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.

Figure 1: Illiquidity premia for investment-grade private debt to Q1 2026 (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, and ICE BofAML Sterling and Euro Investment Grade Corporate indices. Data as of 31 March 2026.

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 re-price 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 and projections are not reliable indicators of future returns.

Note: ILP = Illiquidity Premia.

Source: Aviva Investors, 2026.

After a record 2025 for European infrastructure debt, Q1 2026 has been more muted. With around €45 billion of activity, Q1 posted its lowest-ever quarterly volume, albeit only marginally lower than Q1 2025. The UK remains the largest contributor, with volumes of around €11 billion, followed by Germany, Italy and France.

The largest sector volumes were in renewables and digital, which contributed around €15 billion each. Digital activity happened predominantly in data centres. Fifteen deals closed, with a value of around €10 billion, illustrating the sector’s continued growth. Solar PV (with around €6 billion in deals) and airports (which issued circa €4.8 billion) were the other key contributing sectors to Q1 activity.

The infrastructure market has yet to see any material impact from current geopolitical issues, either in terms of issuance or pricing, although investors are monitoring this closely.

Many market participants’ focus and expectations changed during Q1, driven primarily by the Middle East conflict and uncertainty about both its length and the severity of any economic fallout. At the beginning of the year, investors widely anticipated further reductions in interest rates. They also expected to see a good level of liquidity, both in terms of equity deployment and lending. Subsequently, transaction volumes reduced somewhat, and we’ve seen a greater degree of caution. The impact this has had on the real estate debt market is quite nuanced and variable.

In the UK, for the strongest assets in popular sectors, lending appetite and pricing remain robust, with some IG transactions achieving margins of more than 120bps over gilts. The market – and financing – for secondary assets is more challenging, with liquidity and activity at lower levels. Lower activity makes it hard to assess the exact level of impact on margins, but we expect some spread widening. Key European markets are seeing similar trends, although there are growing concerns about the pace of economic growth, particularly in Germany, which may further dampen some areas of activity.

Since January 2026, private corporate debt markets have been increasingly shaped by external shocks rather than purely cyclical dynamics. The Middle East conflict has introduced renewed volatility through energy prices, shipping disruption and risk sentiment. This has disproportionately affected credits with exposure to fuel inputs, global trade routes or emerging-market demand. It has increased dispersion across sectors and in underwriting standards. At the same time, rising redemptions across parts of private credit have changed market behaviour, with investors increasingly prioritising liquidity, structure and downside protection over higher spreads. 

Lower policy rates have made refinancing easier and encouraged renewed issuance from IG borrowers, particularly sub-sovereign, infrastructure-linked and regulated entities. But the benefit has been unevenly distributed. The US and continental Europe continue to offer higher risk-adjusted return than the UK, where competition for deployable assets remains high. In sub-IG, spreads have widened but remain constrained by limited supply. Issuer-specific risk and refinancing exposure are now the dominant drivers of volatility. Against this backdrop, deployment has remained defensive. As liquidity conditions tighten for weaker issuers, investors are emphasising senior, secured, low-leverage structures in sectors with pricing power and cashflow resilience.

Since early 2026, issuance in structured finance and specialty credit markets has focused on liquidity rather than pure growth, reflecting investor concerns. Heightened geopolitical uncertainty has increased their sensitivity to tail risks, boosting demand for structural protections, collateral transparency and predictable cashflows across securitised exposures. 

More importantly, rising redemptions in private credit funds have become a central driver of activity. They have been accelerating the use of liquidity management solutions, such as collateralised fund obligations (CFOs) or rated feeder notes. The turnover of private credit portfolios on the secondary market has also risen markedly. While direct lending and asset-backed finance activity have remained robust, investor appetite is increasingly determined by duration and liquidity risk, rather than by yield alone. 

Clearer regulations in Europe around risk retention and reporting standards have continued to support confidence in collateralised loan obligations (CLOs) and asset-backed securities. But issuance dynamics are now more influenced by fund-level balance sheet management than by borrower demand. These trends are unfolding alongside incremental improvements in market infrastructure, where enhanced data availability and analytics are supporting price discovery and portfolio-level liquidity assessments.