Understanding the Evolving Landscape of Private Credit Spreads
Private credit markets across Europe and the United States are experiencing significant shifts as market volatility and investor behavior reshape typical lending patterns. Historically, European private credit has been perceived to command higher spreads than its US counterpart. However, recent developments suggest that this dynamic may be undergoing a transformation.
Recent Trends in US and European Private Credit Spreads
In the United States, private credit spreads have widened considerably since the beginning of the year. Data indicates that spreads on most transactions have increased by 50 to 100 basis points (bps), with typical deal pricing now around 525 bps. This widening reflects increased risk premiums demanded by lenders amid broader market volatility.
Conversely, in Europe, the spreads have remained relatively steady. According to industry data from LCD, the average European direct lending spread over the past 12 months (up to April) is approximately 509 bps, which is slightly lower than the full-year 2025 average of 522 bps. Market participants note that European spreads have only nudged up by about 25 bps in recent months, with no significant increase in margin for high-quality, mid-market deals.
European Market Stability Despite US Spread Widening
Patrick Schoennagel, managing director at Houlihan Lokey, explains that European deal terms and spreads have largely remained unchanged over the past six months. While some larger transactions have experienced a slight increase, the typical high-quality, mid-market credit remains within a stable pricing environment.
Historically, European private lenders have maintained a spread premium of approximately 25-50 bps over US deals. Some estimates suggest that this premium has been as high as 150 bps according to certain lenders like Hayfin. However, the current market indicates that European spreads are holding firm, even as US spreads expand.
Market Dynamics and Fundraising Activity
The divergence in spread movements is partly driven by differing market conditions. Europe continues to see robust fundraising activity, with private debt funds raising significant capital—$79.4 billion in 2025 compared to $55.9 billion in 2024. Major fundraises include Ares Management’s €17.7 billion fund and CVC Capital Partners’ €12.2 billion vehicle, highlighting strong investor confidence in European private credit.
Meanwhile, the US market shows signs of retrenchment. Private credit lenders have become more cautious amid economic uncertainties and geopolitical concerns, leading to a reduction in new deployments. This shift is evidenced by a decline in capital deployment from business development companies (BDCs), with gross fundings dropping from $9.0 billion in Q4 2025 to just $5.7 billion in Q1 2026.
Impact of Capital Flows and Market Sentiment
In the US, many institutional investors are pulling back from new investments, especially in sectors like software, where spreads have surged to between 550 and 1,000 bps for new loans. Some lenders are also cautious about lending to volatile sectors, leading to a more discerning approach in credit selection.
In contrast, European lenders remain active, albeit more selective, especially regarding sectors with uncertain risk profiles such as technology. They are increasingly scrutinizing deals to avoid exposure to AI-related risks or other sector-specific uncertainties.
Market Outlook and Future Trends
Market analysts predict that the European environment will remain borrower-friendly throughout 2026, with lower leverage, stronger covenants, and better documentation standards. The US market, on the other hand, may see continued spread widening as lenders adjust to increased risk and reduced competition.
Overall, these developments point to a shifting landscape where traditional spread premiums and market dynamics are being tested by macroeconomic factors, investor sentiment, and sector-specific risks. Both European and US private credit markets are adapting to these new conditions, shaping the future of direct lending in the coming months.
