Key facts
- Direct lending by U.S. private credit firms decreased by approximately 55% in the second quarter compared to the first.
- Fundraising for North America-focused closed-end direct-lending funds reached $16.25 billion in Q2, the highest in two years.
- Lending volumes declined to $33.59 billion in Q2, the lowest since Q2 2023, with deal counts falling to 154.
- Private equity-backed lending, a key demand driver, saw a sharp pullback, with buyout-related volume decreasing significantly.
- Lenders are becoming more selective due to increased scrutiny after defaults, concerns over specific sector exposures, and redemption pressures.
Direct lending activity by U.S. private credit firms experienced a sharp decline in the second quarter, even as the amount of capital raised by these firms rebounded significantly. North America-focused closed-end direct-lending funds raised $16.25 billion in the quarter, a substantial increase from $1.3 billion in the first quarter and the highest level in two years, according to Preqin data.
However, lending volumes moved in the opposite direction. U.S. direct-lending volume, which measures loans made directly by private-credit funds to companies, fell approximately 55% quarter-on-quarter to $33.59 billion in the second quarter from $74.67 billion in the first. This marks the lowest level since the second quarter of 2023, according to PitchBook/LCD data. The number of deals also decreased to 154 from 217.
Direct lenders are private-credit funds that provide loans directly to companies, often for buyouts, acquisitions, or refinancings, bypassing traditional banks or the broadly syndicated loan market. The divergence between fundraising and deal flow suggests that while capital is still flowing into private credit, lenders are becoming more selective about deploying it. This shift follows increased scrutiny after defaults, concerns over software exposure, and redemption pressures from some retail investors.
Jun Li, EY’s global and Americas wealth and asset management leader, attributed the slowdown to softer M&A and buyout activity, borrower delays, competition from the broadly syndicated loan market, and greater selectivity among private-credit managers. The pullback was most pronounced in private equity-backed lending, a key source of demand, with PE-backed direct-lending volume falling to $19.40 billion in Q2 from $44.61 billion in Q1. Leveraged buyout-related volume dropped to $9.79 billion from $22.31 billion.
Some caution among private credit firms also stems from loans made during the 2021-2022 boom when rates were lower and terms were looser. Higher current rates have made these loans harder to service, prompting lenders to demand better pricing and stronger protections on new deals. Additionally, some firms are constrained by existing portfolio stress, with business development companies keeping cash available for troubled borrowers rather than new loans. Private BDCs have also faced redemption requests, and many public BDCs' shares trade below net asset value, limiting their ability to raise fresh equity.