Direct lending: Favorable setup for compelling risk-adjusted dynamics in 2025
Ron Kantowitz
The US economy continued to demonstrate strength in 2024, although core PCE, the Fed’s preferred measure of inflation, has proven more stubborn than expected. Further, labor markets continued to exhibit volatility, pandemic savings have become largely depleted, delinquency rates on auto loans and credit cards have continued to trend higher, and credit card balances are at the highest level we have seen in a decade. All this to say, that while we believe 2025 should be a compelling opportunity for the Direct Lending asset class, we remain disciplined, focused and cautious.
With the new US government administration coming into office, we are anticipating continued strength in the economy, coupled with potential inflationary pressures from some of the anticipated government policy changes. Should we experience a more restrictive tone, or at least a slower easing of monetary policy, we believe the US economy is well positioned to weather any challenges given GDP growth is trending close to 3.0% currently.
Importantly, we continue to see a very favorable setup for direct lending in 2025. Private equity firms continue to face mounting pressures from investors to provide liquidity as well as deploy the significant amount of new capital that has been raised in recent years. A conclusion to the election process without incident has been well received by the equity markets, which in turn has fueled a meaningful pickup in M&A volumes. With expectations for a higher-for-longer rate environment, we expect the risk/return dynamics for Direct Lending to continue to offer a compelling value proposition in 2025.
