Recent turbulence in the loan markets has led Vistra Equity Partners to pause its plans for US bank lenders to refinance Finastra’s nearly $5bn private credit-backed debt as it approaches maturity. Instead, Vistra is reportedly in discussions for an alternative private credit-backed refinancing. If completed, this would be the largest private credit deal ever. This uncertainty in the loan markets is likely to create more opportunities for private credit. Norton Rose Fulbright partners James Collis and Gemma Long write.
Uncertainty prevails
Usually, private equity fund managers (GPs) aim to return money to their investors (LPs) before the fund ends by selling all investments. However, the prolonged challenging economic environment has disrupted this process.
The prevailing climate has significantly affected the performance of some assets, causing financial distress. Higher interest rates have worsened this distress, especially for borrowers with capital structures set during the peak of the cycle in 2017/2018. The expected normalisation of rates at higher levels will make it hard for some borrowers to argue that their financial problems are temporary, making their current capital structures unworkable.
These factors often lower the value of portfolio companies and, sometimes, the debt they owe.
Despite this, sale valuations continue to remain stubbornly high. GPs are understandably reluctant to accept lower-than-expected returns for their LPs, and high leverage levels in the companies, set at the peak of the market, make it necessary for GPs to maximise exit returns. The lack of exits results in fewer benchmarks for comparison.
These challenges have two main consequences. Firstly, exits become more difficult, leaving some assets “stranded”. Secondly, refinancing the debt owed by these assets, usually done through a sale, becomes more challenging.
For funds, efficiently deploying capital and showing a profitable return for their LPs is crucial for both the current fund’s performance and future fundraising. A tough economic climate, especially with a shortage of suitable assets at the right price, puts a lot of pressure on GPs.
Flexibility and creativity are key
In the current climate, GPs need alternative ways to exit or deliver returns to their LPs. Continuation funds are one favoured solution. These funds, managed by the same GP, are set up to buy an asset or portfolio company currently held by an existing fund. This approach helps private equity funds manage liquidity challenges and meet investor expectations by providing more time and flexibility to manage and exit investments.
For some stranded investments, restructuring will be needed. This may involve resetting the financial structure of individual investments. Refinancing these structures will likely require a more developed capital structure with senior debt and junior/non-cash pay capital (e.g. payment-in-kind or preference shares). These instruments add flexibility to the capital stack, effectively delaying the day of reckoning on the asset’s performance.
Hybrid lenders would benefit from improved performance, but if the asset’s performance does not improve, the fund’s equity investment could be at risk.
New faces around the table
The creditor community in 2025 has changed almost beyond recognition since the financial crisis of 2008. The displacement effect post-2008 saw sub-investment grade assets increasingly financed by the less-regulated private credit community.
From 2008 to 2024, the volume of loan assets managed by private credit funds grew significantly – from $375m in 2008 to $1.5tn at the start of 2024. As is well-known, private credit achieved this initially by taking advantage of stricter lending requirements for banks, which led banks to pull out of riskier markets or focus on customers operating in specific jurisdictions. This growth was further aided by the expansion of the traditional sub-investment grade corporate lending market and diversification into markets such as real estate, infrastructure, healthcare, life sciences, and investment grade lending.
Over time, private credit has grown and diversified alongside its private equity cousin. This community now plays a key role in the financial ecosystem.
As such, private credit has an important seat at the table of many financial restructurings. The flexibility shown by private credit in new money transactions is no less evident in distressed scenarios.
Despite the rise in private credit, some roles still require banks’ involvement, particularly those related to revolving credit lines/overdrafts, treasury management, and foreign exchange – all areas key to liquidity that tend to move centre stage when a business is stressed. The resulting intercreditor issues will also need to be worked out.
Creative solutions: private credit’s approach to distress
The private credit community uses various approaches tailored to each transaction’s specific dynamics and the strength of relationships with sponsors. There is no “one size fits all” method. However, private credit’s flexibility, due notably to fewer regulatory constraints, allows for more innovative and adaptable solutions to distressed loans compared to traditional bank lenders.
The more tailored terms in many loans originated by private credit will also smooth the way to more creative, consensual solutions, including liability management transactions, to address distress.
A collaborative, consensual approach is central to private credit’s handling of distressed loans. Private credit providers, focused on investor returns and less bound by stringent bank regulations, have more freedom to use their own valuation assessments and strategic considerations for write-downs and further funding. This flexibility allows them to delay crystallising losses and defer enforcement action.
Private credit’s adaptability allows for more transactional solutions to distress, such as moving up and down the capital structure to maximise returns. This reduces the need for traditional insolvency processes like pre-packaged filings or enforcement, minimising the risks of adverse publicity and value destruction. This is all facilitated by strong relationships with sponsors, often managed by the same professionals throughout the life of the credit.
Private credit has come of age. It is now integral to managing distressed assets and ensuring liquidity amid economic uncertainty. Over the past fifteen years, its flexibility and creativity have been key carving out this role.