By Lisa Rafter
As specialty finance fuels middle market dealmaking in 2025, a wave of pending regulations looms on the horizon, poised to reshape the landscape for private credit, asset-based lending (ABL) and other subsectors. With the U.S. private credit market at $1.7 trillion and specialty lending playing a pivotal role in private equity (PE)-driven transactions, the stakes are high.[1] Regulatory bodies, from the Federal Reserve to the SEC, are intensifying oversight, driven by concerns over systemic risk, transparency and consumer protection. For the dealmaker ecosystem — PE sponsors, investment bankers, legal advisors, specialty lenders and turnaround experts — this shift demands proactive adaptation to mitigate compliance costs and preserve business model viability. This article reviews key regulatory proposals, assesses their financial and operational impacts and outlines strategies to navigate the evolving framework, grounded in data and expert insights.
Pending Regulations: Subsector Impacts
The regulatory pipeline for 2025 targets multiple specialty finance facets, each with distinct implications:
- Private Credit Oversight: The Federal Reserve and IMF have flagged private credit’s rapid growth — outpacing leveraged loans at $1.4 trillion — as a potential systemic risk.[2] Upper middle market funds face heightened scrutiny, while lower middle market lenders (sub-$50 million EBITDA) may encounter lighter burdens but stricter valuation standards.
- ABL and Specialty Lending: The CFPB’s small business lending data collection rule, under Dodd-Frank Section 1071, the first of three compliance deadlines begins in July 2025, requiring Tier 1 lenders to report loan terms and demographics for deals under $5 million.[3] This impacts ABL providers financing retail or inventory-heavy borrowers. Concurrently, the Digital Operational Resilience Act (DORA), effective January 2025 in the EU with U.S. echoes, mandates cybersecurity resilience for cross-border specialty lenders.[4]
- Non-Bank Financing: The OCC and FDIC are exploring tighter capital and liquidity rules for non-bank lenders, spurred by recent bank failures.[5] These measures could impose higher reserve requirements, reshaping leverage profiles across the sector.
Compliance Costs and Business Model Impacts
The financial and operational toll of these regulations is significant:
- Cost Escalation: Deloitte estimates compliance costs for financial firms rose 15% annually since 2020, with specialty lenders facing $500,000 to $1 million per firm in 2025 for reporting and tech upgrades.[6] The SEC’s disclosure rules alone add 10-20 hours of legal and audit work per transaction, per PwC.[7]
- Leverage Compression: Stricter capital rules could cap leverage at 5x EBITDA, down from 5.9x in Q1/25, per Secured Research’s Middle Market Lending Review.[8] This threatens PE returns in an environment accustomed to higher multiples.
- Operational Shifts: ABL providers may pivot from covenant-lite structures (70% of 2024 private credit loans) to tighter terms, per S&P Global, slowing deal velocity. Secured Research warns that specialty lenders might shrink deal sizes or exit riskier subsectors if compliance outweighs yield.
Ecosystem Implications: Navigating the Burden
Each participant faces unique challenges and opportunities:
- Private Equity Sponsors: Enhanced disclosure strains deal economics — McKinsey notes 2024 buyout leverage at 4.1x could dip to 3.8x under new rules.[9] PE firms must recalibrate capital stacks, relying on IB for creative structuring.
- Investment Bankers: IB firms will see demand surge for compliance-aligned hybrids, blending ABL and cash flow lending to optimize leverage within regulatory bounds.
- Legal Advisors: Complexity spikes with intercreditor agreements and cross-jurisdictional compliance (e.g., DORA). Fees could rise 20% per deal as legal expertise becomes paramount.
- Specialty Lenders: ABL and private credit providers must invest in RegTech — KPMG pegs automation savings at $138 billion industry-wide.[10] Smaller players risk consolidation if costs outpace revenue.
- Turnaround Advisors: With leverage tightening, advisors will stress-test portfolios preemptively, targeting sectors prone to overexposure.
Strategies for Adaptation
The ecosystem can turn regulatory pressure into competitive advantage with these approaches:
- Tech Integration: RegTech adoption — AI-driven reporting and data aggregation — slashes compliance time by 30%, per Cappitech.[11] Specialty lenders should mirror banks’ $1 billion annual tech spend to stay agile.[12]
- Scenario Planning: PE and IB should model leverage under base (SOFR 4.5%, 5x EBITDA), adverse (SOFR 5%, 4.5x), and severe (SOFR 5.5%, 4x) cases, aligning with IMF stress tests.[13] This preempts capital adjustments.
- Collaborative Compliance: Legal and turnaround advisors can partner with lenders to streamline reporting, cutting costs 15%, per Deloitte. Shared platforms enhance efficiency across the ecosystem.
- Portfolio Diversification: PE and lenders should shift from concentrated sector bets to broader exposure, mitigating systemic risk flags from regulators.
Looking Ahead: Resilience in Oversight
The regulatory horizon for specialty finance in 2025 is a double-edged sword — compliance burdens threaten margins, yet disciplined adaptation unlocks stability. For the ecosystem, success hinges on integration: IB crafting compliant structures, legal teams fortifying terms, specialty lenders leveraging ABL’s rigor, and turnaround advisors guarding against distress.
Lisa Rafter is publisher of ABF Journal.
[1] “Private Credit: Characteristics and Risks,” Federal Reserve, Feb. 23, 2025.
[2] “SEC Enhances the Regulation of Private Fund Advisers,” U.S. Securities and Exchange Commission, Press Release, Aug. 23, 2023.
[3] “Small business lending rulemaking,” Consumer Finance Protection Bureau.
[4] Regulation (EU) 2022/2554 of the European Parliament and of the Council of 14 December 2022 on digital operational resilience for the financial sector and amending Regulations, European Union.
[5] 2023 Annual Report, Office of the Comptroller of the Currency.
[6] Deloitte, “Cost of Compliance and Regulatory Productivity,” 2023.
[7] “The Changing Regulatory Landscape,” PwC, 2025.
[8] “Q1 2025 Middle Market Lending Review,” Secured Research, 2025.
[9] “The next era of private credit,” McKinsey & Company, Sept. 24, 2024.
[10] Ruddenklau, Anton and Haji, Karim, “Pulse of Fintech,” KPMG, H2 2024.
[11] Namer, Trudy, “2024 Regulatory Reporting Trends and Predictions,” Cappitech, Dec. 20, 2023.
[12] “Bank of America Reports Fourth Quarter 2024 Financial Results,” Bank of America, Press Release, Jan. 16, 2025.
[13] “Central Bank Stress Testing—Guidance Note,” International Monetary Fund, Dec. 23, 2024.