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 2022, average illiquidity premia have improved across all private debt sectors (see Figure 1). This has been driven by tightening public debt spreads (of around 130 basis points since the middle of 2022), with private debt spreads holding firm in comparison.¹

Tightening public credit spreads reflected market optimism. Investors expected a “soft landing”, with inflation moving back towards target levels and the Bank of England, European Central Bank and US Federal Reserve all cutting interest rates and loosening policy.

Meanwhile, in contrast with the heavy issuance of government debt, and growing scrutiny of sovereign risk and fiscal sustainability, corporate debt was delivering moderately attractive real debt yields across most countries. As a result, the market smoothly absorbed corporate issuance.

Figure 1: Illiquidity premia for investment grade private debt to Q3 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: Various methodologies can be employed to calculate the illiquidity premia. The illiquidity premia shown here are calculated based on Aviva Investors’ proprietary deal information. Please note 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 September 30, 2025.

Following Liberation Day on April 2, 2025, public credit spreads widened sharply (see Figure 2). However, with trade tensions and markets stabilising, public IG credit spreads are now trading around 20 basis points tighter than at pre–Liberation Day levels.

Year-to-date, we have also seen compression in private debt pricing, but not as aggressively as in public credit. As a result, illiquidity premia have remained above their long-term average in Q3 2025.

This quarter in our analysis, we have also split out private corporate debt (PCD) and asset-based finance (ABF). The output in Figure 1 shows ABF has historically generated a higher illiquidity premium than PCD. This is because ABF includes securitisations which can consist of niche and new structures, and therefore also command a “complexity premia” component.

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 parallel, 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, 2025.

European infrastructure debt activity has remained consistent and was around €54 billion in Q3 2025.² Activity was led by Germany (€14 billion), Spain (€9 billion) and France (€8 billion). At nearly €10 billion, solar was the largest subsector.

Most large deals were refinancings, with the largest being GD Towers. There was also the largest greenfield asset refinancing which was phase one of the Portuguese high-speed rail line.

The UK had a good quarter, with around £15 billion of deals closing. Key transactions included the East Anglia 3 offshore windfarm and the Haweswater aqueduct. The Financial Times and Infralogic forecast that 2025 could exceed the previous record volume (achieved in 2021), with pricing levels remaining tight and little movement relative to the previous quarter.³

The first half of 2025 saw a record £22.3 billion of lending to the UK real estate debt market.⁴ Yet the sector has continued to be impacted by low volumes of new underlying transactions (c. 25 per cent) and high levels of available liquidity for real estate debt. The liquidity was boosted by North American insurers and debt funds.

This has pressured margins, especially in more favoured asset classes such as the living sector and industrial assets. The pressure has also spread to high-quality offices, hotels and even some retail assets. However, the cost of longer-term debt remains high compared to recent history, and borrowers are looking for shorter-dated funding and limited prepayment restrictions.

The wider European real estate debt market has also shown considerable margin compression in the most favoured sectors. However, margins haven’t compressed as much in unfavoured sectors, including retail and offices. While the market for longer-dated debt is less deep than in the UK, some borrowers are taking advantage of current interest rates to lock-in longer-term financing costs.

For private corporate debt, we expect to see an increase in IG issuance as interest rates continue to fall. Issuers are increasingly returning to the private placement market seeking fixed-rate debt, particularly at the longer tenors for sub-sovereign and quasi-government sectors.

We continue to see stronger risk-adjusted returns in the US and continental Europe than in the UK, where there is a large supply of UK insurance capital for relatively few investment opportunities.

In the asset-based finance market, we are seeing an increased supply of fund finance transactions. Their prevalence is due to increased demand from both general partners and limited partners.

We are also seeing more rated feeder transactions being pitched at insurers as a capital-efficient way for them to gain exposure to private assets.