Illiquidity premia in private debt

In private debt markets, illiquidity premia are a key factor in assessing relative value between private sectors as well as versus public debt. For investors who can provide long-term patient capital, these premia represent the potential to harvest additional returns from investing in private debt, while also enabling investors with a “multi-sector” or opportunistic approach to take advantage of relative-value opportunities between private debt sectors and pricing dislocations versus public markets.

Average illiquidity premia have improved across all private debt sectors since 2022, as Figure 1 shows. The key driver of this has been a backdrop of tightening public debt spreads (around 120 basis points since the middle of 2022), while private debt spreads have held relatively firmer.² Tightening credit spreads have reflected market optimism of a “soft landing” outcome, with inflation moving back towards target levels and the Bank of England, European Central Bank and US Federal Reserve all cutting interest rates.

Figure 1: Illiquidity premia for investment grade private debt to Q2 2025 (basis points)

Past performance is not a reliable indicator of future returns. For illustrative purposes only. The value of an investment can go down as well as up and there is no guarantee that the forecasted return will be achieved.

Note: The illiquidity premia are calculated based on Aviva Investors’ proprietary deal information. There are various methodologies that can be employed to calculate the illiquidity premium. Please note that the illiquidity premia shown are measured against broad relevant public debt reference data, are rating band (not notch) matched and are not duration/maturity matched.

Source: Aviva Investors, ICE BofAML sterling and euro investment grade corporate indices. Data as of July 1, 2025.

Following “Liberation Day” on April 2, public credit spreads widened substantially. But since President Trump reconsidered some tariff threats, they have recovered (see Figure 2). Private debt markets saw a brief slowdown in activity over this period, and presented some secondary market opportunities, most notably in the sub-IG space, with spreads on BB-rated Collateralised Loan Obligations (CLOs) reaching mid-700s compared to low 500s a week before.

As market volatility subsided, private debt activity picked up and the evidence of the illiquidity premia remains established (see Figure 1). However, following President Trump’s original tariff announcements, private debt spreads have not tightened as rapidly as public credit spreads. As a result, illiquidity premia increased in Q2 2025 and were above long-term average levels.

A key takeaway we draw from this analysis is that illiquidity premia are not static and vary through the market cycle. Secondly, illiquidity premia across the various private debt sectors do not move in tandem, reflecting different dynamics through market cycles.

Private debt spread dynamics

An important driver of pricing dynamics is the ‘stickiness’ of private debt sector spreads versus public debt.

• Real estate debt spreads tend to be the most “sticky”, resulting in illiquidity premia that have historically been correlated to the real estate cycle. Real estate debt illiquidity premia tend to compress when real estate capital values decline, and then typically recover as real estate valuations rise.
• Private corporate debt spreads tend to be the least sticky and re-price the fastest to public debt markets. Given this dynamic, illiquidity premia tend to remain in a narrower range over the long term. Also, some of the highest illiquidity premia have occurred during periods of higher market volatility, especially when there is less capital available from more traditional lending sources.

• Infrastructure debt spreads tend to be moderately sticky, and reprice more gradually to public debt markets. 

Figure 3 sets out these spread dynamics in more detail. The implication is that when investing in private debt, a multi-asset approach can be beneficial and allow investors to take advantage of relative value pricing opportunities between sectors.

Figure 3: Pricing dynamics across private debt sectors

Past performance is not a reliable indicator of future returns.

Note: ILP = Illiquidity Premia.

Source: Aviva Investors, 2025.

UK leads activity

In Q2 2025, European infrastructure debt activity rose to £48 billion. The UK led by volume, followed by Spain and Poland, boosted by the Baltyk II and III offshore wind deals developed by Equinor and Polenergia.

The UK also saw the £2.5 billion close of Hynet, its second carbon capture, utilisation and storage (CCUS) transport asset, while Spain contributed £2.3 billion from 18 solar projects, out of a total of 48 solar assets spanning Europe.

In terms of pricing, spreads remained tight amid strong bank-led demand, with capital continuing to chase limited assets. In the UK, the National Infrastructure Strategy was published, setting a plan for the next 10 years. It reaffirmed a focus on private capital in economic infrastructure, particularly energy, utilities, and digital, but offered little new information.

Activity levels and sentiment improve; margins tighten

In Q2 2025, the UK real estate debt market absorbed two key surprises: the broader disruption from tariff announcements and the minimal impact these had on pricing or activity. Despite softer-than-expected real estate transaction volumes, deals across most sectors continued to emerge, supported by strong debt liquidity that has kept downward pressure on loan margin pricing.

Lenders remain especially active in the living sector, though appetite for offices and retail is also growing. Pricing competition is most evident among UK clearing banks and debt funds deploying back leverage for whole loans, with UK commercial real estate debt now, in some cases, pricing below European levels for the first time since the global financial crisis (GFC).

Many issuers are favouring short duration and floating rate structures

Corporate issuance in UK IG markets remains subdued amid high rates, with many issuers favouring short-duration, floating-rate structures. A persistent supply-demand imbalance (driven by limited issuance and strong insurer demand for long-duration assets) has pushed spreads to historic lows, though illiquidity premia remain intact.

Continental Europe and the US offer more attractive risk-adjusted returns, with European markets particularly appealing due to shorter durations and constrained bank lending for longer-term loans amid ongoing quantitative tightening.

In sub-IG markets, subdued M&A activity and elevated rates have led to reduced lending volumes and heightened competition, especially around unitranche deals.

We see better value in senior secured loans with lower leverage, and notably, the UK sub-IG space offers compelling opportunities due to the absence of a deep CLO market compared to Europe and the US.

Asset-Backed Lending (ABL) is emerging as a distinct sub-strategy within private debt. With diversified collateral and cash-flow-backed structures, it shares characteristics with real estate and infrastructure lending, offering resilience and attractive risk-return profiles.

Private credit flows into emerging markets are accelerating, with development finance institutions adopting blended finance to attract private investment into high-impact sectors.

With M&A activity slowing, one emerging solution for liquidity management is the use of leverage within fund structures. Interest is growing in fund finance strategies aligned with Solvency II and Matching Adjustment eligibility, targeting long-term insurance capital.