Closed-end direct-lending funds concentrated on North America attracted $16.25 billion in the second quarter, reversing a weak first quarter result of $1.3 billion and marking the largest quarterly haul in two years, according to Preqin data. Despite that rebound in fundraising, loan originations by U.S. private-credit managers fell sharply.
PitchBook/LCD reported U.S. direct-lending volume - defined as loans originated directly by private-credit funds to companies - declined by roughly 55% quarter-on-quarter, from $74.67 billion in the first quarter to $33.59 billion in the second. That level of activity is the lowest recorded since the second quarter of 2023. The number of deals completed in the period also slipped, falling to 154 from 217 in the prior quarter.
The disconnect highlights a growing mismatch between commitments flowing into private-credit strategies and the availability of transactions to absorb that capital. While investors are again allocating money to closed-end direct-lending funds, managers appear to be exercising greater selectivity before deploying it.
Industry participants point to several drivers for the slowdown. Jun Li, EY's global and Americas wealth and asset management leader, attributed the cooling to softer merger-and-acquisition and buyout activity, delays from prospective borrowers, heightened competition from the broadly syndicated loan market, and a marked increase in selectivity by private-credit managers.
Concerns that have emerged in recent quarters are also constraining deployment. Defaults and worries around exposure to certain software-related credits have prompted closer scrutiny of new underwriting. In addition, redemption pressure from retail investors in some semi-liquid vehicles has prompted managers to be more cautious.
The retreat in activity was particularly pronounced in lending to private equity-backed companies, a traditional engine for direct-lending demand. PitchBook/LCD data show private equity-backed direct-lending volume fell to $19.40 billion in the second quarter from $44.61 billion in the first. Volume tied specifically to leveraged buyouts declined to $9.79 billion from $22.31 billion over the same interval.
Part of the caution among private-credit providers stems from the legacy of transactions completed during the 2021-2022 boom. Many loans originated then carried lighter terms and were structured when interest rates were lower. As rates increased, servicing those commitments has become more challenging for some borrowers, prompting lenders to insist on stronger pricing and enhanced protective covenants on new deals.
Portfolio stress in existing holdings is also limiting some firms' ability or willingness to originate new loans. Bryant Riley, chairman and chief executive of B.Riley Financial, said that older credits are showing strain. That pressure has led some business development companies to hold cash in reserve to support troubled portfolio companies instead of deploying it into new credit opportunities.
Private BDCs have faced redemption requests, and many publicly traded BDC shares currently trade below net asset value, which constrains those vehicles' capacity to raise fresh equity. EY's Jun Li suggested this cycle could lead investors to place a higher premium on underwriting quality and risk-adjusted returns over the speed of deployment.
Implications
The data reflect a period in which capital availability and lending activity are out of sync. Fund-raising momentum has returned, yet a range of market and credit concerns is prompting private-credit managers to tighten underwriting standards and lean toward preserving capital for existing portfolio needs.