Private Credit’s New Era: Embracing Market Challenges

GlobalData

Mon, Jul 7, 2025, 4:00 AM 5 min read

Recent turbulence in the loan markets has led Vistra Equity Partners to pause its plans for US bank lenders to refinance Finastra’s nearly $5bn private credit-backed debt as it approaches maturity. Instead, Vistra is reportedly in discussions for an alternative private credit-backed refinancing. If completed, this would be the largest private credit deal ever. This uncertainty in the loan markets is likely to create more opportunities for private credit. Norton Rose Fulbright partners James Collis and Gemma Long write.

Usually, private equity fund managers (GPs) aim to return money to their investors (LPs) before the fund ends by selling all investments. However, the prolonged challenging economic environment has disrupted this process.

The prevailing climate has significantly affected the performance of some assets, causing financial distress. Higher interest rates have worsened this distress, especially for borrowers with capital structures set during the peak of the cycle in 2017/2018. The expected normalisation of rates at higher levels will make it hard for some borrowers to argue that their financial problems are temporary, making their current capital structures unworkable.

These factors often lower the value of portfolio companies and, sometimes, the debt they owe.

Despite this, sale valuations continue to remain stubbornly high. GPs are understandably reluctant to accept lower-than-expected returns for their LPs, and high leverage levels in the companies, set at the peak of the market, make it necessary for GPs to maximise exit returns. The lack of exits results in fewer benchmarks for comparison.

These challenges have two main consequences. Firstly, exits become more difficult, leaving some assets “stranded”. Secondly, refinancing the debt owed by these assets, usually done through a sale, becomes more challenging.

For funds, efficiently deploying capital and showing a profitable return for their LPs is crucial for both the current fund’s performance and future fundraising. A tough economic climate, especially with a shortage of suitable assets at the right price, puts a lot of pressure on GPs.

In the current climate, GPs need alternative ways to exit or deliver returns to their LPs. Continuation funds are one favoured solution. These funds, managed by the same GP, are set up to buy an asset or portfolio company currently held by an existing fund. This approach helps private equity funds manage liquidity challenges and meet investor expectations by providing more time and flexibility to manage and exit investments.