Gridlock

Summary

• Private equity transaction volumes remain limited in 2025 despite predictions for a boom due to elevated interest rates & an uncertain economic backdrop.
• Financial sponsors are holding portfolio companies for longer periods because executing acquisitions & IPOs is challenging.
• The lack of fresh deals has created an absence of new supply for leveraged credit markets that typically fund M&A & LBOs.
• Elevated yields have increased investor demand for credit, creating a supply/demand dynamic that constrains spread widening.
• Credit markets have experienced relatively limited defaults, unremarkable spreads, & compelling coupon income despite recent volatility.
• M&A & LBO activity has struggled to recover to 2021 levels after central banks raised rates to curb inflation in 2022-23.
• The Federal Reserve faces challenges making meaningful rate cuts due to strong U.S. economic data & persistent price increases.
• Hold periods for portfolio companies have increased, with almost 30% held for over seven years in 2024 due to capital cost mismatches.
• Distributions from buyout funds dropped to 11% of fund NAV in 2024, down from around 30% in 2021.
• Private equity managers are using NAV financing & continuation vehicles to return capital to LPs without selling assets at undesirable valuations.
• Refinancings have constituted over 85% of supply in the loan market in 2025, limiting overall market growth to 6.1% over the three years ending March 2025.
• Demand for credit remains strong with investors seeking high single-digit coupons, record CLO creation, & yields around 8% for high yield bonds.
• Credit spreads remain relatively tight even with elevated base rates, which currently drive over half of the yield on high yield bonds.
• Global trade policy uncertainty & tariff announcements in April caused a pause in the M&A market & increased volatility.
• Equity markets saw significant drops following tariff announcements, while credit markets remained relatively steady due to contractual returns.
• CCC-rated bonds experienced a repricing of risk with spreads widening from 700 bps to 1,100 bps in early April.
• European equities outperformed U.S. equities in early 2025, with German equities benefiting from debt brake reforms & increased defense spending.
• German ten-year bond yields increased by 30 bps in one day before investors bought bonds as a haven amid U.S. tariff tumult.
• BB-rated bonds were the top performers in U.S. high yield bonds with a 1.5% return in Q1 2025, while CCC-rated bonds returned -0.7%.
• High yield bond issuance totaled $68bn in Q1 2025, dominated by refinancings due to slow M&A activity.
• European high yield spreads widened to the middle of the historically normal range of 300–500 bps by the end of Q1 2025.
• Less than 10% of the high yield bond market is set to mature by 2027, limiting the risk of near-term defaults.
• U.S. senior loans recorded a 0.6% return in Q1 2025, with gross issuance totaling $337bn, though refinancings continued to dominate.