US Stock Market: Private credit lending slumps in Q2 despite rebound in fundraising

Fundraising by US private credit firms rebounded strongly in the second quarter, but direct lending activity dropped sharply, highlighting a widening gap between investor capital flowing into the sector and the pace of new lending opportunities.

According to Reuters, North America-focused closed-end direct lending funds raised $16.25 billion during the second quarter, a sharp increase from $1.3 billion in the first quarter and the highest quarterly fundraising total in two years, based on data from Preqin.

However, lending activity moved in the opposite direction. Reuters reported, citing PitchBook/LCD data, that U.S. direct lending volume fell 55% quarter-on-quarter to $33.59 billion in the second quarter from $74.67 billion in the first quarter. The figure marked the lowest lending volume since the second quarter of 2023. The number of completed deals also declined to 154 from 217 in the previous quarter.


Capital inflows outpace deployment
Direct lenders are private credit funds that provide loans directly to companies, typically financing acquisitions, buyouts or refinancing transactions without relying on traditional banks or the broadly syndicated loan market.

The divergence between fundraising and lending suggests that while investors continue to allocate capital to private credit, fund managers are becoming increasingly selective about deploying that money. According to Reuters, the shift comes amid heightened scrutiny following rising defaults, concerns over exposure to software companies and redemption pressure affecting some semi-liquid investment vehicles.

Jun Li, EY's global and Americas wealth and asset management leader, told Reuters that the slowdown reflected softer merger and acquisition activity, fewer buyouts, borrower caution, increased competition from the broadly syndicated loan market and greater selectivity among private credit managers.

Private equity-backed lending weakens
The sharpest decline was seen in lending tied to private equity transactions, traditionally one of the largest drivers of direct lending demand.

As per the Reuters report, private equity-backed direct lending volume dropped to $19.40 billion in the second quarter from $44.61 billion in the first quarter. Lending linked to leveraged buyouts also declined significantly, falling to $9.79 billion from $22.31 billion over the same period.

The slowdown reflects weaker acquisition activity, reducing the need for financing from private credit providers.

Legacy loans add pressure
Industry participants also point to challenges stemming from loans originated during the 2021-2022 credit boom, when borrowing costs were lower and lending standards were more accommodative.

Higher interest rates have since increased debt servicing costs for many borrowers, prompting lenders to seek stronger pricing and tighter protections when extending new loans.

Existing portfolio stress has also limited the capacity of some firms to pursue fresh lending opportunities. Bryant Riley, chairman and chief executive of B. Riley Financial, told Reuters that pressure on older loans has led several business development companies (BDCs) to preserve liquidity to support existing borrowers instead of committing capital to new deals.

Investors focus on quality over speed
Private BDCs have also experienced redemption requests, while many publicly traded BDCs continue to trade below their net asset value, making it more difficult to raise additional equity capital.

According to Reuters, EY's Jun Li said that over the longer term, investors are expected to prioritize underwriting discipline and risk-adjusted returns rather than the speed at which private credit managers deploy capital, reflecting a more cautious approach as the industry adapts to a higher-rate environment.