US Direct Lending Volume Plunged 55% in Q2 Despite Fundraising Rebound

U.S. direct lending activity plunged in the second quarter, creating a stark disconnect with a simultaneous rebound in fundraising for private credit firms. Lending volumes fell by approximately 55% to their lowest level in a year, even as managers raised the most capital in two years, signaling a more cautious and selective deployment environment.

A Tale of Two Trends

While capital continues to flow into the private credit asset class, the pace of dealmaking has slowed dramatically. The divergence highlights a growing caution among lenders who are accumulating capital, often called "dry powder," faster than they are deploying it.

Key second-quarter figures illustrate the split:

• Fundraising: North America-focused closed-end direct-lending funds raised $16.25 billion, a significant jump from $1.3 billion in the first quarter and the highest quarterly total in two years, according to Preqin data.
• Lending Volume: In contrast, U.S. direct-lending volume fell to $33.59 billion from $74.67 billion in the prior quarter, the lowest level since the second quarter of 2023, PitchBook/LCD data showed. The number of deals also declined to 154 from 217.

Lenders Hit the Brakes

The slowdown in lending is attributed to several factors, including a softer mergers and acquisitions market, competition from the broadly syndicated loan market, and increased selectivity from private credit managers, according to Jun Li, EY’s global and Americas wealth and asset management leader. The pullback was particularly sharp in lending to private equity-backed buyouts, a primary driver of demand.

Ad

Lenders are also contending with stress in their existing portfolios. Many loans originated during the 2021-2022 boom, when interest rates were lower and terms were looser, have become more difficult for borrowers to service. This has prompted lenders to demand stronger protections and better pricing on new deals.

Some firms are also constrained by portfolio challenges. Bryant Riley, chairman and CEO of B.Riley Financial, noted that strain in older credits is leading some business development companies (BDCs) to hold cash for troubled borrowers rather than funding new loans. This caution comes amid increased scrutiny on the sector following recent defaults and redemption pressures on some retail-focused funds.

Market Implications

This more discerning approach suggests a shift in the market's focus from rapid capital deployment to underwriting quality. "Over the long term, investors are likely to place greater value on underwriting quality and risk-adjusted returns than on deployment speed alone," EY's Li said.

The environment presents challenges for BDCs, a common structure for private credit funds. Some publicly traded BDCs have seen their shares trade below net asset value, limiting their ability to raise new equity, while some private BDCs have faced redemption requests from investors.