Market conditions during the third quarter were mixed and reflected a continuing trend towards more cautionary stance. In an ongoing effort to tame inflation, the Federal Reserve enacted 75 bps rate hikes at both the July and September meetings. Recent readings suggest early success, as the September consumer price index eased slightly. Fed officials remain split on the pace and ultimate rate target, while markets are uncertain if the Fed can engineer a soft landing.

What cannot be disputed is the impact that rate hikes have had on credit markets, most of which has inured to the benefit of private lenders. Dislocation in broadly syndicated deals has driven borrowers to private credit. Meanwhile, pricing trends that first emerged in the syndicated market have expanded into private credit transactions, resulting in spreads widening 50 to 100 bps, in addition to base rate increases. Furthermore, lenders are becoming less lenient in documentation by tightening definitions, covenant cushions, etc. All told, lenders are being compensated for risk taking in this choppy environment.

However, not all trends are positive for private credit funds. M&A volume has slowed significantly, and participants admit that credit quality is similarly lacking. Additionally, lenders are downsizing check sizes and one-stop deals are now being completed via clubs. Lastly, after years of record fundraising, fund managers represent that interest is waning and fundraising has become significantly more challenging of late.