Private credit: seizing M&A momentum and yield advantages

Key takeaways

  • 2024 saw significant spread compression in private credit, fueled by rising economic confidence and a market technical imbalance stemming from high investor demand relative to low M&A activity.
  • 2025 suggests a wave of deal activity, attractive yield opportunities, and continued growth in private credit, potentially expanding beyond traditional direct lending.
  • The private credit asset class is well positioned due to strong economic conditions, increasing M&A activity, and attractive yield potential.

In 2024, the financial landscape was marked by a notable risk-on sentiment, evident in the compression of credit spreads as economic confidence rebounded. This spread tightening was further exacerbated by a technical imbalance, with investor demand outpacing the limited issuance of new loans in both public and private credit markets. While merger and acquisition (M&A) volume showed some improvement compared with the previous year, the majority of transactions consisted of opportunistic deals, such as repricing and dividend recapitalizations, as borrowers sought to capitalize on the highly accommodating credit environment.

Looking ahead to 2025, there’s growing consensus that M&A activity could continue to gain significant momentum. A combination of lower interest rates, favorable economic conditions, pro-business deregulation, and tax policies under the new administration is expected to drive deal flow. Private equity firms flush with record levels of dry powder will continue to experience growing pressure from limited partners to return capital. While the new administration’s pro-growth stance is seen as beneficial for both the private equity and private credit markets, risks remain. Shifting policies, such as potential prolonged inflation driven by tariffs, supply chain disruptions, and changes in labor markets, could introduce volatility. Additionally, concerns over interest-rate fluctuations due to monetary policy, reversal and deficit spending,and geopolitical risks add layers of complexity.

Global private equity dry powder trend, 2000–2024 ($B)

A bar chart showing the global private equity dry powder trend from 2000 to 2004. The y-axis represents the amount in billions, while the x-axis shows the years from 2000 to 2004. Each bar represents a year, illustrating a general upward trend in dry powder over this period.
Source: S&P Global Markets Intelligence. Year to date through July 10, 2024. Analysis includes aggregate dry powder of global private equity funds with vintage year between 2000 and 2024. Dry powder data is supplemented by Preqin.

Despite these uncertainties, private credit is expected to continue to deliver premium yields in 2025. While the U.S. Federal Reserve is anticipated to ease rates gradually, the increase in deal flow should relieve some of the pressure on spread compression, offsetting what's expected to be a modest decline in base rates. Private credit’s attractive risk/return profile, particularly in a low-yield environment for traditional fixed-income assets coupled with relatively low default rates, enhances its appeal to investors. Moreover, the stability and predictability of cash flows from private credit investments make them an attractive option for income-seeking investors while also offering risk mitigation. 

Historical asset class return and risk (September 2015 - June 2024)

A scatter dot chart showing historical asset class return and risk from September 2015 to June 2024. The y-axis represents annualized return, while the x-axis represents annualized risk (standard deviation).
Source: Cliffwater, as of June 30, 2024.

As businesses increasingly seek alternative financing options outside traditional banks, the demand for private credit is expected to remain strong. This demand is extending beyond the traditional middle market direct lending space, encompassing a broader range of activities such as infrastructure projects, real estate-backed debt, and structured credit. Furthermore, private credit providers are partnering with banks to offer balance sheet solutions, further cementing private credit’s role as a vital pillar in the capital markets. This diversification and growth within the asset class present a dynamic investment landscape with numerous opportunities for innovation and expansion.

As we move into 2025, private credit is well positioned to benefit from a range of favorable conditions: strong economic fundamentals supporting credit quality, increased M&A activity fueling capital deployment, and continued yield upside. With growing diversification, strong returns, and an expanding role in the financial ecosystem, private credit presents attractive  opportunities for investors seeking strong returns and long-term growth.

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.

The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.

This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management or its affiliates. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.

Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment, or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment, or legal advice. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.

Manulife Investment Management

Manulife Investment Management is the brand for the global wealth and asset management segment of Manulife Financial Corporation. Our mission is to make decisions easier and lives better by empowering investors for a better tomorrow. Serving more than 19 million individuals, institutions, and retirement plan members, we believe our global reach, complementary businesses, and the strength of our parent company position us to help investors capitalize on today’s emerging global trends. We provide our clients access to public and private investment solutions across equities, fixed income, multi-asset, alternative, and sustainability-linked strategies, such as natural capital, to help them make more informed financial decisions and achieve their investment objectives. Not all offerings are available in all jurisdictions. For additional information, please visit manulifeim.com.

This material has not been reviewed by, is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at manulifeim.com/institutional.

Australia: Manulife Investment Management Timberland and Agriculture (Australasia) Pty Ltd, Manulife Investment Management (Hong Kong) Limited. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. Mainland China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area: Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland. Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Asset Management Indonesia. Japan: Manulife Investment Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad 200801033087 (834424-U) Philippines: Manulife Investment Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G). South Korea: Manulife Investment Management (Hong Kong) Limited. Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority. United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Manulife Investment Management Private Markets (US) LLC and Manulife Investment Management Timberland and Agriculture Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited.

Manulife, Manulife Investment Management, Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

4116520

Maila Chuong

Maila Chuong, 

Director, Head of Capital Markets, Senior Credit

Manulife Investment Management

Read bio