Private debt outlook & key market trends for 2025

Exploring 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. Securities offered in this space are also predicted to evolve with trends, further enhancing attractiveness to investors. Debt funds must adapt pricing while leveraging securities to maintain competitiveness in core sectors.

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 financial landscape is evolving, bringing new views and strategies into private debt.

The asset class has proven resilience through rising inflation, benefiting from market shifts and proving reliable returns. 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. Lenders will continue to provide diversified financing solutions to support various sectors.

Private debt managers will face increasing competition from global banking institutions and investors in 2025, impacting future financing. 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.  

Data from Bank of America and information from 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 market participants will remain competitive, not solely based on pricing, but through strategic asset management. 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. Insights into how institutional investors view private debt’s role will be shared.

Pricing pressure for private debt investment targets

Banks and other financial institutions are reshaping their service profiles to adapt to these changes. 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 acknowledge the need to 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. Significant asset growth is anticipated across the private credit sector. Global trends indicate increased private market activities, including corporate financing.

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. With emerging corporate partnerships, private debt providers are poised to capitalize on substantial investment opportunities, also supported by significant asset allocations.

Private debt players have demonstrated the capability to finance significant credits during 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. This showcases the increasing access to diverse private credit options that accommodate less traditional financing preferences.

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. Private equity firms are exploring additional private market ventures, including direct lending strategies to leverage growth. While BSL markets will appeal to 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

Strategic partnerships will be vital for managing private debt portfolios effectively, including asset risk considerations. 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. 

Asset management strategies will need to adjust to address defaults. 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. 

Regulatory changes influencing private debt

The evolving regulatory environment in 2025 is reshaping how companies value private debt. Emphasis on transparency ensures valuations precisely reflect the market conditions. This heightened scrutiny requires comprehensive and meticulous financial reporting.

Independent evaluations and transparent financial information will ensure asset values align with actual market conditions. Private credit managers must comprehend and strategize around regulatory shifts to manage obstacles. Emphasizing regulation can foster improved business practices among private credit managers, thereby offering clients more secure and stable investment options in a dynamic market landscape that features stringent regulatory standards from both global and regional authorities.

Leveraging global trends to expand in private credit

Banks are also participating more actively, providing complementary services to bolster private credit growth. Private credit is increasingly global, with heightened investor access to cross-border investment opportunities. The allure of high yields and diversification benefits is attracting global investors, making private credit a key strategy for asset managers aiming to harness international opportunities while managing financial risks. As global demand for securities evolves, embracing trends will be vital to stay competitive.

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.