Private debt: outlook for 2025

Private debt trends in 2025

• Private debt is in line for a bumper year of deal flow in 2025 as M&A activity rebounds 
• Interest rate cuts will squeeze returns a little, but the asset class will continue to present compelling risk-adjusted investment opportunities    
• Private credit defaults are likely to track higher, but within manageable levels for managers equipped to troubleshoot 
• Competition for deals will intensify as broadly syndicated loan (BSL) markets continue to rally. Debt funds will have to adapt pricing, but will still benefit from sticking to core strengths 

Private debt’s so called “golden age” will still have room to run in 2025, even as interest rates come down and broadly syndicated loan (BSL) markets reopen. 

The asset class proved one of the best performers through the cycle of rising inflation and interest rates, with its floating rate structures benefitting from rising base rates at the same time as risk-averse BSL markets pulled up the shutters, opening the way for private debt managers to gain market share and take their pick from the best credits on offer. 

These favorable dynamics have shifted in 2024, with central banks cutting rates as inflation subsided and BSL markets bouncing back to record double-digit gains in year-on-year issuance. 

Private debt managers will face increasing competition from BSL markets in 2025 as a result, with BSL arrangers and investors showing strong appetite to lean back into M&A and leveraged buyout financings after a stepping back through the period of interest rate dislocation. 

The last year has already seen BSL markets claim back market share, offering lower pricing to win back credits that were financed with private debt-backed unitranche loans.  

Bank of America figures reported by Bloomberg show that at least US$30 billion worth of private debt deals in the US were refinanced in the BSL market in 2024 at lower rates. BSL players will continue to run hard in 2025 and will not only compete on price. Arrangers, noting the speed of execution and certainty offered by private debt providers, have worked hard to get BSL pricing spot on to avoid flex and mitigate syndication risk. 

For deep dives into key trends driving the 2025 private debt outlook, read on. 

Pricing pressure for private debt investment targets

Increased competition will keep private debt managers on their toes, but the asset class is still well placed for a strong year of activity and opportunity in 2025. 

Managers will have to accept that they may have reduce margins to stay within a reasonable range of the pricing banks and BSL markets can offer in the year ahead. Many have already done so. 

But while margins may have to come down, and interest rates are lower, private debt managers will still be able to deliver consistent, high single digit returns, as base rates remain well above levels from 24 months ago. On a risk-adjusted basis, private debt will continue to appeal to investors, even if returns are slightly lower than those delivered in 2024. 

Lower returns, however, will be more than made up for if a much-anticipated uptick in M&A activity is realized in 2025. Interest rate stability and the urgent requirement for private equity dealmakers to make distributions to LPs promises to deliver a meaningful uptick in deal volume and demand for private debt financing. 

Private debt players have also proven their ability to finance large credits through the period of interest rate rises. BSL markets may be open again, but private debt managers now have a track record of clubbing together to deliver financing for massive credits that not too long ago would have been the exclusive preserve of BSL markets.  

Recently, for example, a club private credit managers teamed up to provide a £1.7 billion loan to help finance the take private of UK investment platform Hargreaves Lansdown. BSL markets will entice borrowers with lower pricing in 2025, but large credits will no longer default to BSL markets, as private debt managers show that they have the scale and appetite to offer flexibility and certainty of execution on big credits. 

Dealing with private debt defaults

A rise in deal financings, however, will not be the only thing taking up private debt manager time in 2025. Portfolio management will remain a key priority, as managers move to protect value and limit losses. 

Private debt portfolios have proven resilient through a period of rising rates, and while defaults are expected to increase in 2025 as the impact of rising rates trickles down to borrower balance sheets, overall default levels should, all being well, remain within manageable thresholds. 

An uptick in defaults, however, will see a bifurcation in the market between managers with the capability and resources to steward credits through periods of stress and distress, and those that have strong transactional capabilities but haven’t made the investment in restructuring capability. This will become especially apparent in a market where defaults track higher at the same time as new financing deal volumes start to rally. Managers with lean teams will find it increasingly difficult to keep on top of new opportunities and keep troubled credits on track. 

A good time to be in private debt

The next year might not be quite as good for private credit debt as 2023 and 2024, but the asset class is still set for a good 2025. 

Winning deals will take more work as competition increases, and margins and returns will have to be adjusted accordingly for private debt to remain competitive in a market where other financing channels are beginning to function normally once again. 

There will, however, be more deals to go for if M&A activity rebounds as expected, which should balance out the challenges posed by rising competition and tighter margins and returns. 

The private debt “golden era” may have run its course, but private debt is an asset class that looks likely to retain is luster for some time yet.