The private credit market is showing signs of sustained stress, with two concurrent data points pointing to a material slowdown in credit activity across the US leveraged finance market — a market closely watched by London practitioners given its influence on European deal structures and fund strategies. Direct lending — where non-bank lenders such as credit funds provide loans directly to companies, typically private-equity-backed borrowers, bypassing the broadly syndicated loan (BSL) market — provided an estimated $45.2 billion of new loans in the three months through May 2026, the lowest level since Q2 2023, according to LCD data. That represents a 40% decline from Q1 2026 levels, and deal count fell to 184 transactions in the period — also a multi-year low. The slowdown is attributed to elevated market volatility, geopolitical uncertainty, and heightened redemptions in retail credit products. Separately, dividend recapitalisation (recap) activity — a structure where a company takes on new debt to pay a dividend to its private equity owner, effectively extracting capital without a sale — has also been subdued. Sponsored borrowers launched $2.9 billion of recap loans in the broadly syndicated market in June, with year-to-date recap volume of $16.5 billion lagging the $28.9 billion and $31 billion totals recorded over the same periods in 2025 and 2024 respectively. The median time between a leveraged buyout (LBO) and a dividend recap has risen to more than four years, up from 2.5 years in 2022, suggesting sponsors are holding back.
Why this matters
The simultaneous compression in direct lending volume and dividend recap activity points to a market in which PE sponsors are neither deploying new credit aggressively nor extracting value from existing portfolio companies at historic rates. For banking and finance lawyers, this creates a dual headwind: fewer new leveraged finance mandates and fewer recap transactions requiring facility agreement amendments and security package review. The 40% quarter-on-quarter decline in direct lending is particularly notable because direct lenders had consistently outpaced the BSL market over the prior two years — the reversal of that trend, with the BSL market overtaking direct lenders in Q1 2026 and continuing to do so, signals a structural shift in where sponsors are sourcing credit. Law firms advising credit funds on portfolio management, amendment and waiver work, and covenant renegotiations may see offsetting workflow as borrowers navigate tighter conditions.
On the Ground
A trainee on a direct lending mandate would be managing the CP (conditions precedent) checklist, coordinating execution of security documents (such as share charges and debentures), and chasing legal opinion sign-offs from local counsel in relevant jurisdictions before drawdown.
Interview prep
Question you might get
“What are the key legal differences between a direct lending facility and a broadly syndicated leveraged loan, and why might a PE sponsor choose one over the other in the current market?”
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A model answer you can lift into an interview — how to frame this story for a partner.
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