Built To Last: Private Credit’s $1.7 Trillion Opportunity
Executive Summary:
- Although not perfect, 2025 largely validated our "Golden Age of Private Credit" thesis, with persistent supply-demand gaps, muted defaults and a continued higher-for-longer rate environment.
- Entering 2026, supportive macro conditions, resilient earnings and healthy equity cushions underpin continued stability in credit.
- We believe that scaled managers who can source, select and diligently underwrite risk-adjusted investments will define private credit outcomes in the year ahead.
Reflection is a powerful tool. In April 2025, we published a piece in response to global investor questions regarding the potential end of the "Golden Age of Private Credit." Our conclusion was that the golden age had further room to run, rooted in the following fundamentals:
- A higher-for-longer rate environment leading to higher absolute yields.
- Private credit demand exceeding supply would create sector tailwinds.
- Consistent historical performance and public market benchmark outperformance.
- A muted default backdrop.
We begrudgingly wrapped the piece with a ‘looking ahead’ section amidst volatile policy pivots that required numerous pre-publication changes. We got most, but not all, of our predictions right. We were wrong in predicting that macroeconomic uncertainty would likely be accompanied by widening spreads. The opposite happened. Macroeconomic data related to employment, consumer spending, U.S. GDP, inflation and corporate earnings nudged market confidence upward, creating a risk-on and tightening-spread environment. This year, we explore whether the fundamentals that carried the golden age of private credit forward through 2025 will remain intact.
2025's private credit fundamentals
Higher for longer: While today's 3-month term SOFR is 65 bps lower than where we were at publication time in March 2025, the forward SOFR curve suggests investors are still poised to earn +200 bps of floating rate premium. Despite recent spread tightening, absolute all-in yields through 2036 should remain attractive relative to all-in yields in the decade leading up to 2022’s rising rate environment.
The leveraged loan market is healthy evidence of this. The yield-to-maturity (YTM) following 2022 has been +200 bps above the 2011 to 2022 average and is estimated to remain elevated based on the forward SOFR curve.
Leveraged Loan Market YTM
Source: Source: PitchBook | LCD, Data through December 31, 2025, unless otherwise noted.
We would be remiss if we didn’t point out that private credit spreads tightened in 2025 to approximately 450–500 bps for middle-market senior loans, creating pressure on absolute returns. Despite that, we expect higher returns over the next decade relative to the one leading up to 2022’s rising rate environment, making private credit an attractive place to find yield.
Demand exceeding supply: The funding gap between available private equity (PE) capital and credit origination dry powder persists. As of Q2 2025, there was a $1.2T funding gap between the amount of private equity buyout dry powder raised and the amount of credit origination raised. That gap declined from Q3 2024 to Q2 2025 by +$250B, largely due to an increase in the amount of credit origination dry powder. Despite that decline, when we marry the current funding gap with upcoming loan maturities, we estimate there is close to a $1.7T need over the next four years, suggesting private credit has ample deployment runway.
Buyout Credit Financing Demand
Leveraged Loan Maturities
Source: PitchBook LCD. Data as of January 1, 2026.
And consistent with last year’s article, our view is that it is unlikely the banks will close that funding gap. PE borrowers in particular tend to favor relationships, confidentiality and certainty of execution, which private credit can offer over bank-led financing. Just look at the count of leveraged buyouts (LBOs) in recent years financed by private credit versus the syndicated markets.
Count of LBOs Financed in BSL vs Private Credit Markets
Source: Pitchbook, LCD (9/30/2025, unless otherwise stated). Private credit count is based on transactions covered by LCD news.
Consistency of performance: Private credit continues to demonstrate positive vintage year IRR and benchmark outperformance, and the data speaks for itself.
Private Credit IRR vs PME
Defaults: A resilient labor market and continued consumer spending continued to fuel growth in 2025. Through the end of 2025, the default rate remained muted yet again. In the leveraged loan market, the default rate was 1.18% by issuer count, which remained below the 25-year average of 2.15% and below average annual default levels following 2022’s rising rate environment of 1.34%.
Turning to the distressed ratio, a leading indicator of future default activity, December 2025 levels of 7.24% are in-line with the 25-year average of 7.2%. 2025 overall saw the distressed ratio ocellate between 4 and 7% throughout the year, which was generally lower than the 9-10% peaks seen in the 2022 and 2023 periods.
Closing thoughts
Our perspective is that the fundamentals remain intact. Today, senior-secured lending is well-positioned to stay the course and weather any potential macroeconomic or geopolitical headwinds. With a $1.7 trillion runway, private credit can offer investors the opportunity for continued yield and stability. This asset class is built to last.
Corporate Finance/Buyout: Any PM fund that generally takes control position by buying a company.
Credit: This strategy focuses on providing debt capital.
Distressed Debt: Includes any PM fund that primarily invests in the debt of distressed companies.
S&P UBS Leveraged Loan Index: The S&P UBS Leveraged Loan Index represents tradable, senior-secured, U.S. dollar-denominated non-investment grade loans.
PME (Public Market Equivalent): Calculated by taking the fund cash flows and investing them in a relevant index. The fund cash flows are pooled such that capital calls are simulated as index share purchases and distributions as index share sales. Contributions are scaled by a factor such that the ending portfolio balance is equal to the private equity net asset value (equal ending exposures for both portfolios). This seeks to prevent shorting of the public market equivalent portfolio. Distributions are not scaled by this factor. The IRR is calculated based off of these adjusted cash flows.
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As of 2/11/2026