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 (see Figure 1). That’s because public debt spreads have tightened by around 130 basis points (bps) since the middle of 2022, while private debt spreads have held relatively firmer.¹ Over the last year, this has pushed the average illiquidity premia across sectors to around 120bps, which is above their long-term average levels of around 50bps.
 

Figure 1: Illiquidity premia for investment-grade private debt to Q2 2026 (basis points)

Past performance is not a reliable indicator of future results.

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 30 June 2026.

Developed-market economic growth remains muted but has proved resilient despite the energy shock and geopolitical disruption earlier this year. The US continues to lead, supported by strong domestic demand and investment, while Europe and the UK are recovering more gradually. For the next few months, our central scenario is one of slow but positive expansion. We expect IG public credit spreads to remain relatively tight, supported by constructive corporate fundamentals.

The resulting “higher for longer” interest-rate environment supports an improved all-in yield for IG private debt. We also expect tight public credit spreads to continue supporting the current above-average level of illiquidity premia.

The principal downside risk is a prolonged disruption of global energy supplies, which would push up oil and gas prices, weaken growth and slow disinflation. That could keep policy rates higher for longer, particularly if energy-driven inflation begins to feed through into wages and broader prices. Escalating geopolitical tensions could increase volatility across government-bond and credit markets, especially given how tight IG public credit spreads remain (see Figure 2). Such a scenario would likely result in a reduction in the illiquidity premia achievable, whilst slower-moving private-debt spreads adjust to public markets.
 

In terms of sectors, structured finance has continued to generate a higher illiquidity premium than private corporate debt (see Figure 1). The reason is that structured finance includes securitisations, which can consist of niche and new structures, and therefore also commands a “complexity premium”.

A key takeaway we draw from this analysis is that illiquidity premia are not static but vary through the market cycle. Secondly, the various sectors’ illiquidity premia do not move as one, instead reflecting different dynamics through the market cycle.

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.

Volumes for European infrastructure debt reached around €54 billion in the second quarter of 2026. The largest contributor was the UK, with around €20 billion, followed by France and Italy, with €7 billion and €9 billion respectively.

Sector-wise, the largest contributions came from renewable energy (with volumes at €18 billion) and transport (at €23 billion). Those two sectors combined represented almost two-thirds of all activity for the quarter.

Sub-sector activity was led by solar PV and onshore wind, at €7 billion and €6 billion respectively. Interestingly, activity picked up in the rolling stock sub-sector, with a total of €4 billion for the quarter, led by the Italo train deal in Italy. Data centre activity was at €3 billion and fibre was down, with only €1.5 billion in activity, perhaps reflecting financing challenges in the German and UK markets.

The major deals this quarter were the refinancing of bus operator Go-Ahead and the sale of smart meter business OnStream – both in the UK. Greenfield activity made up only €12 billion of the total, as the majority of deals related to a refinancing of existing facilities.

In the second quarter of 2026, sentiment in the real estate sector has been primarily driven by the global political and economic headlines. These have provided an uneasy backdrop for investors, reflected in transaction volumes for real estate in the UK and across Europe. While much of the underlying occupational market remains robust, investors’ more cautious approach is leading to yield softening in some industry sectors.

Two elements have impacted real estate debt: a lack of transaction volumes, and greater caution on development projects due to rising construction costs. This has led to lower lending volumes and more delays and pauses in financings. While there is still strong lender appetite to provide funding, the fierce pricing competition seen earlier in the year has decelerated, leading to stable – and in some cases slightly higher – pricing.

In Q2 2026, private corporate debt markets continued to be shaped by external shock transmission rather than cyclical dynamics. The Middle East conflict has reinforced the contrast between sectors and widened credit dispersion. Older loans, software-related borrowers and businesses with limited pricing power were particularly hard-hit.

At the same time, rising redemption requests increased investors’ scrutiny of liquidity in direct lending – i.e. sub-IG corporate private credit. US retail and semi-liquid vehicles came under the most pressure, encouraging greater emphasis on liquidity, structure and downside protection. There was less scrutiny of European closed-ended institutional funds.

Still in sub-IG markets, volatility became increasingly issuer specific. Refinancing exposure, leverage and business-model resilience emerged as key differentiators. Against this backdrop, deployment remained defensive and selective. Investors continued to emphasise senior-secured, conservatively leveraged structures in sectors exhibiting durable cash flows, pricing power and limited sensitivity to energy, trade and refinancing shocks.

In Q2 2026, structured and specialty credit markets were increasingly shaped by liquidity management rather than asset origination. Strong growth in semi-liquid private credit funds, continued use of continuation vehicles and high secondary portfolio trading supported demand for liquidity solutions, including collateralised fund obligations (CFOs), rated feeder notes and NAV facilities.

While direct lending and asset-backed finance activity has remained robust, spread compression has reduced excess return opportunities across parts of the market. As a result, investors are placing greater emphasis on portfolio liquidity, collateral quality and manager selection.

In European collateralised loan obligations (CLOs), technicals have remained supportive, with strong demand for senior tranches, low default rates and continued refinancing activity (in light of the upcoming 2028 maturity wall). Regulatory developments around EU securitisation and risk-retention requirements have remained a key focus, prompting some structural adjustments while improving transparency and supporting investor confidence.