Private Credit Comes of Age: Direct Lending and the New Architecture of LBO Financing

A decade ago, private credit was a niche complement to the syndicated loan market. Today it is the default financing route for much of the European mid-market buyout universe, and an asset class large enough to draw the sustained attention of the International Monetary Fund. For sponsors and borrowers, understanding how this market now prices and behaves is no longer optional.

A remarkable growth trajectory

Preqin's data put global private debt assets under management at roughly USD 1.5 trillion at the end of 2023, rising to around USD 1.7 trillion in its 2025 report, and forecasts the market reaching USD 2.6 trillion by 2029. Moody's Ratings, working from a narrower definition, expects the asset class to cross USD 2 trillion during 2026. Whichever lens one applies, private credit has moved from the periphery of corporate finance to its centre in barely a decade.

European direct lending now dominates buyouts

Nowhere is that more visible than in European direct lending. According to ION Analytics' Full-Year 2025 European Direct Lender Rankings, direct lenders deployed a record EUR 115 billion across 1,357 transactions in 2025 — deal volume up 23% on the year and well above the prior four-year average of roughly EUR 84 billion. Sponsor-backed situations accounted for around three-quarters of activity.

Crucially, direct lenders now dominate buyout financing: roughly 26% of direct-lending proceeds funded new-money LBOs, against only about 10% of broadly syndicated loan proceeds.

Pricing, terms and credit performance

That dominance is reflected in pricing. ION Analytics records fourth-quarter 2025 direct-lending spreads of around 521 basis points, against 381 basis points for the broadly syndicated market, on net leverage of about 4.7x EBITDA — the premium borrowers pay for speed, certainty and structural flexibility. Even so, spreads have compressed as capital has flooded in; Morgan Stanley Investment Management notes US direct-lending yields easing from 8.97% in September 2024 to 7.31% by June 2025. Fund-raising has kept pace, with European direct-lending vehicles raising a record EUR 58 billion in 2025.

Credit performance has so far held up. Moody's places the speculative-grade default rate at around 4.5% at the end of 2025 and forecasts a decline below 3% by the end of 2026 as rate pressure eases. But headline default rates tell only part of the story in a market where much restructuring happens privately, through amendments and payment-in-kind arrangements that defer rather than resolve stress.

What the regulators are flagging

The IMF's October 2025 Global Financial Stability Report observes that more than 40% of private-credit borrowers had negative operating or free cash flow at the end of 2024, and cautions that nonbank lenders are "less transparent and not as firmly regulated" than the banks they are displacing. Its concern is less any individual loan than the system — the deepening interconnection between banks, insurers and private-credit funds, and the growing flow of retail capital into a fundamentally illiquid asset class. These are not reasons to avoid the market, but they are reasons to underwrite it with discipline.

Up to USD 3 trillion of assets could migrate off bank balance sheets into private credit over the next five years — spanning not only leveraged loans but mortgages, commercial real estate, project finance and asset-based lending.

— Moody's Ratings, 2026 Private Credit Outlook

The advisory takeaway

McKinsey describes this as the "next era" of private credit, in which the asset class expands well beyond sponsor-backed lending and banks, insurers and asset managers increasingly converge. For European borrowers, the practical consequence is a financing market that is deeper, faster and more flexible than the bank-led model it is supplanting — provided the terms are negotiated with full awareness of the cycle.

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Sources

• International Monetary Fund — Global Financial Stability Report, October 2025
• Preqin — Future of Alternatives 2029
• Moody's Ratings — 2026 Private Credit Outlook (January 2026)
• ION Analytics / Debtwire — Full-Year 2025 European Direct Lender Rankings
• Morgan Stanley Investment Management — The Evolution of Direct Lending
• McKinsey & Company — The Next Era of Private Credit