Private debt in 2026 - The underserved rises

January 21, 2026

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In a fragmented global economy, our heads of Private Debt across Pan-Europe, the US and Asia Pacific discuss the five key themes they expect to characterise the market in 2026.

1. Private credit investors to benefit from selectivity over scale

We believe the private credit outlook will be shaped more by structural dynamics than by expectations of economic acceleration. In Europe, our base case is for a broadly stable macro environment rather than a sharp recovery, with ongoing geopolitical risk, uneven growth and persistent uncertainty limiting cyclical upside. A similar picture is evident in the US, where growth remains supported by certain sectors, but policy uncertainty and elevated interest rates continue to influence corporate and investor behaviour. In Asia Pacific, the macro narrative is more fragmented, reflecting divergent growth trajectories and structural realignment in global trade rather than a single economic cycle.

In this environment, we believe private credit returns are increasingly likely to be driven by selectivity and execution. As a result, the ability to assess downside risk, structure conservatively and manage complexity across jurisdictions and capital structures is becoming increasingly important.

2. Investor priorities converging around resilience and capital preservation

Concurrent with the growing importance of selectivity, we believe investor behaviour will also likely show a shift toward defensiveness. Across regions, investors appear to be increasingly focused on consistency and predictability of income, senior secured positioning, diversification across geographies and strategies and effective liquidity management. Yield maximisation has become a secondary consideration to capital preservation and downside protection.

This shift has important implications for private credit managers. Competitive pressure, particularly in larger cap segments, continues to challenge pricing and documentation standards.¹ While these pressures are less acute in the lower middle market, maintaining underwriting discipline remains critical.

From a credit perspective, default indicators remain broadly stable across regions, absent a significant macro shock (Figure 1). However, as portfolios grow and mature, the absolute number of restructurings is likely to increase. This places greater emphasis on active portfolio monitoring, restructuring expertise and deep understanding of underlying businesses. This also reinforces our view that the lower middle market – with its simpler capital structures, ability for earlier intervention through covenants and more conservative leverage – should continue to deliver better recovery outcomes.

3. The lower middle market remains an underserved opportunity

One of the most important global trends shaping private credit is the continued concentration of capital among the largest managers. In Europe and the US, fundraising has increasingly favoured scale, pushing capital towards core and upper middle-market transactions where large pools of capital can be deployed efficiently. This has intensified competition in these segments, placing pressure on pricing, leverage and documentation.²

This concentration has reinforced the relative attractiveness of the middle and lower middle market across regions. In Europe, smaller deal sizes, local market dynamics and execution complexity continue to act as natural barriers to entry, insulating this segment from the most acute competitive pressures. In the US, despite the overall depth of the market, the lower middle market remains structurally underserved as capital gravitates toward larger, more standardised transactions.³ In the Asia Pacific, we believe complexity related to business models, cross-border operations and legal fragmentation further limits competition.

Across all regions, these dynamics allow lenders operating in underserved segments to retain greater influence over deal terms. Higher relative spreads, lower leverage, stronger covenant packages and more conservative documentation remain achievable where capital is scarce, and execution risk higher. We believe this bifurcation between crowded and overlooked markets is likely to persist into 2026 and beyond.

4. Bank retrenchment continues to open doors for private lenders

In our view, bank retrenchment and re-orientation remain among the most durable sources of opportunity for private credit, though the form this takes varies by region. In Europe, tightening regulatory requirements under Basel frameworks continue to constrain bank balance sheets.⁴ As capital constraints increase, banks are stepping back from certain lending activities, creating opportunities for private credit to fill the gap through direct and parallel lending (pari-passu lending alongside a bank) structures.⁵

The US lending landscape is also evolving as regulatory pressures continue to constrain traditional commercial lending and we see two key themes emerging.⁶ First, banks are increasingly lending to lenders, with fund finance emerging as a core use of balance sheets, offering diversified exposure, strong collateral and attractive risk-adjusted returns. Second, banks are pivoting towards an originate-and-share model (parallel lending), retaining client relationships and fee income while distributing credit risk to third parties.⁷ Together, these shifts have expanded capacity in larger markets but left gaps for smaller, customised transactions and non-standard structures - creating space for private credit to play a complementary role.⁸

Meanwhile Asia Pacific presents a more nuanced picture. Domestic and regional banks remain broadly willing to lend.⁹ However, in contrast, global banks operating in the region are increasingly focused on risk-weighted asset optimisation as they prepare for Basel IV.¹⁰ We believe the coexistence of these two banking systems creates inefficiencies rather than wholesale dislocation. Where regional banks cannot fully meet borrower needs and global banks are selectively stepping back, private credit can act as a complementary source of capital.

5. Borrower demand is shifting toward flexibility, duration and customisation

The prolonged slowdown in exits since 2022 has had a lasting impact on the nature of private credit demand.¹¹ Across Europe and the US, private equity sponsors have been unable to exit assets as originally planned, resulting in extended holding periods and increased use of continuation vehicles. As portfolios mature, refinancing activity remains elevated – not always due to acute financing gaps, but because sponsors and corporates are seeking to extend runway, manage leverage and preserve optionality.

We believe this environment has driven growing demand for more complex and bespoke capital solutions, including layered capital structures alongside senior refinancings. While these situations often sit outside traditional lending strategies, they offer attractive opportunities for flexible capital where risk can be appropriately structured and priced.

In Asia Pacific, the shift toward bespoke capital is driven less by exit overhang and more by structural complexity. Cross-border operating footprints, divergent legal regimes and non-standard capital structures require tailored solutions that banks are often unwilling or unable to provide. Structured lending – designed to manage complexity rather than distress – has become a key source of risk-adjusted return, particularly in the core and lower middle market.

Across regions, we believe private credit is increasingly being used to solve for time and flexibility rather than purely to fund growth, reinforcing its role as a strategic balance-sheet partner.

A structurally defined opportunity set

Looking ahead, private credit remains a compelling opportunity set but will be increasingly differentiated by skill rather than scale. Structural capital flows, evolving bank behaviour and shifting borrower needs continue to support demand, while competition, regulation and macro uncertainty are raising the bar for execution.

Globally we believe success will depend less on broad market exposure and more on disciplined underwriting, geographic flexibility, diversification and the ability to manage complexity across capital structures and jurisdictions. In a fragmented global economy, private credit’s strength lies in its capacity to adapt – providing flexible, well-structured capital where traditional financing solutions fall short, while seeking to provide downside protection through the cycle.

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co are as of January 2026 and may change without notice.

References

1. 9fin, as of 5th September 2025. For lender to kingmaker – How private credit is seizing the restructuring crown.
2. Chronograph, as of 30th September 2025. How direct lending competition is impacting private credit deal terms.
3. Pitchbook, as of 19th September 2025. Q3 Global Private Credit Survey: Focus on asset shortage; AI to hasten change.
4. European Central Bank, as of 15th April 2025. Euro area bank lending survey – first quarter of 2025.
5. European business magazine, as of 2nd January 2026. Europe’s EUR1.7 trillion private credit boom is rewriting how companies get funded.
6. Federal Reserve, as of 3rd November 2025. Senior Loan Office Opinion Survey on Bank Lending Practices.
7. McKinsey & Company, as of 18th August 2025. Risk transfer: A growing strategic imperative for banks.
8. BCG, as of January 2024. The forthcoming revolution in small business lending.
9. IFR, as of 22nd December 2025. IFR Asia Asian private credit markets roundtables.
10. Norton Rose Fulbright, as of November 2025. Regulation around the world – Basel 3.1 implementation
11. S&P Global, as of 26th June 2025. Private credit promises bespoke capital.

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