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.

Since the middle of 2022, the illiquidity premia available in IG private debt have been on an upward trend across all sectors, as Figure 1 shows. The key driver has been a backdrop of tightening public debt spreads (around 130 basis points – bps – since the middle of 2022), while private debt spreads have held firmer in comparison.¹ As a result, the average illiquidity premia across all sectors increased to c. 115bps for 2025, which is above long-term average levels.

Structured finance as a sector has historically generated a higher illiquidity premium than private corporate debt. Structured finance includes securitisations, which can consist of niche and innovative structures, and therefore also command a “complexity premium” component.

Figure 1: Illiquidity premia for investment grade private debt to Q4 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 December 31, 2025.

Tightening public credit spreads reflect the market optimism of a “soft landing” for the global economy, with inflation moving back towards target levels and the Bank of England, European Central Bank and US Federal Reserve all cutting interest rates and removing restrictiveness. We saw some volatility in public spreads following “Liberation Day” on April 2, 2025, with credit spreads widening. However, with trade tensions and markets stabilising, public IG credit spreads are now trading c. 20bps tighter than pre–Liberation Day levels (see Figure 2).

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

• 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.

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, 2026.

2025 set a new high-water mark for European infrastructure debt deployment, underpinned by continued activity in the energy transition and digital infrastructure markets.

Q4 European infrastructure debt volumes were around €80 billion, continuing the upward trend of recent years. The largest deals to close in the period included 23 deals over €1 billion, led by the UK Sizewell C nuclear power plant. Sizewell’s overall €48 billion financing included a €6.2 billion tranche of export credit agency debt, with the remainder provided by the UK government through the National Wealth Fund earlier in the year.

Other notable deals included the MasOrange/Vodafone refinancing and the financing of Hornsea Three UK offshore wind farm. Overall, UK deals contributed £24 billion to the European total, which was led by Spain, Italy and Germany, although the total of these three countries was only slightly ahead of the UK total. Renewables was the dominant sector, with €27 billion from 143 deals. Among narrower sub-sectors, solar led with €11.7 billion followed by fibre with €8 billion.

The UK real estate debt market remained highly competitive throughout 2025, ending the year with several large financings closing and lenders building pipeline for 2026. Activity levels across lenders held strong, with refinancing remaining the primary focus, although acquisition and development funding have both become more common.

As confidence began to recover, several large portfolios went on sale, notably in the industrial and living sectors. These transactions have met with strong support from lenders.

Margins are becoming squeezed in higher-yielding strategies and senior loans – but the latter still provide strong relative value compared to public credit.

The wider European real estate debt market has shown the same trends, albeit at an earlier stage, with a growing level of financing volume. However, some lenders remain cautious and/or focused on their existing loan book. Loan pricing has contracted for the most favoured assets but considerably less so in less favoured sectors, such as parts of the office market and the retail sector.

Tight credit conditions persisted through Q4 2025, but with variations depending on the sector and on exposure to geopolitical drivers, including US tariffs. Illiquidity premia in private corporate debt remained strong. 

As rates fall, we expect to see an increase in supply from IG issuers, particularly in sub-sovereign and regulated sectors returning to the private placement market for longer-dated fixed-rate debt.

The US and continental Europe continued to offer stronger risk-adjusted returns than the UK, where there is a structural imbalance between local insurer capital and investment opportunities. In the sub-IG market, spreads stayed historically tight but were more volatile than in IG.

M&A activity improved only gradually in Q4, and we maintained a conservative focus on low-leverage and secured transactions in defensive sectors. This approach was consistent with the year-end backdrop of uneven corporate fundamentals. Easing monetary policy over the course of 2026 should help reduce stress on the level of interest companies will have to pay to service their debts, which would support credit fundamentals.

Private credit activity accelerated meaningfully across the market in Q4, with direct lending volumes rising and larger transactions regaining momentum. This uptick coincides with a broader expansion in specialty and structured credit strategies, supported by evolving regulatory frameworks that promote greater transparency, risk retention and standardisation (e.g. changes in European CLO regulations). In parallel, ESG-linked and sustainable securitisation themes continued to re-emerge, with expectations for renewed issuance into 2026 after a slower 2025.

In Q3, we began to see Limited Partners and General Partners requiring increased liquidity. This is continuing. For example, more collateralised fund obligation and rated feeder notes are being issued, there is increased activity in continuation vehicles, and opportunities in secondary private assets and portfolios are more liquid than in the first half of last year.

These developments are occurring alongside a broader shift in the market’s infrastructure. Q4 saw a rising adoption of tokenisation and artificial-intelligence-enabled tools that enhance settlement efficiency, reporting transparency and regulatory alignment across structured finance.