (“HWM”) – a feature that first appeared in U.S. credit agreements in the BSL market around 2022 – attempted a resurgence in 2025. HWM allows borrowers to size EBITDA-based baskets by reference to the highest EBITDA achieved in any prior reporting period, rather than the most recently reported EBITDA, which is the customary approach. As a result, baskets are not reduced during periods of EBITDA decline, allowing borrowers to benefit from historical performance even when current results deteriorate.
From a credit perspective, this position remains difficult to justify economically. While borrowers have long benefited from EBITDA growth through traditional “grower” components of EBITDA-based baskets, retaining peak EBITDA levels during periods of underperformance can transfer significant value away from lenders without corresponding protections or guarantees. As a result, both arrangers and lenders have generally resisted HWM provisions in U.S. transactions.
Xtract reporting indicates that HWM provisions cleared in at least eight deals between 2024 and 2025, despite appearing in approximately 35 term sheets during that period, all of which were sponsor-led transactions. Covenant Review has similarly noted that HWM provisions failed to survive in the thirteen months through November 2025. A recent example of lender pushback occurred in the Potters Industries transaction, where HWM language was removed to facilitate syndication.
While industry reporting suggests that HWM provisions are more common in European private credit markets than in the United States, U.S. lenders continue to view the feature as aggressive. Heading into 2026, HWM is expected to remain contentious and highly negotiated, with continued resistance from arrangers and investors in both private credit and BSL markets.
8. Covenants and borrower flexibility – how the private credit and BSL markets compare
As private credit and BSL markets have expanded side by side, loan documentation has continued to converge, though meaningful differences remain. BSL first-lien institutional loans remain overwhelmingly covenant-lite (approximately 98% in 2025), while private credit transactions are generally tighter and show a materially lower incidence of covenant-lite structures (estimated at approximately 53% in 2025). These differences reflect distinct investor bases, liquidity considerations, and underwriting philosophies, even as sponsors seek greater uniformity across products.
Incremental debt mechanics also display divergence. Both markets typically permit “free-and-clear” incremental capacity alongside ratio-based tranches. However, private credit transactions more frequently include relationship-lender protections such as rights of first offer (“ROFOs”) and consent rights, while BSL transactions rarely include ROFO provisions.
Restricted payment and investment basket access similarly varies. Private credit documentation typically conditions basket access on the absence of defaults and meaningful deleveraging since closing. In contrast, BSL documentation often links access to investment baskets to financial metrics determined at closing, with more limited deleveraging requirements for restricted payments.
Most Favored Nation (“MFN”) protections also differ across markets. In 2025, MFN sunsets were common in BSL transactions, frequently set at six months, with a growing number requiring at least a 75-basis-point yield differential before protection applied. Private credit transactions generally showed fewer MFN sunsets and tighter yield protection thresholds, consistent with more lender-protective economics. Liability-management protections appeared in both markets but continued to feature more prominently in private credit transactions.
Looking ahead to 2026, gradual convergence is expected at the upper end of the sponsor-backed market, particularly with respect to incurrence-based terms. Middle-market private credit, however, is likely to remain differentiated by relationship-driven controls and a greater prevalence of maintenance covenants, even as sponsors continue to push for harmonized documentation.
9. OCC and FDIC on Leveraged Lending Guidance
On December 5, 2025, the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”) formally withdrew the 2013 Interagency Leveraged Lending Guidance and the related 2014 FAQs. The agencies stated that the prior framework was overly restrictive, overly broad, and constituted a rule that had not been submitted to Congress under the Congressional Review Act. They further noted that the guidance had pushed significant volumes of leveraged lending activity outside the regulated banking system, contributing to the growth of non-bank lenders.
In place of the withdrawn guidance, the OCC and FDIC articulated a principles-based supervisory framework centered on eight core expectations, including risk appetite, underwriting standards, pipeline management, lifecycle monitoring (including refinancing risk), bank-specific leveraged loan definitions, and independent credit assessments for participations. Examiners will continue to assess underwriting quality, risk ratings, and loan loss reserves under general safety-and-soundness principles tailored to the size, complexity, and risk profile of each institution.
For market participants, the shift away from bright-line leverage thresholds (such as de-levering tests and 6x debt-to-EBITDA references) may reduce supervisory frictions that previously constrained banks’ hold capacity or participation in certain transactions. At the same time, the revised framework places greater emphasis on governance, documentation, and consistent application of internal risk standards. Peer analyses suggest this recalibration could enhance banks’ ability to compete with private credit lenders, subject to capital, liquidity, and risk limits, and may support more collaborative origination and distribution models between banks and private credit funds.
Overall, the OCC and FDIC’s principles-based approach aligns with broader themes of market convergence, seeking to bring leveraged lending activity back within the banking perimeter while preserving prudent risk management.
10. The future
2025 solidified the view that the private credit and BSL markets are complements to one another, with both markets continuing to grow in parallel heading into 2026. Market participants increasingly describe the landscape as “not either/or,” but rather “yes, and,” with aggregate growth expected across both markets rather than zero-sum competition.
Building on the strong pace of refinancings and maturity extensions in recent years, and facing a record approximately $344 billion of leveraged loan maturities over the next three years, including a steep $288 billion maturity wall in 2028, speculative-grade borrowers are expected to continue evaluating private credit and BSL markets in parallel. In doing so, borrowers are likely to select or combine broadly syndicated and direct-lending solutions based on execution certainty, all-in cost of capital, and the flexibility these structures provide in a higher-for-longer rate environment.
Collaboration between banks and direct lenders has become a consistent feature of the leveraged finance landscape. Private credit funds are increasingly serving as anchor investors in syndicated transactions, while banks leverage origination, sales, and trading capabilities to deliver both BSL and private credit solutions, including through agency and distribution roles. Looking ahead to 2026, both markets appear well positioned to support strategic activity, including anticipated increases in M&A and continued investment in artificial intelligence and digital infrastructure.