The first half of 2026 was shaped by a series of geopolitical and sector-specific headwinds alongside a more uncertain macroeconomic backdrop. Investor sentiment turned more cautious through the spring as a result of:
Mixed economic data fueling inflationary concerns
A Federal Reserve whose policy outlook has shifted from potential rate cuts last year to a possible hike
A prolonged conflict in the Middle East pressuring energy markets and global economies
Questions around AI’s potential to disrupt the software sector, one of the largest industries in credit markets
A Retreat in Private Equity Volumes.
Against the confluence of the above factors as well as private equity valuation expectations and the implications of high borrowing costs on leverage, second quarter private equity deal volume fell 52% quarter-over-quarter and 41% year-over-year, reaching the lowest levels since the start of the Covid-19 pandemic.1
This contributed to a broader slowdown in deal activity across both the private and public credit markets.
Many private equity firms turned to balance sheet management to push out debt maturities either through refinancing or amend-and-extend transactions, in particular to address the upcoming maturity wall in 2028/2029.
Additionally, we saw several private equity firms execute tack-on acquisition transactions with their portfolio companies as a means to increase scale and position these companies for future sell-side processes.
Despite the broader pullback during the first half, we have started to see activity pick up in June.
M&A activity in June increased almost three times from May’s volume (which fell to a three-year low) with new LBO activity driving the majority of this uplift.
First Half 2026 Private Credit Snapshot.
A Subdued First Half. Private credit activity was mixed through the first half of 2026. Direct lending volume totaled approximately $108 billion in the first six months of the year, a 20% decline versus the comparable period in 2025.2
Private credit lenders grew more selective amid the broader headwinds described above, as outflows from retail-oriented private credit vehicles limited dry powder across several mega-managers.
Favorable Shift in Terms. We have seen increased lender discipline drive more investor-friendly terms across the market.
Average unitranche spreads widened to S+5.13% in June, an increase of roughly 17-basis-points from S+4.96% at the beginning of the year.2
High-quality credits that would have commanded S+4.50% to S+4.75% pricing in early January are now pricing with a “5-handle,” reflecting a sharper premium for current market risk.
Original issue discounts widened to 115 basis-points, the highest level since the third quarter of 2025.2
Stable Fundamentals. We see underlying credit quality across middle market to large cap borrowers remaining sound.
Average interest coverage ratio increased to 2.5x in the second quarter, the highest level since the third quarter of 2022.2
Average unitranche leverage at approximately 5.5x, which is well below the levels of 6.0x or higher commonly seen in 2021-2022.2
Default rates for the sponsor-backed direct lending market remain low at 1.2% on a trailing twelve-month basis and are forecasted to end the year at 2.3%.2
While marks across the sector were negatively impacted in the first half of 2026 amid a broader macro backdrop of geopolitical shocks, inflation uncertainty, and elevated AI-driven volatility, we are not seeing the degree of fundamental deterioration in our portfolio that recent coverage might suggest.
BDC Headlines. BDC redemption requests have drawn significant attention this year, raising questions about private credit broadly. We believe this concern is overstated outside the retail and high-net-worth segment. Pressures stemmed from fund mechanics specific to the retail BDC channel. Managers backed by institutional, long-term capital should be well positioned to navigate the environment and capitalize on emerging opportunities.
Looking Ahead: Brinley’s Outlook.
As we move into the second half, the macroeconomic environment is more uncertain than anticipated at the start of the year, making a linear recovery in deal flow unlikely in the near term.
That said, we believe periods of volatility are exactly when selectivity and conviction matter most. The current environment favors disciplined credit investors like Brinley, who are backed by institutional, long-term capital and don’t face pressure to deploy. Sponsors, meanwhile, remain under pressure to return capital to LPs, refinance maturities, and deploy dry powder — a dynamic we expect to support deal flow through year-end.
Geopolitical uncertainty and rapid technological change are driving real market disruption, but we stay anchored to fundamental analysis, careful underwriting, and downside protection. We view volatility as opportunity for private credit, and we’re positioned to act on disruption as it happens.
This discipline shapes where we lean in. For example, we continue to underwrite AI-related credits and software more broadly, though we remain selective. We also continue to see opportunities in healthcare, where we maintain a dedicated investment team, and in industrials, business services, and other sectors.
Warm regards, The Brinley Partners Team
The information and opinions contained herein are for background purposes only, are subject to change without notice, do not purport to be full or complete and do not constitute an offer to sell, or a solicitation of any offer to buy, any securities or investment services. Brinley Partners, LP (“Brinley”) has no obligation to update any information contained herein for any reason, including to reflect any change in its research conclusions, investment methodology, strategy or perspective. Unless otherwise indicated, the information contained herein is current as of the date indicated. The information contained herein is believed to be reliable and has been obtained from sources believed to be reliable, but no representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained in this presentation by Brinley, its affiliates or any of their respective members, partners, directors, officers, employees and agents and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions. In particular, but without prejudice to the generality of the foregoing, (i) no representation or warranty is given as to the achievement or reasonableness of any returns, projections, estimates, valuations or prospects contained in this document or in such other written or oral information and (ii) Brinley makes no guarantee as to the reliability of any third-party information source, and its opinions concerning the accuracy, relevance and implications of the historical information or future projections included herein are liable to change without notice.
This document contains “forward-looking statements” within the meaning of the federal securities laws. In this context, forward-looking statements often address expected future business and financial performance and financial conditions, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” “will,” “would,” “target,” similar expressions, and variations or negatives of these words. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Recipients should note that these and other forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed in any forward-looking statements. Past performance is not a guarantee of future results.
Opinions expressed herein reflect the current subjective views and opinions of Brinley as of the date hereof only and are subject to change. Such opinions and views may be based on a variety of factors, including, without limitation, market observations, the experience of Brinley and its team as investors in the relevant market and Brinley’s analysis or interpretation of objective market data or historical trends. Certain information contained herein discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed or relied upon as research or investment advice. There can be no assurances that any trends described herein will continue or will not reverse. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of, future events or results.
Pitchbook LCD Q2 2026 US Credit Markets Quarterly Wrap (“Q2 US Loan Market Wrap”), as of 6/30/26.
KBRA DLD, as of 6/30/26. Note: Average unitranche leverage and interest coverage ratios reference borrowers with $20M+ of EBITDA.
With Intelligence “BDC Portfolios: Redemptions, NAVs and Credit Stress” as of April 30, 2026.
1H 2026 Brinley Market Minute
Macro Environment.
The first half of 2026 was shaped by a series of geopolitical and sector-specific headwinds alongside a more uncertain macroeconomic backdrop. Investor sentiment turned more cautious through the spring as a result of:
A Retreat in Private Equity Volumes.
Against the confluence of the above factors as well as private equity valuation expectations and the implications of high borrowing costs on leverage, second quarter private equity deal volume fell 52% quarter-over-quarter and 41% year-over-year, reaching the lowest levels since the start of the Covid-19 pandemic.1
This contributed to a broader slowdown in deal activity across both the private and public credit markets.
Despite the broader pullback during the first half, we have started to see activity pick up in June.
First Half 2026 Private Credit Snapshot.
A Subdued First Half. Private credit activity was mixed through the first half of 2026. Direct lending volume totaled approximately $108 billion in the first six months of the year, a 20% decline versus the comparable period in 2025.2
Private credit lenders grew more selective amid the broader headwinds described above, as outflows from retail-oriented private credit vehicles limited dry powder across several mega-managers.
Favorable Shift in Terms. We have seen increased lender discipline drive more investor-friendly terms across the market.
Stable Fundamentals. We see underlying credit quality across middle market to large cap borrowers remaining sound.
While marks across the sector were negatively impacted in the first half of 2026 amid a broader macro backdrop of geopolitical shocks, inflation uncertainty, and elevated AI-driven volatility, we are not seeing the degree of fundamental deterioration in our portfolio that recent coverage might suggest.
BDC Headlines. BDC redemption requests have drawn significant attention this year, raising questions about private credit broadly. We believe this concern is overstated outside the retail and high-net-worth segment. Pressures stemmed from fund mechanics specific to the retail BDC channel. Managers backed by institutional, long-term capital should be well positioned to navigate the environment and capitalize on emerging opportunities.
Looking Ahead: Brinley’s Outlook.
As we move into the second half, the macroeconomic environment is more uncertain than anticipated at the start of the year, making a linear recovery in deal flow unlikely in the near term.
That said, we believe periods of volatility are exactly when selectivity and conviction matter most. The current environment favors disciplined credit investors like Brinley, who are backed by institutional, long-term capital and don’t face pressure to deploy. Sponsors, meanwhile, remain under pressure to return capital to LPs, refinance maturities, and deploy dry powder — a dynamic we expect to support deal flow through year-end.
Geopolitical uncertainty and rapid technological change are driving real market disruption, but we stay anchored to fundamental analysis, careful underwriting, and downside protection. We view volatility as opportunity for private credit, and we’re positioned to act on disruption as it happens.
This discipline shapes where we lean in. For example, we continue to underwrite AI-related credits and software more broadly, though we remain selective. We also continue to see opportunities in healthcare, where we maintain a dedicated investment team, and in industrials, business services, and other sectors.
Warm regards,
The Brinley Partners Team
The information and opinions contained herein are for background purposes only, are subject to change without notice, do not purport to be full or complete and do not constitute an offer to sell, or a solicitation of any offer to buy, any securities or investment services. Brinley Partners, LP (“Brinley”) has no obligation to update any information contained herein for any reason, including to reflect any change in its research conclusions, investment methodology, strategy or perspective. Unless otherwise indicated, the information contained herein is current as of the date indicated. The information contained herein is believed to be reliable and has been obtained from sources believed to be reliable, but no representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained in this presentation by Brinley, its affiliates or any of their respective members, partners, directors, officers, employees and agents and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions. In particular, but without prejudice to the generality of the foregoing, (i) no representation or warranty is given as to the achievement or reasonableness of any returns, projections, estimates, valuations or prospects contained in this document or in such other written or oral information and (ii) Brinley makes no guarantee as to the reliability of any third-party information source, and its opinions concerning the accuracy, relevance and implications of the historical information or future projections included herein are liable to change without notice.
This document contains “forward-looking statements” within the meaning of the federal securities laws. In this context, forward-looking statements often address expected future business and financial performance and financial conditions, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” “will,” “would,” “target,” similar expressions, and variations or negatives of these words. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Recipients should note that these and other forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed in any forward-looking statements. Past performance is not a guarantee of future results.
Opinions expressed herein reflect the current subjective views and opinions of Brinley as of the date hereof only and are subject to change. Such opinions and views may be based on a variety of factors, including, without limitation, market observations, the experience of Brinley and its team as investors in the relevant market and Brinley’s analysis or interpretation of objective market data or historical trends. Certain information contained herein discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed or relied upon as research or investment advice. There can be no assurances that any trends described herein will continue or will not reverse. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of, future events or results.
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