Headlines

• Increase in capital in the financial system has put downward pressure on private credit pricing
• Absolute returns on private credit funds remain very attractive
• Managers pursue strategic diversification to maintain deployment

The private credit industry entered 2026 in a robust position, having delivered consistently good risk-adjusted returns and secured strong fundraising support from investors.

However, M&A financing opportunities remain in short supply. In response, private credit players have had to tighten margins and loosen terms to win new deals and protect existing portfolios in an increasingly competitive market.

In this Q&A, we provide an in-depth analysis of how chilly M&A conditions, competition from BSL markets and lower interest rates will shape private credit deployment in the year ahead.

Private credit lenders have had to narrow margins and price capital more strategically in a competitive market. What does this mean for returns?

Private credit pricing has come down during the past 12 months. Dealmakers have consistently priced at margins less than 5 per cent, and there have been fewer deals pricing at margins above 6 per cent.

There are two macroeconomic factors that have placed downward pressure on pricing.

First, there is still a large amount of private credit dry powder available to finance deals, but there have not been many deals in a quiet M&A market. When there is abundant credit chasing a smaller number of deals, the result is greater price competition.

Second, the BSL market is back and open for business, providing finance very cheaply, at margins of 3 per cent, or even as low as 2.75 per cent, depending on the currency of issuance. Private credit must compete with that.

When private credit pricing was higher, the context was different. The BSL market was not open and there was less dry powder available. It is normal and natural for pricing to come down when there is more capital in the system, and additional financing options are available.

What do these pricing conditions and interest rate cuts mean for the private credit returns outlook?

There are senior industry leaders who argue that the new normal of lower pricing means that the era of excessively high private credit returns has passed.

That is a reasonable assessment. Naturally, lower pricing will have an impact on the returns available to investors. However, it remains the case that an investor with exposure to a European credit fund can still expect an annual return of approximately 8 to 9 per cent by taking senior secured risk (albeit with some leverage), with the return paid in cash.

When you compare that to the expected long-term returns from stocks—especially when equities are as highly valued as they are now—you can still reasonably expect, on average, to receive a better return from private credit, even though you are taking less risk. That is a compelling position to be in as an investor, notwithstanding recent pricing declines.

Regarding how changes in interest rates impact private credit returns, private credit can advertise higher returns when base rates go up but must advertise lower returns when they come down. In neither case does that say anything about the relative return you are making compared to risk-free assets.

The relevant measure for a savvy investor should not be the absolute number. It should be the spread over treasuries or over an equivalent risk-free asset. Risk-free assets move in line with interest rates too, and the spread between private credit and the risk-free rate has not narrowed very much since the market was in a high-rate environment.

How are private credit players thinking about deployment in 2026? Is there confidence that the M&A market will rebound, increasing the flow of financing opportunities? Are there any other levers private credit players can pull to increase deployment?

The M&A rebound will come. The question is when, and no one can predict that. Analysts have been predicting a bounce-back for several years now, and it has yet to materialise.

If M&A activity does increase, it will be good for everyone. But most private credit stakeholders—whether private credit firms, banks or advisers—will be focusing on ways to be profitable and do business even if that does not happen. We see private credit managers pulling different levers, rather than waiting for M&A volumes to rebound.

Private credit firms are broadening the types of investments they make beyond sponsor-backed LBOs. Some options are sponsorless corporate deals, private infrastructure lending, high-grade asset-backed finance, real estate and data centres. We have seen private credit funds move into these areas and others.

A safe prediction is that over the next 24 months, most of the big private credit platforms will do more lending in non-LBO channels. LBO lending will still be an active area, but managers will see growth in these adjacent credit channels.

In many cases, the broadening of the addressable market for private credit has been driven by the new pools of capital that have flowed into the asset class. Some of the largest asset managers are now deploying credit as part of an insurance strategy. Apollo, for instance, merged with insurance company Athene, while Blackstone Credit is now part of a larger Blackstone Credit & Insurance unit. These platforms exemplify this shift but are not unique in pursuing this model.

Insurance businesses require predictable, low-risk long-term returns. They do not want to lend for five years at an interest coupon of 10 per cent; but they are happy to lend at coupons in the 4 to 5 per cent range that are locked in for more than 25 years.

Different sources of capital drive different investment philosophies, and we see that playing out in the market now.

How are managers approaching portfolio diversification?

If you are a borrower, CFO, capital markets professional or sponsor, when you look at your lending options, there is a very broad menu from which to choose.

Not every private credit lender is the same; there is a wide spectrum of investment philosophies. Some managers have always operated at different points along the credit spectrum, while others are very conservative. The mix of approaches may shift slightly as the market evolves, which is natural.

It is important to emphasise that underwriting standards remain robust across the market. This diversity has always characterised private credit, with managers maintaining disciplined processes appropriate to their individual strategies.

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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