Public insights on private credit: Déjà Vu: History doesn’t repeat, but it sure rhymes

Volatility is creating attractive opportunities in direct lending

The current deterioration in investor sentiment toward direct lending echoes the backdrop of 2022, when rising interest rates, persistent inflation, and mounting recession concerns drove a broad rotation out of risk assets. Today, a similar unease has taken hold — compounded by growing angst around software exposure in private credit and escalating geopolitical tensions that have disrupted commodity markets and clouded the macroeconomic outlook.

While growth expectations have not fully reset to recessionary levels, confidence has weakened materially and the forward outlook remains uncertain. Interest rates stay elevated as central banks maintain a cautious stance, and the rapid evolution of artificial intelligence presents a difficult-to-quantify source of disruption. The result is a familiar pattern: a flight to liquidity and elevated redemptions across evergreen direct lending structures — now surpassing the 2022 highs and continuing to accelerate into 2026.

Critically, this wave of redemptions appears driven more by sentiment than by fundamentals. Capital is retrenching on perception, not evidence of broad-based credit deterioration. Historically, these are precisely the conditions that have produced the most compelling deployment opportunities.

In 2022, banks pulled back from lending, creating a financing gap that direct lenders were well positioned to address. With fewer capital providers in the market, direct lenders gained negotiating leverage, resulting in wider spreads, tighter structures, and improved economic terms. We are now seeing an incremental shift in deal financing toward direct lending, which may create additional opportunities.

The prior dislocation created a compelling entry point and laid the groundwork for strong subsequent performance. As such, 2022 stands out as a period in which disciplined deployment during market stress translated into meaningful opportunity.

In 2022, BDC price-to-book ratios compressed to roughly 0.8x as total returns fell to -8.9%. What followed was a +26% rebound in 2023—a pattern where valuation troughs have historically preceded sharp recoveries. Today's setup looks remarkably similar: price-to-book ratios are sliding back toward those same 2022 levels, with the current drawdowns approaching -19%.

Current market dynamics suggest a similar setup may be emerging. Single-B yields – over which direct lending has typically captured a 150–200 bps illiquidity premium – compressed to multi-year lows and have since widened in 2026. Early indications point to a corresponding repricing in direct lending, with improving spreads and more attractive risk-adjusted returns on new originations.

For investors maintaining a rigorous, fundamentals-driven approach, disciplined credit selection is critical in this environment. Periods of market turbulence create a window to deploy capital on more conservative, better-priced terms. As in prior dislocations, volatility can constrain traditional lenders and reduce competitive intensity, allowing direct lenders to be more selective and dictate terms.

This dynamic supports deployment into higher-quality credits with wider spreads, stronger structures, and enhanced downside mitigation. In that context, periods of uncertainty are not simply to be navigated – they are to be capitalized on. For investors with the discipline to underwrite rigorously and the conviction to deploy, today’s environment represents a compelling opportunity to put capital to work.