Is the Shine Coming Off of Private Credit’s ‘Golden Age’?

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This was supposed to be the year M&A activity bounced back.

At the end of 2024, analysts were forecasting continued cuts in interest rates and the uptick in deal activity that private equity general partners and many investors have been anticipating. Indeed, January showed a 12% increase in deal activity compared with December 2024 for transactions valued at more than $100 million. Overall, 132 deals were completed, amounting to $155 billion in value, according to data from Dealogic.

Despite that, sources say, many buyers and sellers are getting cautious and feeling uncertain about how the rest of the year will shake out. The dearth of exits in private equity is starting to trickle down to some private credit funds that are at the end of their investment periods.

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More companies are using pay-in-kind financing arrangements, which is adding risk to balance sheets and portfolios. Liability management exercises, sometimes known as creditor-on-creditor violence, are also becoming more common. Inflation concerns, labor issues and potential tariffs are all making it difficult to forecast what business conditions will look like over the next month, let alone the five-to-10-year timeline on which private credit and private equity typically operate.

These are not the data points of a boom year for mergers and acquisitions.

Shifting Timelines

“There is more concern out there generally,” says Michael Ewald, global head of Bain Capital’s Private Credit Group. “If you look at where inflation is, that’s raising some concerns. There is still a mismatch on valuations. The cost of capital is still high. There’s more uncertainty overall. I think people realized they weren’t going to be able to hit the ground running in January and need to wait and see how the dust settles. To the extent that a big burst of deals is going to come to market, I think people are pushing that at least six months out and hoping to get more clarity between now and then.”

If the bulk of the M&A story for 2025 is written in the second half of the year, that would not be totally unusual historically. The problem, sources say, is that many firms and companies do not have unlimited time to wait.

Over the past few years, lenders have been willing to extend and amend loans for companies, but now it is more of a hands-on process. Ewald says that lenders are no longer automatically willing to offer an extension for an amendment fee. They want to see what the two-to-five-year plan is for the business. They are taking a much closer look at financials.

“You aren’t seeing these deals get done with debt only anymore,” he adds. “Some equity has to be in the mix. There is more structure to these deals overall.”

Companies that cannot offer up equity—or companies that end up in a liability management exercise with existing lenders who want to ensure they will recover everything the lenders are owed—could end up finding that refinancing is hard to come by or much more expensive than they anticipated. Sources say that while they do not expect a significant uptick in defaults, weaker companies may face a harder time getting to a workout arrangement on which everyone agrees.

Ewald adds that exit issues, which have plagued private equity funds for the past two years, are starting to impact private credit funds. Evergreen funds and business development companies— vehicles without tight investment timelines—are not as affected by slow exits. But fund structures with defined investment periods can run into trouble, even on the lending side.

“It’s just a persistent problem where sellers can’t get the price they’re looking for if they exit right now, so they want to find some way to extend,” Ewald says. “We were looking at a deal recently with a single lender who had to get out – they had capital they had to return to investors – and told the [borrower] if they wanted an extension to go find someone else. It’s not an existing portfolio company of ours, so we would be coming in as another lender to do the refinancing and solve their maturity problem.”

These dynamics are making Ben Radinsky, a private credit partner in HighVista Strategies, more cautious about private credit overall.

“We’re seeing distributions back to investors slow down, and it’s not necessarily a reflection of poor credit quality; it’s a reflection of structural issues in the broader transaction environment,” he says. “That liquidity problem is coming alongside indications of higher distress at both the senior debt level and the mezzanine level. I think that’s being driven by the fact that interest rates remain elevated, and earnings are not keeping up with elevated rates. We are starting to see covenant compression in some areas. The net result is more companies are turning to [payment-in-kind] loans, and whenever you have that, you have a whole host of risks emerge that eat into your loan-to-value and eat into the liquidity investors are expecting and not getting because there’s no cash [paid] on a PIK.”

The use of PIK loans is growing out of necessity, sources say, but almost no one seems to like it.

David Ross, head of private credit at Northleaf Capital Partners, says PIK loans can be a valuable tool for companies to get the financing they need, especially if liquidity is tight otherwise. But, he says, as a lender, it requires extra due diligence up front.

“We are very cautious about our portfolio’s exposure to PIK interest loans, which is focused on supporting strong, performing borrowers, but it is also critical to be transparent with our investors about the current market dynamics and what our PIK exposure is,” he explains.

But even with that transparency, investors ultimately do not have many options or outs if they are not comfortable with adding risk. In this way, the growing use of PIK financing is similar to the use of other liquidity solutions like net asset value loans or continuation funds. All of these tools have grown in popularity as the result of the tough liquidity environment for both sponsors and investors, but they all come with trade-offs.

Radinsky explains it this way: “The dilemma is if you’re in a credit fund as an LP right now and you’re coming up to end of lifecycle, the managers will come up to you and say, ‘OK, I’ll show you all the underlying assets which are performing fine, but we have a problem, because the fund expires.’ If they force a refinancing, it will come at a loss. LPs can take that loss, try to sell their stake on the secondary market or try rolling it into some new vehicle. If you, as an allocator, have the liquidity to deal with it, you’re probably taking Option 2 or 3, but those are fast-moving options. The terms might be subpar. LPs don’t like it.”

Uncertainty Ahead

Alongside the increased use of complex financing solutions, business conditions are getting harder to predict, which could lead to problems for lenders. Recent inflation prints have come back higher than expected. If that trend continues, companies may face persistently higher labor costs, says Michael Guarnieri, managing partner in Evolution Credit Partners.

“We’ve all been focused on the labor question for the past few years, and that’s unlikely to change,” he says. “It does impact how you assess company financials and long-term forecasts.”

Rising tariffs could also have an impact.

“It’s very, very difficult to follow the supply chain for a given business all the way through end-to-end and determine how tariffs will or won’t impact each part of it,” Guarnieri says. “Even if a single company is relatively insulated, there are knock-on effects of these policies throughout the economy. It’s hard to say how that will ultimately play out.”

Tariffs tend to be inflationary, and if inflation continues to rise, that could put the Fed in a tight spot. If recent layoffs in the federal government and private sector start putting pressure on the other part of the Fed’s dual mandate, Federal Reserve Chairman Jerome Powell could be forced to act on interest rates, and that would likely lead to a lot of volatility in credit.

Ewald says if the Fed holds rates where they are, the market will not be happy about it but can likely muddle through.

But “if the Fed raises rates, even nominally, that would really spook the market—we’d see a lot of volatility in that scenario,” he says.

More on this topic:

	With Interest Rates Elevated, It’s Time for Fixed Income
	Investors Move More Into Alts Following Stock Surge

Tags: Bain Capital, Ben Radinsky, David Ross, Evolution Credit Partners, Fixed-Income, HighVista Strategies, Michael Ewald, Michael Guarnieri, Northleaf Capital Partners, Private Credit

Evolving Demand for Heating and Cooling Services

Rising temperatures are driving demand for more efficient HVAC systems, with the U.S. Department of Energy projecting that demand for space cooling will outpace household formation in the coming years. Regulatory changes, such as stricter energy efficiency standards set to take effect in 2029, will further accelerate the transition toward lower-carbon solutions.

Trane Technologies is well-positioned to benefit from this trend. As one of the most innovative players in the HVAC industry, the company focuses on energy-efficient cooling systems, heat pumps and advanced air filtration solutions. Trane is pioneering the transition from fossil fuel-based heating and cooling systems to electric alternatives, such as heat pumps, which provide better indoor air quality, lower emissions and cost savings through greater energy efficiency. The company is also leading the industry in refrigerant technology, replacing hydrofluorocarbon-based coolants with lower-impact alternatives that reduce emissions and environmental damage.

Trane’s environmental leadership is not just about compliance with stricter regulations but is a core part of its long-term competitive strategy. Through its “Gigaton Challenge,” the company has pledged to reduce one billion metric tons of greenhouse gas emissions from its customers’ operations by 2030. This goal demonstrates Trane’s commitment to sustainability and cost efficiency. As governments continue to push for stricter building codes and energy efficiency mandates, companies like Trane that provide climate-conscious solutions will likely see growing demand from commercial property owners, manufacturers and residential developers.

Transformation in Farming Technology

Farmers face unpredictable growing conditions due to shifting rainfall patterns, increased droughts and greater crop yield volatility. Precision agriculture is emerging as a necessary adaptation, with companies like Deere & Co. integrating artificial intelligence and automation to optimize resource use. Deere’s “See and Spray” technology is a prime example of how innovation is improving efficiency while lowering input costs. Using advanced computer vision and artificial intelligence, the system efficiently detects and targets weeds with pinpoint accuracy, reducing herbicide use by up to 66%. This lowers farmers’ operating expenses and decreases the environmental impact of chemical runoff and excess pesticide use. Since agriculture accounts for a significant portion of global greenhouse gas emissions, optimizing resource consumption will be a critical priority for the sector in the years ahead.

Beyond weed control, Deere is at the forefront of integrating data-driven solutions into farming operations. The company’s connected ecosystem of autonomous tractors, smart irrigation systems and precision planting technology enables farmers to make real-time adjustments based on soil health and weather patterns. As climate change continues to increase variability in growing conditions, these innovations will be essential for stabilizing crop yields and maintaining profitability. Investors should consider how companies deploying climate-smart technology to increase resilience are positioned within the agricultural value chain. Firms that enable adaptation will be at the center of an expanding global market as demand grows for sustainable and efficient farming solutions.

Financial Sector Not Immune

The financial sector is also facing fundamental changes as climate risk becomes a more prominent factor in underwriting and risk management. The rising cost of extreme weather events has led to record-breaking insured losses, with an unprecedented number of billion-dollar disasters in 2023. Insurance companies are shifting from a reactive model to a more proactive approach, using data analytics to assess and mitigate risk before it materializes. Marsh & McLennan, a leader in this space, is refining climate risk models and providing corporate clients with tools to enhance resilience. Their approach includes asset protection strategies, operational risk assessments and business continuity planning, all of which are becoming essential, rather than optional.

Marsh & McLennan uses advanced risk modeling to assess how weather-related events could impact assets, supply chains and operational stability. The company’s climate analytics division helps businesses quantify the potential impact of extreme weather on their real estate portfolios, production facilities and infrastructure investments. By leveraging predictive analytics, Marsh & McLennan enables businesses to make better informed decisions regarding insurance coverage, property investments and risk mitigation strategies.

Navigating a Market Megatrend

Adapting business operations to climate risks is a strategic imperative that will affect every sector differently, and leaders and laggards have already begun to emerge. The unpredictable nature of climate events means being prepared and able to withstand events with the least possible impact is the goal. Companies that recognize this reality and invest in business resilience will be better positioned for long-term success.

Investors who position themselves in companies at the forefront of climate resilience will align with one of the most significant capital reallocation trends of the coming decades. The far-reaching range of recent extreme weather events validates that climate risks are no longer just a consideration for sustainability-focused investors. Being prepared for climate events is now an economic necessity, and these investments will continue to shape the future of capital markets and long-term investment strategies. Over time, only the strong will survive. Companies that invest for climate resilience will be better prepared to navigate uncertainty and capitalize on the opportunities emerging from one of the most significant market transformations of our time.

Todd Ahlsten is CIO at Parnassus Investments.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS STOXX or its affiliates.