July 9 (Reuters) - Direct lending by U.S. private credit firms fell sharply in the second quarter even as fund-raising by such firms rebounded, underscoring the deviation between capital raised for the asset class and the deal flow to absorb it.
North America-focused closed-end direct-lending funds raised $16.25 billion in the quarter, up from $1.3 billion in the first quarter, according to Preqin data, the highest in two years.
But lending volumes moved in the opposite direction.
U.S. direct-lending
volume, a measure of loans made directly by private-credit funds to companies, fell about 55% quarter-on-quarter to $33.59 billion in the second quarter from $74.67 billion in the first, the lowest level since the second quarter of 2023, according to PitchBook/LCD data. The deal count declined to 154 from 217.
Direct lenders are private-credit funds that lend directly to companies, often to finance buyouts, acquisitions or refinancings, rather than arranging debt through banks or the broadly syndicated loan market.
The split shows money is still flowing into private-credit funds, but lenders are becoming more selective about putting that capital to work. The shift follows increased scrutiny after defaults, concerns over software exposure and redemption pressure from retail investors in some semi-liquid vehicles.
Jun Li, EY’s global and Americas wealth and asset management leader, said the slowdown reflected softer M&A and buyout activity, borrower delays, competition from the broadly syndicated loan market and greater selectivity among private-credit managers.
The pullback was sharpest in private equity-backed lending, a key source of direct-lending demand. Buyout firms use private-credit loans to finance acquisitions, but PE-backed direct-lending volume fell to $19.40 billion in the second quarter from $44.61 billion in the first, PitchBook/LCD data showed. LBO-related volume dropped to $9.79 billion from $22.31 billion.
Some caution among private credit firms also stems from loans made during the 2021-2022 boom. Many borrowers took on debt when rates were lower and terms were looser. Higher rates have since made those loans harder to service, pushing lenders to demand better pricing and stronger protections on new deals.
Some firms are also constrained by existing portfolio stress. Bryant Riley, chairman and chief executive of B.Riley Financial, said older credits are showing strain, leading some business development companies to keep cash available for troubled borrowers rather than new loans.
Private BDCs have also faced redemption requests, while many public BDCs' shares trade below net asset value, limiting their ability to raise fresh equity.
“Over the long term, investors are likely to place greater value on underwriting quality and risk-adjusted returns than on deployment speed alone,” EY’s Li said.
(Reporting By Patturaja MurugaboopathyEditing by Vidya Ranganathan and Chizu Nomiyama )
