How Private Credit Is Displacing Bank Debt in Leveraged Buyouts: What It Means for Deal Valuations

TLDR: Private credit now funds 77% of leveraged buyouts globally, displacing syndicated bank debt as the default LBO financing instrument. The Neumarz thesis: this is a valuation story, as much as a financing story. When private credit sets the pricing floor for the majority of transactions, it becomes the reference rate for deal structure itself, requiring sponsors to recalibrate entry multiples, return models, and exit assumptions against a higher-cost, covenant-richer financing baseline.

From Niche to Dominant: The Scale of the Displacement

The leveraged finance market has undergone a structural reorientation that most deal commentary still understates. Private debt accounted for 77% of global leveraged buyout financing in 2024, the highest annual share recorded by S&P Global LCD since at least 2015. Bank debt funded the remaining 23%, its lowest share over the same period.

This reversal is structural and durable. The private credit market stood at approximately $3 trillion at the start of 2025, more than doubling from roughly $2 trillion in 2020, with Morgan Stanley projecting growth to $5 trillion by 2029. Capital deployment reached $592.8 billion in 2024, up 78% year-on-year according to AIMA. Buyout financing via direct lenders totalled $81.4 billion in 2025, the highest level since S&P LCD began tracking the category, up from $72.9 billion in 2024.

Average LBO deal size for direct lending expanded in step: from approximately $200 million in 2020 to $295 million in 2024 to $380 million in 2025. Private credit has moved well beyond mid-market territory and now serves as the de facto capital market for the majority of sponsor-backed transactions across size brackets.

Three Structural Advantages That Drove the Shift

Banks pulled back from leveraged finance for reasons that are durable. Basel III and IV capital requirements substantially increased the cost of holding leveraged loan exposure on balance sheet, making risk retention prohibitive at scale. Post-2022, elevated rates combined with syndication risk in volatile credit markets accelerated that retreat. Three structural advantages of direct lending filled the resulting gap.

Speed and certainty of execution. A direct lender commits and closes on a bilateral basis. A bank-led syndication depends on investor appetite across a roadshow, creating settlement risk across the deal timeline. For a sponsor working a 60-day exclusivity window, this distinction is decisive. The incremental pricing premium of approximately 150 basis points above comparable syndicated spreads as of mid-2025 compresses to a manageable cost when weighed against deal certainty.

Covenant protection as deal engineering. Direct lending documentation is covenant-rich by design. According to S&P LCD data, 96% of lower middle market direct lending deals and 76% of upper middle market deals carry maintenance covenants. In the broadly syndicated market, fewer than 10% of 2024 new-issue loans included maintenance covenants. This divergence gives direct lenders structured visibility into borrower operational performance before a formal breach materialises, creating early intervention rights that syndications surrender in exchange for broad market distribution.

Documentation flexibility. Direct lenders write bespoke terms. PIK toggle provisions, add-on flexibility, equity co-investment alongside the debt tranche, and customised security packages are all structuring tools that sit outside a standardised syndicated loan package. For complex carve-outs, platform builds, or cross-border structures, this flexibility carries real economic value to the sponsor.

Two Deals That Illustrate the Displacement at Scale

The Permira-led take-private of Squarespace in May 2024 illustrates the displacement in large-cap territory. The $6.9 billion transaction was financed with a $2.6 billion direct lending club, assembled and committed bilaterally. For a public-to-private of that scale, the speed and documentation control of the direct lending route outweighed any pricing advantage a syndicated process might have offered in a more receptive rate environment.

Bain Capital’s acquisition of PowerSchool Holdings, completed in June 2024 at a $5.6 billion enterprise value, followed the same logic. Direct lenders provided the full debt financing package. PowerSchool operates in education technology, a category where software EBITDA margins and subscription cohort visibility make direct lender credit analysis precise: lenders can model maintenance test outcomes directly against subscription retention data, aligning covenant structure with the business’s actual performance drivers rather than applying generic credit tests.

Both transactions share a common pattern: the sponsor chose execution certainty and documentation control over pricing optimisation. That choice, now made across more than three-quarters of all LBO transactions globally, is the mechanism through which private credit has become the reference market for leveraged finance.

Private Credit vs Syndicated Bank Debt in LBO Financing: A Structural Comparison

The Valuation Repricing Effect: What the Data Alone Leaves Unsynthesised

The market data documents the displacement. What it leaves unsynthesised is the downstream structural consequence: when private credit finances 77% or more of all LBO transactions, it ceases to function as an alternative market. It becomes the reference market. Entry multiples, return modelling, and exit pricing all calibrate against direct lending terms, because that is the financing instrument the vast majority of transactions actually close with. Sellers, advisers, and sponsors who apply prior cycle valuation assumptions to this market face a compounding mismatch between their models and the actual clearing mechanism.

Entry multiple compression on a constant return target. A sponsor underwriting a business at 12x EBITDA with a direct lending package at SOFR plus 500 basis points builds a different return model than one underwriting the same asset with a broadly syndicated loan at SOFR plus 375 basis points. At 5x leverage, 125 basis points of incremental annual interest cost reduces levered free cash flow materially across a five-year hold. To preserve a target IRR, the sponsor must accept a lower entry multiple, underwrite a higher exit multiple, or model a more aggressive operational improvement plan. Private credit’s dominance therefore applies a structural downward pressure on the sustainable entry multiple for a given return target. Sellers whose valuation expectations were calibrated to a lower-rate syndicated environment face a buyer pool underwriting against a higher financing cost base.

Exit strategy reorientation. Prior cycle exit planning routinely assumed the ability to refinance into a broadly syndicated term loan at tighter spreads, using the spread compression trade as a value creation lever alongside the operational improvement story. That lever functions with reduced reliability when syndicated market access is uncertain or reserved for only the largest and most liquid credits. The preferred exit route for a direct-lender-financed portfolio company therefore tilts toward a secondary buyout or a strategic sale rather than a leveraged recapitalisation into public credit markets. Sponsors who model return paths with a syndicated-refinancing optionality assumption are working from a prior cycle’s playbook.

Governance realignment throughout the hold period. The covenant richness of private credit financing alters sponsor-lender dynamics at every stage of the hold. When a direct lender holds maintenance covenants, it holds structured access to the borrower’s operational performance before a formal breach materialises. A covenant slip triggers renegotiation: lenders typically seek an amendment fee, revised terms, and operational representation before granting a waiver. This changes the incentive architecture for management teams and for sponsors managing multiple portfolio companies simultaneously, since operational underperformance triggers earlier and more structured lender engagement than the covenant-lite syndicated market would produce. The GP’s operational improvement mandate runs on a shorter feedback loop, with the lender as an informed counterparty rather than a passive creditor.

Neumarz treats this as the central and durable consequence of the financing shift: the repricing of LBO deal architecture itself, extending well beyond any cost-of-debt line item adjustment.

The Outlook: Selective Bank Re-Entry and the Expanding Direct Lending Perimeter

The trajectory points toward continued private credit dominance in the mid-market and selective bank re-entry in large-cap transactions. S&P LCD data shows banks recovering some share in LBO financings above $1 billion, with the bank share reaching approximately 50% in 2025, recovering from a low of 39% in 2023. The broader competitive dynamics that drove bank retreat remain structurally in place: elevated capital requirements on leveraged exposure, and the continuing build-out of large direct lending vehicles at firms including Ares Management, Apollo Global Management, Blue Owl Capital, and Blackstone Credit.

The strategic question for sponsors has evolved. The relevant question is how to structure the direct lending relationship to extract value from its flexibility premium, rather than paying only its pricing premium. Covenant packages written to provide operational optionality serve the sponsor’s value creation plan. PIK provisions defer cash interest during asset build phases. Documentation flexibility enables add-on acquisitions without resetting the entire capital structure. The direct lender, engaged as a capital partner with operational visibility rather than managed as a passive line item, becomes a more productive participant in the hold period.

The displacement of syndicated bank debt by private credit in leveraged buyouts is a structural market transition. The financing market has moved. Deal valuation models, return underwriting frameworks, and exit planning assumptions must follow.

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References

1. S&P Global Market Intelligence. “Private Debt’s Share of Buyout Financing Hits Decade High.” February 2025. https://www.spglobal.com/market-intelligence/en/news-insights/articles/2025/2/private-debts-share-of-buyout-financing-hits-decade-high-87373500
2. Morgan Stanley. “Private Credit Outlook: Estimated $5 Trillion Market by 2029.” https://www.morganstanley.com/ideas/private-credit-outlook-considerations
3. AIMA. “Strong Growth Sees Private Credit Market Reach US$3.5 Trillion.” Press Release. https://www.aima.org/article/press-release-strong-growth-sees-private-credit-market-reach-us-3-5-trillion.html
4. PitchBook LCD. “Private Credit Activity Stays Strong in 2025, Buoyed by LBO Deals.” https://pitchbook.com/news/articles/private-credit-activity-stays-strong-in-2025-buoyed-by-lbo-deals
5. Northleaf Capital Partners. “Private Credit Market Update: Q3 2025.” https://www.northleafcapital.com/news/private-credit-market-update-q3-2025
6. PitchBook LCD. “Large Deal Drought Drags Private Credit LBO Financings Down 21% YoY.” https://pitchbook.com/news/articles/large-deal-drought-drags-private-credit-lbo-financings-down-21-yoy
7. CNBC. “Private Credit’s Cracks Open Door for Wall Street Banks’ Comeback.” March 2026. https://www.cnbc.com/2026/03/27/wall-street-banks-private-credit-market-share-leveraged-loans.html