Looking back at 2024, Europe’s private credit market has faced significant challenges, including subdued M&A activity and increased competition from banks. As it adapts to deal with these headwinds, the boundaries between asset classes have become increasingly blurred — all of which underscores the maturity of the private credit offering, which is now far removed from its earlier iteration as an alternative lender.
First and foremost this year, private credit has increasingly retreated to its original habitat — namely the middle market — thereby ceding jumbo deals to the syndicated product. Following the dominance of private credit in Europe’s M&A financing markets in 2023, the return of underwritten bank financing through syndicated loans and high yield bonds therefore represents a major shift that has fundamentally reshaped the market landscape.
“At the very big end of the market we don’t see dual-track processes anymore, and neither do we see them at the extreme lower end,” one lender notes. “It’s difficult to say what the ‘mid-market’ is, but the tickets are bigger now, and a €100 million EBITDA company still could qualify as mid-market.”
Teaming up
In this context, private credit players and banks are increasingly collaborating on deals, with both sides sometimes working together despite competing for market share. One of the more notable features of this new coexistence — which gained significant traction during 2024 and is expected to continue in 2025 — is the use of PIK financing. In such cases, private credit provides a PIK while the banks syndicate a loan or bond.
Recent situations such as those for Ceva Sante, Sanofi and Nord Anglia are all illustrative of this development.
Meanwhile, other types of collaboration are emerging. Hybrid financings are becoming increasingly common, for example — such as a euro term loan syndicated by banks, paired with a private credit financing for a sterling tranche. This combination was in play on the two-part term loan refinancing for OCU Group in October that took out a unitranche facility.
The market also saw a mixed lending base on Ardonagh’s transaction, which attracted a broad club including direct lenders, banks and insurance firms to provide the $3.3 billion-equivalent three-part loan portion of the firm’s $5.6 billion debt refinancing.
Banks and private credit firms are also collaborating through partnerships, in a trend that’s expected to continue into the coming year as banks increasingly seek to strengthen their presence in the private credit asset class. One notable feature of this collaboration is the expected proliferation of JVs and partnerships between banks and private debt funds.
In such partnerships, banks are getting together with credit funds to leverage their origination and servicing capabilities, without taking on significant capital risk. For credit funds, this is a popular option to get scale very quickly. The recent partnership between Citi and Apollo Global is a case in point here, generating a $25 billion exclusive programme to arrange financing for corporate and private equity clients. Similarly, Lloyds Banking Group partnered with Oaktree Capital Management to finance UK buyouts — as part of this partnership, the groups aim to deploy more than £1 billion over the next three years.
In other cases, banks have launched their own funds, such as the HSBC Direct Lending Fund.
Middle ground
Overall, the financing environment next year is expected to be more stable. “The reduction of the cost of debt, and the reduction in spreads is going to make it easier for buyers and sellers to meet in the middle,” one lender said. Meanwhile, private equity is sitting on an enormous pile of dry powder, estimated at $1.3 trillion, and this should support the M&A pipeline, the same lender added.
“The pick-up in deal volume in the second half of the year, though moderate, was driven by a combination of factors as rate cuts and spread tightening lowered the cost of borrowing, macroeconomic conditions improved and we saw the conclusion of major elections. This set the stage for greater opportunities in corporate financing and M&A activities through the end of this year and into the next,” says James Vanek, partner and co-head of global performing credit at Apollo.
Amit Bahri, co-head of European direct lending at Goldman Sachs Asset Management, echoes this sentiment. “We are seeing a number of deals kicking off processes for 2025, and the pipeline looks solid. Momentum is expected to build as the year begins.”
Mike Dennis, co-head of direct lending at Ares, notes that improving valuation expectations are fueling middle market activity. “Today, buyers are more confident in underwriting 3 to 5 years of company earnings and cashflows, which has improved the bid-ask spread between buyers and sellers,” he said.
If the recovery proceeds as anticipated, Bahri added, deals shelved over the past 12–18 months due to macroeconomic uncertainty and valuation mismatches could return to market. “Some previously pulled deals have already been completed, but quite a number of them are expected to resurface in Q1,” he said.
Geography lesson
However, not everything is rosy in the private credit garden, with some geographies seemingly struggling a little more than others. Germany is in recession, for example, while in France there are currently some “trading issues,” sources say. Government instability in France not helping matters as the market dislikes uncertainty, sources add, though the UK has now had its general election and is more stable, while Italy is becoming more open to private equity — and therefore to private credit.
That said, as private credit matures, dents are appearing across portfolios. “There is no doubt that roughly 3% to 8% of the portfolio companies for our funds are struggling,” said one private credit manager.
“I think most of the problems in portfolios come from the deal frenzy after Covid, during which people were trying to compensate for the loss of deals and may have been too pushy,” suggests a debt adviser.
“Margins have been under pressure but if you have a financial covenant breach, which is a default, it does not necessarily mean we are going to take the keys — rather, we just reprice,” another lender notes.
Natural selection
Fundraising has been problematic in the past 18 months or so, as LPs are becoming more risk-averse. Larger managers — such as Goldman Sachs, Ares and Blackstone — continue to dominate, raising billions for their direct lending strategies. For smaller players meanwhile, fundraising remains challenging as M&A activity has yet to fully recover, and LPs are awaiting capital. “Many LPs are still committed to prior vintages of private funds, with substantial future capital commitments. This creates constraints on their liquidity planning, making institutional fundraising particularly difficult,” flags Ares’ Dennis.
This dynamic has prompted LPs to be more selective in choosing managers, thereby driving market consolidation. “For a smaller manager, there is going to be a question of whether they can raise the capital — and if they can’t then what happens to those platforms remains to be seen,” adds Dennis, referring to broader market situation.
A few managers even decided to exit the European market during 2024, such as Fidelity International and Polen Capital. Market consolidation is expected to accelerate next year as well, as managers face up to the challenges of scaling their businesses effectively. In that context, the recent BlackRock-HPS acquisition agreement likely speaks to the state of play in the market.
Looking further ahead through 2025, the rise of retail investors in both private credit and private equity will eventually reshape the dynamic between LPs and GPs in Europe. At the same time though, private credit funds are also capable of mixing more elements into their offerings, such as private credit CLOs, NAV lending, and subscription lines.
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