Private Credit News Weekly Issue #82: Megadeals Return, Spreads Compress, and Managers Brace for the "Cockroaches"
Record 68 deals over $10 billion announced in 2025 as credit executives warn of spread compression, vintage 2020-2021 restructurings, and a bifurcated market where size determines survival
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Megadeals are back. A record 68 transactions valued at $10 billion or more were announced globally in 2025, according to LSEG data going back to 1980. That drove average annual deal size to a new high of nearly $227 million. Wall Street is bracing for another wave in 2026.
But private credit managers entering the new year aren’t celebrating. They’re preparing for spread compression, rate cuts, and the restructuring wave from loans originated during the 2020-2021 zero-rate frenzy. According to Mark Jenkins, head of global credit at Carlyle, “there are a lot of companies that took on outsized capital structures in a low-rate environment. Those companies represent a vintage that is never going to grow enough to catch up to their cap structure.”
The bifurcation is stark. Aaron Kless, CEO of Andalusian Credit Partners, distinguishes between “headline-grabbers, the household-name lenders doing massive deals that are really analogous to broadly syndicated loans” where you see “cockroach examples,” and “the core middle market where we operate” with companies generating $10-50 million in earnings through bilateral, hands-dirty underwriting.
Jamie Dimon’s “cockroach” warning still resonates. First Brands and Tricolor bankruptcies exposed fraud allegations including double-pledging and off-balance-sheet vehicles. Silver Point Capital partner Michael Gatto wrote that First Brands founder Patrick James had a documented history of two legal battles over fraud allegations, including a 2009 lawsuit claiming he inflated accounts receivable and inventory figures. The company used special-purpose vehicles to keep debt off its balance sheet, a tactic used by Enron.
“People were all confused on credit defaults,” said Mathieu Chabran, co-founder of Tikehau Capital. “We’re not talking AAA-rated government bonds. We’re talking about credit underwriting, so there is some credit risk. That was a very significant misconception. Maybe because the last credit cycle goes back to the global financial crisis, which is now 17 years ago.”
Jenkins doesn’t see defaults as unusual. “I’ve been involved in credit for 35 years. You have defaults. You can’t avoid them. If you find somebody who says they have never had a default, you may have a Bernie Madoff situation -- there’s probably fraud, because it’s impossible.”
The opportunities are shifting. Chabran sees the secondary market as the big play for 2026. “You’re getting to a maturity phase of the market. People have to rebalance, to arbitrage, to rotate the portfolio. The amount of capital going after secondary direct lending is only a fraction of what is on offer.”
Kless expects non-sponsored finance to accelerate. His portfolio currently splits 50/50 between sponsored and non-sponsored deals, but he expects that to tilt toward 60% non-sponsored in 2026. “In the non-sponsored channel, we generally see lower leverage, higher spreads and tighter terms.”
The PE backlog remains elevated. About 12,900 US companies sat in private equity portfolios as of September 30, up slightly from end of 2024 despite a pickup in broader deal activity. Family offices controlling approximately $5.5 trillion in wealth, up 67% from five years ago, are becoming increasingly influential players.
Data center investment soared in 2024, with capital invested almost matching the previous four years combined. US data-center credit deals reached $178.5 billion in 2025 as of December 21, according to Bloomberg figures.
SoftBank agreed to buy infrastructure investor DigitalBridge for $4 billion including debt, paying $16 per share representing a 15% premium. Stonepeak agreed to buy a 65% stake in BP’s Castrol lubricants business in a deal valuing the entire division at $8 billion, with BP receiving roughly $6 billion in proceeds.
Key Market Themes
1. Megadeals Hit Record as M&A Machine Cranks Up
A record 68 transactions valued at $10 billion or more were announced globally in 2025, driving average annual deal size to nearly $227 million, according to LSEG data going back to 1980. The fourth quarter of 2025 was the busiest for acquisition funding since 2021, with the period ranking as the fourth busiest on record for M&A-related bond sales.
“The M&A machine is starting to crank up,” said Carlyle’s Mark Jenkins. “You’re seeing these large corporate deals, obviously, but that will lead to other activity, which is good for the ecosystem. We’ve been talking about this for two years now, and it just really hasn’t come to fruition until now.”
Wall Street expects another wave in 2026. SpaceX, OpenAI, and Anthropic are all preparing for potential public offerings that would rank among the biggest IPOs of all time. SpaceX is valued at $800 billion by investors, OpenAI at $500 billion, and Anthropic is working on a funding round likely priced north of $300 billion.
Market Dynamics
One investment banker predicted 2026 will come “out of the gate like a lion and leave like a lamb.” The first half of 2025 was slow thanks to Trump’s “liberation day” tariffs, but the second half was gangbusters. In 2026, expect the opposite as economic uncertainty and potential midterm election shifts dampen appetite for riskier deals.
2. Credit Managers Warn of Spread Compression and Rate Risk
Private credit executives see spread compression and falling rates as top concerns for 2026. Jerome Powell’s term as Fed chairman ends in May 2026, and a new chair might pursue more aggressive rate cuts. According to Andalusian’s Kless, “as spreads compress, there is a temptation in the market to compensate for lower absolute returns by increasing fund-level leverage.”
Carlyle’s Jenkins pushed back on expectations for sustained high returns. “People have really short memories. We went through a period in 2021-2022 where we were doing unlevered first-lien loans at 12% or 13%, and it was unsustainable. Normal spreads are around that 450- to 550-basis point range, and so the industry should be inking out unlevered returns between 7.5% and 8.5%.”
He argued investors got “anchored on something that was just unrealistic and temporal.” With the new math after rates rose, “you couldn’t execute a reasonable buyout anymore because it implied your growth rate on doing a buyout was about 50% or 60% higher than it was the year before to achieve 20% returns to the equity.”
Deployment Pressure
According to a Bloomberg Intelligence poll of 140 respondents conducted in September, almost a third of investors surveyed expect private credit deployment rates to remain unchanged or even decline over the next year versus the previous 12 months. In April, only 12% felt this way. About 88% of investor respondents to the April survey expected deployment to increase. In September, this dropped to 68%.
3. Vintage 2020-2021 Loans Face Restructuring Wave
Loans originated during the 2020-2021 zero-rate environment are coming due and many borrowers can’t grow fast enough to service the debt. “There are a lot of companies that took on outsized capital structures in a low-rate environment,” Carlyle’s Jenkins said. “Those companies represent a vintage that is never going to grow enough to catch up to their cap structure. They have to be restructured. And the only way to do that is to throw the debtholders the keys.”
More than 10% of private credit deals now involve borrowers paying interest with debt, with deferrals after deal closures ranging from 30-70% in recent quarters according to Lincoln International data. This represents a significant increase from 2022 levels.
Jenkins emphasized defaults are normal. “I’ve been involved in credit for 35 years. You have defaults. You can’t avoid them. If you find somebody who says they have never had a default, you may have a Bernie Madoff situation -- there’s probably fraud, because it’s impossible.”
Restructuring Reality
Jenkins noted there “hasn’t been a massive uptick relative to our past nine years” in foreclosures and restructurings. But the vintage 2020-2021 cohort represents a specific problem requiring systematic workouts rather than catastrophic defaults.
4. Market Bifurcates Between Large Syndicated and Core Middle Market
Andalusian’s Kless drew a sharp distinction between two private credit markets. “There are the headline-grabbers, the household-name lenders doing massive deals that are really analogous to broadly syndicated loans. That is where you see the ‘cockroach’ examples. The underwriting and negotiation in that upper market are often intermediated, and the diligence can be lighter.”
By contrast, “the core middle market where we operate -- companies with $10 million to $50 million in earnings. Even when we do sponsor-backed deals, the process is bilateral. It is old-fashioned, get-your-hands-dirty private credit. We are negotiating directly with the management team or the private-equity firm, not buying a piece of a syndicated deal.”
Tikehau’s Chabran echoed concerns about large-deal commoditization. “Direct-lending new origination is increasingly becoming commoditized here in the US as a consequence of two things. Obviously, a lot of capital is still being raised, and in many places, a great absence of skill in the game.”
Quality Divergence
The misconception, according to Kless, is “assuming the rot in those large, commoditized deals reflects the health of the bilateral middle market.” The bifurcation suggests manager selection will matter more as credit cycles mature and performance dispersion widens.
5. Secondary Market Emerges as Top Opportunity
Tikehau’s Chabran identified secondary markets as the biggest opportunity for 2026. “Where I see the big opportunity getting into 2026 is no longer the primary but the secondary market. You’re getting to a maturity phase of the market. People have to rebalance, to arbitrage, to rotate the portfolio.”
The supply-demand imbalance favors buyers. “The amount of capital going after secondary direct lending is only a fraction of what is on offer. We’ve always liked the supply/demand imbalance because that’s when you can be a price-setter.”
As the asset class matures with funds reaching their natural end dates and LPs seeking liquidity, secondary transactions provide price discovery that primary markets lack. The PE backlog of approximately 12,900 US companies as of September 30, up slightly from year-end 2024, creates additional pressure for creative liquidity solutions.
Market Maturation
The shift toward secondaries reflects private credit’s evolution from growth phase to maturity. When funds need to rebalance portfolios and investors seek exits, secondary markets become essential infrastructure rather than niche opportunities.
6. Red Flags and Risk Management Take Center Stage
Silver Point Capital partner Michael Gatto outlined systematic red flags investors should monitor to avoid “the next disaster akin to the recent collapse of First Brands and Texas subprime auto lender Tricolor.” His checklist includes material increases in receivable days, declining order backlogs, significant FX fluctuations, aggressive serial acquisitions, inventory mismanagement, and reductions in operating expenses like R&D or advertising.
First Brands exemplified multiple warnings. Beyond debt and acquisition-fueled growth, founder Patrick James had documented history of two legal battles over fraud allegations, including a 2009 lawsuit claiming he inflated accounts receivable and inventory. Cases were dismissed after settlements. The company used special-purpose vehicles to keep debt off balance sheet and relied heavily on reverse-factoring.
“Financial statement analysis has become something of a lost art in today’s era of rapid capital deployment in the credit markets,” Gatto wrote. A red flag should “trigger rigorous due diligence and uncomfortable questions that demand clear answers from the company.”
Lost Discipline
According to Gatto’s mentor Ed Mule, co-founder of Silver Point Capital, “the best way to become a great credit investor is to conduct postmortems on deals that went wrong.” In an asset class that has grown seven times since 2008 to approximately $1.7 trillion, “the pressure to put money to work can overwhelm the patience required for proper analysis.”
7. Non-Sponsored Finance Gains Traction
Andalusian’s Kless expects a “real shift toward non-sponsored finance, lending to companies not owned by a private-equity firm.” His portfolio currently splits 50/50 between sponsored and non-sponsored deals, but he expects that to tilt toward 60% non-sponsored in 2026.
“In the non-sponsored channel, we generally see lower leverage, higher spreads and tighter terms. We source these deals through a network of smaller regional advisers or directly through word-of-mouth.”
The shift reflects saturation in sponsor-backed lending where competition has commoditized terms and compressed spreads. Non-sponsored borrowers often lack access to competitive financing options, allowing lenders to maintain discipline on structure and pricing.
Strategic Repositioning
As large managers chase mega-deals with sponsors, middle-market lenders find opportunities in directly-originated, non-sponsored transactions where relationship-driven underwriting and flexible capital solutions command premium economics.
Deals of Note
DigitalBridge - SoftBank buying infrastructure investor for $4B including debt, paying $16 per share representing 15% premium, company has $108B in telecom and data center assets
Castrol - Stonepeak buying 65% stake in BP’s lubricants business for roughly $6B in deal valuing entire division at $8B
Warburg Pincus - Commits $225M to combination of OceanFirst Financial and Flushing Financial in transaction valued at $579M, plans 12% equity stake
PineBridge - MetLife Investment Management closes acquisition from Pacific Century Group, adding roughly $100B in assets, expected to pay up to $1.2B
WideOpenWest - DigitalBridge and Crestview complete acquisition of broadband provider with enterprise value of $1.5B
Lee Enterprises - Hoffmann Family backs $50M equity investment at $3.25 per share, shares jumped 21% on news
Southern Water - Macquarie commits further £245M ($331M) bringing total investment to £2.55B since 2021
Sapporo Holdings - KKR and PAG agree to acquire real estate subsidiary valued at $3B
Forum Engineering - KKR wrapping up take-private of Japanese staffing provider for ¥1,710 per share, market value over $568M
The Reality Check
Megadeals hitting record levels while credit managers warn of spread compression captures the contradiction. Jenkins saying normal spreads are 450-550 bps and returns should be 7.5-8.5% conflicts with investor expectations anchored on 12-13% from 2021-2022. That gap doesn’t close quietly.
The bifurcation Kless describes between large syndicated-style deals and core middle market bilateral lending isn’t just operational. It’s existential. When “cockroach” frauds concentrate in mega-deals with intermediated underwriting and lighter diligence, the reputational damage spreads across the entire asset class regardless of whether smaller managers actually conduct rigorous analysis.
Chabran’s observation that “maybe some people haven’t had the experience yet of a credit cycle” because the GFC was 17 years ago explains the shock when First Brands and Tricolor collapsed. An entire cohort of investors and managers raised capital, deployed billions, and collected fees without ever working through a true default cycle. The vintage 2020-2021 restructurings Jenkins describes will provide that education.
Secondary markets becoming the top opportunity for 2026 signals maturation but also distress. When the best risk-adjusted returns come from buying marked-down existing loans rather than originating new ones, primary market pricing has disconnected from reality. Chabran calling it a “supply/demand imbalance” where secondaries can be “price-setters” means primaries are overpriced.
Non-sponsored finance tilting to 60% of Andalusian’s portfolio from 50% represents capital fleeing commoditized sponsor-backed mega-deals for bilateral middle-market relationships. When the largest managers chase the biggest deals at the tightest spreads, smaller managers find alpha by going where competition hasn’t destroyed economics. That only works until the next wave of capital floods into non-sponsored too.
The 12,900 US companies sitting in PE portfolios, up from year-end 2024 despite increased exit activity, shows the backlog isn’t clearing. It’s growing. Every quarter that passes without meaningful distributions adds pressure on sponsors to accept creative structures, dividend recaps, and continuation funds that defer but don’t solve the underlying problem: assets were bought at prices that don’t generate returns exits will validate.
Gatto’s red flags checklist reading like a First Brands autopsy underscores how preventable the blow-ups were. When a founder has documented fraud allegations from 2009, uses SPVs to hide debt, and relies on reverse-factoring to obscure leverage, those aren’t subtle warning signs. They’re flashing red lights. That sophisticated lenders funded the company anyway reveals how thoroughly deployment pressure overwhelmed discipline. The lesson isn’t complex. It’s embarrassing.
