Direct lending: Cautious optimism in a higher-for-longer environment
Ron Kantowitz
The U.S. economy demonstrated resilience in the fourth quarter. Economic growth continued with GDP rising more than 2.7%, while unemployment remained relatively low showing signs of reverting to more historic levels. Benefitting from The Federal Reserve (the “Fed”) rate cuts of 50 basis points in the fourth quarter, following a similar cut in September, inflation remained seemingly manageable at roughly 3.0%, albeit still above the Fed’s target.
Looking ahead, while we remain encouraged by the strength of the U.S. economy and the pro-business stance of the new administration, a more cautious and measured investment approach is warranted. New policy measures, such as tariffs and stricter immigration enforcement, could prove inflationary and slow growth. Additionally, efforts by the U.S. Department of Government Efficiency may reduce fiscal support and dampen momentum.
Although much anticipated M&A-related deal flow has yet to materialise for the Direct Lending market, pressure is building on Private Equity firms to transact and return capital to LPs. As market volatility subsides, we are watching for signs of renewed M&A activity. In the meantime, patient credit investors may continue to benefit from a favorable higher-for-longer rate environment.
Distressed credit & special situations: A new era of economic dislocation
Paul Triggiani
Tariff uncertainty and evolving trade policy have dominated headlines, contributing to heightened volatility across global markets. Although recent weeks have brought a brief period of relative stability compared to the turbulence of early April, the future direction of U.S. trade policy—and the corresponding responses from global economies—remains highly uncertain. This ambiguity, coupled with the lack of historical precedent for the current approach to trade negotiations, is already having tangible effects on economic sentiment. Both consumer confidence and business optimism have declined notably, suggesting a potential path toward slower growth in developed markets. Rising inflation and unemployment may also become more pronounced if these trends persist. The U.S. Federal Reserve’s recent opaque commentary on future monetary policy adds another layer of complexity to the outlook.
The most significant takeaway from recent volatility is the erosion of confidence, which is already manifesting in reduced capital expenditures and consumer spending. As a result, underwriting must now be approached with greater flexibility and patience, both for existing portfolios and new investments. Upcoming announcements on U.S. monetary and fiscal policy are likely to be more impactful than ever, making it essential to evaluate all investment decisions through this lens.
Despite the uncertainty, we believe this environment will generate compelling opportunities. Liability management transactions are becoming more attractive as sponsors seek to enhance liquidity and extend maturities. Capital solutions are also gaining traction, especially as M&A activity remains muted and growth becomes more constrained.
Additionally, distressed-for-control and special situations are expected to rise, offering strong potential for vintage fund performance. Historically, periods of dislocation—such as the 2008 financial crisis or the 2020 pandemic—have created attractive entry points. Today’s environment shares similar traits, demanding a disciplined, opportunistic, and policy-aware investment approach.