State of the Private Credit Market and Valuation Best Practices

We would like to thank Smitha Balasubramanian of Lincoln International for her contributions to this article.

At the 2025 Private Credit and BDC Forum in New York presented by Dechert, Deloitte and Lincoln International, a Lincoln International-moderated discussion featured leaders from HPS Investment Partners, Lincoln International, Neuberger Berman and Oak Hill Advisors and unpacked where private credit stands today, how portfolios and pricing are evolving, and what “best practice” means as retailization accelerates valuation frequency. Read the key takeaways below.

State of the Market

• M&A activity is picking up as investors feel more comfortable around macroeconomic factors, representing a meaningful shift from the cautious stance earlier in the year and lower base rates makes leverage more affordable for buyers. Services businesses that are likely not impacted by tariff concerns have seen the most M&A activity.
• The highest-quality companies are commanding unparalleled competition, resulting in average enterprise valuation multiples exceeding the levels observed at the prior peak of the market in 2021. However, the market remains bifurcated with the population of A+ assets attracting higher valuation multiples and make up a growing percentage of transaction volume.
• Spreads have tightened for A-tier deals driven by increased competition as the need to deploy capital remains strong. New deals for larger companies are closing with higher leverage as the supply-demand imbalance persists, and EV multiples have increased for high-quality deals leading lenders to compete on leverage. Lenders are stretching on leverage rather than further tightening spreads as another tool to compete with an aggressive BSL market offering pricing at multi-year lows.
• Portfolio companies are generally demonstrating stable operational performance, with industry participants not seeing broad indications of stress across portfolios. As of Q3 2025, ~62% of portfolio companies are growing YoY LTM EBITDA, which is in line with four-year historical averages, and interest coverage ratios are improving.
• Although the covenant default rate decreased from 3.4% in Q2 to 3.2% in Q3, and is significantly below the peak of COVID, and where it was in 2023, amendment activity was approximately 5% higher, with covenant holidays nearly doubling quarter-over-quarter.
• Lincoln's senior debt index, published on a monthly basis, shows the average fair value of loans increased to 99.1% as of September 30, 2025 – the second highest it's been in the history of the index, demonstrating generally stable fundamentals and tightening spreads.

Trends

• There's a flock to higher quality, and in some cases that means bigger size, as buyers prioritize stability and proven business models.
• Since the pandemic, portfolios have endured labor shortages, cost inflation, higher interest rates, land wars, "Liberation Day" and trade wars. Through this, private markets have remained resilient and focused on long-term value creation as sponsors and lenders continually worked together. However, in certain cases, this sustained pressure has led to sponsor-lender fatigue, leading to an increase in observed lender foreclosure activity through 2025.
• This sustained pressure has also led to an increase in “Unplanned” PIK (“payment-in-kind”) interest, which has served as a pressure relief valve to help quality businesses navigate temporary challenges. The number of investments with a component of “Unplanned” PIK has increased to 6.0% overall in Q3 2025, compared to 2.6% in Q4 2021.

Valuation Best Practices

• Retailization is driving a shift from quarterly valuations to daily/weekly/monthly valuations. This has required asset managers to adapt their valuation processes, policies and infrastructure to support more frequent reporting of net asset value (“NAV”). This shift will also require managers to navigate reflecting real-time credit developments into these frequent valuations in a more rapid and centralized manner than they have historically with quarterly valuations.
• There is growing scrutiny around process, standardization and consistency of approach, with boards, investors and auditors increasingly focused on these topics. Across the industry, there is a rising expectation that regulators will step in with greater oversight and guidelines to help drive valuation best practices.
• Valuation data that is collected is only as good as what you do with it. The ultimate goal is to use data to enable meaningful substantive conversations about credit risk, rather than simply reconciling numbers.

Risks and Opportunities

• Private credit remains an attractive asset class, and the market is expanding beyond traditional direct lending into fast-growing specialized areas such as asset-backed finance, secondaries and opportunistic credit.
• Retailization is driving new avenues for growth and returns, and private credit managers will also likely continue to explore partnerships and consolidate to increase scale, expand scope and broaden access.
• There's a lot of available capital, making it critical to maintain credit discipline, with many asset managers focused on safeguarding and diversifying their portfolios, and loss given defaults generally trending on the low side. It also helps if investors are attuned to the downside of an abundance of available capital, which could be slower deployment of capital.
• If spreads in direct lending reach a floor, managers may start competing on leverage, documentation and covenants, which isn't necessarily a healthy development for long-term credit quality and market discipline.
• Continuing to find, hire and develop talented personnel remains a challenge – the competition for talent is incredibly fierce as the asset class grows exponentially and demand for skilled professionals across all functions intensifies.
• Finally, investors need to understand the asset class, which is illiquid (or in certain cases semi-liquid), and they won’t be able to entirely trade out in days or months. Private markets in the long term have proven to be less volatile than public markets, and investors need to understand there will be periods of time when spreads are tighter because it's a risk-on environment, and periods of time where spreads are wider because it's a risk-off environment. Like any other market, private credit goes through cycles, and understanding those cycles and managers’ track records will help investors make informed decisions.