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For more than a decade, the private credit industry has been speeding along faster than a Porsche on the Autobahn. But recently speed bumps have emerged. Caution lights are blinking.
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May 29, 2026
There are increasing signs of strain in the market and disciplined lenders are growing uneasy. They’re responding by diving into niches where underwriting edges matter and competition is sparse.
Lenders are easing on covenants and showing a greater willingness to accept payment-in-kind (PIK) features—sometimes embedded upfront, sometimes toggled later—to bridge cash constraints or buy time in amend-and-extend situations.
These shifts show a market growing more competitive and less rewarding. Yet lenders are divided on whether the pressure is confined to the upper end of the market or whether this marks the start of a structural reset that will draw private credit’s golden age to a close.
Protections Are Thin
One of the clearest gauges of private credit’s health is its yield spread—the gap between what borrowers pay on loans and the Secured Overnight Financing Rate (SOFR) benchmark.
McKinsey & Co. estimates average unitranche spreads have compressed by 120 basis points since 2023, eroding the illiquidity premium that fueled the boom. Spreads on new deals have tightened to SOFR + 550 from around +670 a year earlier.
For Christina Lee, managing director and co-portfolio manager for Oaktree’s U.S. Private Debt strategy, it’s a signal that the market is getting crowded. “This tightening reflects both the abundance of capital in the market and the continued appetite for high-quality lending opportunities, even amid macroeconomic uncertainty,” she says.
“There’s a lot of new private credit entries and it’s definitely getting more aggressive,” adds Stephen Beriau, senior managing director, Eclipse Business Capital and senior member of SFNet’s Data Committee. “Yields have compressed and more people are fighting for the best transactions, that’s pretty clear.”
Competition is so fierce it’s eating away at protections. Covenants are getting looser and PIK deals are popping up more often. CreditSights finds covenant quality scores at 2.94 in Q1 2025 (on a 1–5 scale where 5 is weakest), compared to the 3.92 average in syndicated loans.
“There’s a lot of new private credit entries and it’s definitely getting more aggressive.”
Stephen Beriau Eclipse Business Capital
“While private credit covenants traditionally have been looser in bank lending, private credit remedies tend to be stronger,” says Sheon Karol, a senior advisor at middle-market private equity firm West Lane Partners. “An example is the use of irrevocable voting rights and the subsequent ability to flip the board. But as more available capital has flowed into private credit, increasing the competition during recent years, borrowers have been able to soften lending conditions to some extent.”
Meanwhile, PIK use hit a near four-year high in Q2, rising to 11.4 percent of debt investments’ deferred cash interest, according to Lincoln International. The firm says about half of that is “bad” PIK because it comes from borrowers who began deferring cash interest payments mid-loan, suggesting potential stress beyond what standard default rates show.
Strategic Pivot
Experienced private creditors are quietly recalibrating. Lenders are shifting from a volume chase to a discipline-first playbook. They’re picking niches, leaning into collateral and tightening how they get paid.
“The private creditors are getting a little more careful,” Beriau says. Caution shows up in two clear behaviors: a move toward asset-anchored lending and a renewed emphasis on deal selection, he says.
“As more available capital has flowed into private credit, increasing the competition during recent years, borrowers have been able to soften lending conditions to some extent.
Sheon Karol West Lane Partners
Where many funds once chased upper middle-market, sponsor-backed unitranche financings, managers are increasingly building or buying direct-lending and asset-based platforms that offer variable-rate economics and collateral coverage.
BlackRock (NYSE: BLK)’s acquisition ofHPS and Blue Owl (NYSE: OWL)’s $450 million deal forAtalaya both added asset-based finance capabilities. KKR (NYSE: KKR)raised $6.5 billion for itsABF II fund earlier in 2025, while Apollo (NYSE: APO) and Citi (NYSE: C)struck a $25 billion direct-lending partnership in 2024. The common thread: variable-rate exposure and collateral protection as a hedge against rate volatility and borrower cashflow risk.
“I absolutely think that having a direct lending asset-based lending platform is more interesting,” Beriau explains. “Before these private credit groups were only working within the upper middle-market. Now they’re starting to come down towards the middle market with ABL loans, where you’re getting variable debt. They were looking for risk-adjusted returns at variable interest rates because there’s an advantage to it.”
Hope in the Lower Middle Market
Luke Sarsfield, CEO at private equity firm P10, has seen a similar spike in interest in lower mid-market deals where he says protections are still tight.
“While we’ve seen commentary suggesting increasing leverage levels and more covenant-lite structures, we think that is more likely happening at the very upper end of the market,” Sarsfield says.
He points to a structural advantage lower-market lenders enjoy: a deep universe of companies. “The lower end of the market, where we focus, has five times the number of GPs covering 10 times the number of companies. That fundamental supply-demand imbalance drives attractive attributes over long periods of time — lower going-in valuations, lower levels of leverage, more conservative covenants and terms, and less volatility.”
The result is capital that can pivot to specialty products. Rigorous underwriting will survive the next cycle, while players that remain dependent on scale and looser documentation may find returns compressed.
