US Direct Lending Drops 40% While Private Credit Raises $87B — The Deployment Gap Widens

Direct lending volume by US private credit firms fell sharply in Q2 2025, down an estimated 40% from the prior quarter, even as fundraising rebounded to roughly $87 billion across North American strategies. The spread between capital raised and capital deployed has not been this wide since the months immediately following the pandemic lockdowns. The market now holds more dry powder than it has viable borrowers willing to pay the coupon.

PitchBook and Preqin data show Q2 direct lending commitments dropped to their lowest quarterly level since Q4 2020, while fundraising climbed for the second consecutive quarter. Redemption requests in Q1 2025 reached $20 billion, the highest on record, and anecdotal reports suggest Q2 outflows remained elevated, though final figures have not yet cleared. TD Bank's asset management unit closed its first loan under the newly launched TD Greystone Global Private Credit Fund in late June, a timing decision that places new capital into a market where existing managers are sitting on undeployed commitments and facing investor withdrawals simultaneously.

The deployment slowdown reflects three overlapping pressures. First, middle-market borrowers are delaying acquisitions and refinancings, waiting for the cost of capital to stabilize or decline. Second, the spread compression that made private credit attractive relative to syndicated loans has reversed; all-in yields on broadly syndicated loans are now within 50 to 75 basis points of comparable direct loans, erasing much of the premium that justified illiquidity. Third, sponsors are running existing portfolio companies longer rather than levering them for exits, which removes the primary source of new loan origination. The result is capital raised in 2023 and 2024 sitting in escrow-like structures, earning treasury rates while managers hunt for deployment opportunities that meet return hurdles set 18 to 24 months ago in a different rate environment.

This matters because the private credit market has spent the last three years telling allocators it is a diversification away from public credit volatility and a yield enhancement over investment-grade bonds. If capital cannot be deployed at the returns promised in the fundraising deck, the entire thesis compresses into a duration mismatch: long-term lockups on capital that earns short-term rates until deal flow returns. Family offices and endowments that moved allocations into private credit in 2022 and 2023 are now holding positions that are neither liquid nor yielding the 11% to 13% net returns initially modeled. The $20 billion in Q1 redemption requests suggests some allocators have already decided the trade is not working. The fact that TD launched a new fund in June, while peers are returning capital calls unfunded, indicates a belief that entry timing favors latecomers who can deploy into distressed situations—or a misread of where the cycle stands.

Operators and allocators should watch three things over the next 90 to 120 days. First, whether Q3 lending volumes stabilize or continue to fall, which will confirm whether this is a temporary pause or a structural reset. Second, the spread between syndicated loan yields and direct lending yields; if that gap does not widen back above 100 basis points, capital will continue to sit idle. Third, whether redemption queues begin to clear or lengthen, which will indicate whether LPs are willing to wait out the deployment lag or are cutting exposure regardless of gate terms.

TD Greystone closed one loan. The rest of the market is sitting on $350 billion in dry powder and falling deal flow. The question is not whether capital finds a home, but what return it accepts when it does.