Unity Macro Analysis: July 2025
- Unity Investments
- Jul 16, 2025
- 5 min read
Unity Macro Analysis: July 2025
Interest rate is a key driver of our business at Unity. At present, the U.S. macroeconomic environment remains complex yet favorable for private credit. An elevated Fed Fund Rate, a tight bank lending environment, and a general lack of funding options for SMEs create an attractive market for asset-backed lenders.
Private credit has been one of the clearest beneficiaries of elevated interest rates since 2022. While rate cuts are now on the horizon, possibly as early as September 2025, we believe that the U.S. macro environment remains favorable for our business for three key reasons.
1) Higher-For-Longer Rate Environment
Geopolitical frictions, notably the U.S.-China trade war and ongoing supply-chain decoupling, are contributing to structural inflation that keeps underlying prices from returning to pre-2020 trends. Tariffs and trade barriers have raised input costs. Although the tariff impact is one-off, one simulation suggests that current U.S.-China tariffs could add over 5% to U.S. consumer prices. This inflationary backdrop, coupled with a resilient labor market, with U.S. unemployment nearing historic lows at approximately 4.1%, has kept core inflation sticky and has forced the Fed to maintain higher rates longer than many anticipated.
Specifically, the Fed’s updated projections signal a “higher-for-longer” path. Compared to its September 2024 forecast, the Fed has revised its year-end interest rate expectations upward: now projecting a 3.9% rate for 2025 (up from 3.4%) and 3.6% for 2026 (up from 2.9%). In general, policy easing will likely be slower and more measured. While President Trump has been cajoling the Fed for a 300-basis-point cut, we believe that realistically, the Fed will cut rates to ~3% by the end of 2026 (versus the Fed’s dot plot of 3.5-3.75%). This allows the Fed to balance inflationary pressures (from tariffs and labor market tightness) and preemptive easing to hedge against recessionary possibilities.
For Unity, this sustained elevated base rate supports continued robust loan yields. Moreover, easing benchmark rates should gradually improve the overall credit climate and help reduce default pressures on borrowers. However, we still anticipate that lending rates in the lower-middle market will remain relatively high, as credit spreads and risk premiums are likely to remain elevated. Lower base rates could catalyze more borrowing demand, with companies regaining confidence to seek growth capital if financing costs ease even modestly. In other words, a Fed rate cut may spur deal activity without eroding the attractive yield environment for lenders in our segment.
2) Bank Retrenchment and Credit Gaps
Traditional banks have markedly pulled back from middle-market lending, especially after the regional banking turmoil in 2023 (e.g., Silicon Valley Bank’s collapse). Facing regulatory scrutiny and balance-sheet caution, many banks restricted extending credit to smaller borrowers and instead focused on larger, safer corporate loans. This retreat has created a financing gap for SMEs.
In addition, many large credit funds have shifted “up-market” to bigger deals, leaving smaller companies even more underserved. The net result is that nimble non-bank lenders, like Unity, can command stronger pricing and terms when lending to SMEs, filling the void left by banks reluctant to lend. We continue to see ample opportunity to be a capital provider of choice for quality smaller companies that lack access to traditional bank loans.
Despite the current discussions around changing the bank Supplementary Leverage Ratio (SLR), which treats every asset the same regardless of risk, we believe that even a change that loosens capital requirements at major banks does not permanently or adequately address banks’ ability to lend to SMEs. From our pipeline and ongoing discussions with a dozen borrowers, we continue to see ample opportunities to be a capital provider of choice for quality smaller companies that lack access to traditional bank loans.
3) Diminished Private Equity Funding
Equity capital for SMEs remains constrained. Private equity activity has been muted in the high-rate environment. Many sponsors are holding their portfolio companies longer and investing more cautiously due to the higher cost of capital and lower valuations. Notably, fundraising and deal-making have skewed toward larger funds and companies, leaving fewer dollars targeting the low end of the market. In 2023, the number of sub-US$250mm private equity funds dropped by over 50%, reflecting a pullback of capital available for smaller deals. As a result, many smaller companies that might have raised equity (or been acquired by PE sponsors) are now seeking debt financing to fund growth or bridge their capital needs. This dynamic has increased demand for private credit solutions. Unity can step in to provide leveraged capital when equity is either too expensive or unavailable.
What does this mean for Unity?
The current environment presents significant opportunities for disciplined private lenders. We can be selective and structure loans on favorable terms, benefiting from the supply-demand imbalance in lower-middle-market credit. We are also different from the bigger credit funds because we do not do first-lien direct lending (which is primarily based on a company’s cash flow). At the same time, we remain alert to the macro risks, from geopolitical conflicts to higher unemployment rates to changes to banking regulations.
Our strategy is to continue differentiating through speed, flexibility, and trusted relationships, attributes that bank competitors cannot easily replicate. Often, the cost of capital is one of many considerations for a borrower. Even in a lower rate environment, as long as Unity maintains its origination edge, we should be able to price our loans at a premium against regional banks.
Lastly, taking a step back, for 23 consecutive years—through booms, busts, and three recessions—private credit has delivered positive IRRs for every vintage. It has consistently outperformed the Credit Suisse Leveraged Loan Index, its closest public market benchmark. In addition, among all private market asset classes, private credit has shown the tightest band of returns, regardless of market direction. In down markets, credit has a return spread of just ~6%, compared to more than 20% in venture and over 15% in buyouts and real estate. In a world full of volatility, it is the discipline, structure, and resilience that define our product.
Sincerely,
The Unity Team
[1] Kiel Institute for the World Economy, “US-China Trade War: Serious Consequences, Mostly for the USA,” April 30 2025
[2] Federal Reserve Board, “FOMC Projections materials”, Retrieved at https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20241218.htm, September 2024 Federal Reserve Board, “FOMC Projections materials”, Retrieved at
[3] Kevin Egan, Ron Kantowitz, and Paul Triggiani, “Yields Have Remained Attractive and May Maintain Positive Relative Value,” Invesco Insights, September 16 2024
[4] CAIA Association, “The Evolution of Private Credit,” June 9 2025
[5] Emeka Onukwugha and Elisabeth Perenick, “Private Credit: Key Market Themes for the Year Ahead,”
Wellington Management Insight, December 31 2024
[6] Ethan R. Kobre and M. Claire Rajan, “U.S. Banking Regulators Propose Changes to Supplementary Leverage Ratio,” Skadden Insights, July 8, 2025.
[7] McKinsey & Company, “McKinsey Global Private Markets Review 2024,” April 2024
[8] Nayef Perry, “Has the Golden Age of Private Credit Lost its Shine?”, Hamilton Lane, April 18, 2025
