While market players are viewing next year with a mixture of hope and worry, there is a certain reassuring confidence when it comes to the private credit asset class. Against a still-uncertain backdrop for M&A, some dealmakers consider private credit to be particularly well positioned — “I think there is a healthier dry powder in private credit than there is in private equity,” suggested one adviser.
- Europe’s private credit managers need to remain nimble, and a shift in favoured sectors is possible.
- A maturing asset class will continue to compete with banks, with price compression in the spotlight.
- Predictions for M&A issuance are mixed for 2026.
- Adaptability is key, with sponsorless deals among the strategies in play.
“In private credit returns are fairly consistent, and you can get net returns on a fund investment — I think that is better than some PE firms have been able to generate over the last 5 to 10 years,” an adviser told LCD. “And from an allocator perspective, there is definitely a shift to put more money into private credit, including from US firms that also want diversification.”
“It has been a great year for Europe,” said Marcus Maier-Krug, partner at Arcmont. “It’s a rare occurrence, but Europe has been more attractive than the US, largely because it has been perceived to be a more politically stable environment.”
In addition to increasing its appeal relative to the larger US space, the European private credit market has expanded its toolkit and extended sector reach, while also demonstrating flexibility on terms.
As a maturing asset class, private credit is also shedding some of its reputation for opacity, as regulators around the globe reinforce scrutiny on the market — especially after the failures of First Brands and sub-prime lender Tricolor exposed potential weak spots in this lightly regulated sector. “Even though a lot of the features of First Brands did not belong to private credit, we still need to educate investors about that,” said an adviser. Recently, for example, the Bank of England launched a stress test in the form of an ‘exploratory scenario’ for private credit markets.
M&A spotlight
Of most concern to market participants is a lack of meaningful M&A supply. While the number of overall direct lending transactions was significantly higher in 2025, many players are still relying on their portfolios to generate deals, such as refinancings and buy-and-builds.
“The new deal environment has improved over the last few quarters, so we are hopeful this will continue into 2026. It appears the macro outlook has recovered versus years past, and market uncertainty has cooled off, both of which should contribute to greater confidence to move forward,” said Matthew Theodorakis, partner and co-head of European Direct Lending in the Ares Credit Group. Theodorakis adds that anecdotally — just speaking to bankers, law firms and other advisers — everyone is gearing up for a stronger 2026.
“There’s mounting pressure on older private equity vintages to realize investments, which we expect will accumulate into the next year and should drive deal flow. 2026 should be as good as 2025, or even better,” Theodorakis said.
However, Dan Matthews, head of EMEA Leveraged Finance at SMBC, said the market continues to suffer from a suboptimal supply of deal flow. “I think we’re still experiencing insufficient deal flow to meet the demand that’s clearly out there from lenders,” he noted.
The market has recently seen sales processes such as those for Kersia and Solina being pulled back, as they failed to meet the sellers’ expectations in terms of valuations. Participants also suggest there are more processes in the market that have gone quiet recently, due to similar concerns.
That said, market participants remain positive about the prospects for private credit. “The building blocks for a strong M&A pipeline are in place, with healthy financing markets and less uncertainty, but there remains the question of valuations and whether sponsors are prepared to sell assets. For those waiting to exit, it typically comes down to return hurdles,” said Theodorakis.
“As a whole, we should see some uptick in new deal activity,” Matthews noted. “There have been several processes recently for good businesses not reaching a successful conclusion, but with constructive conditions in both the private and syndicated financing markets, we expect buyout activity will build over the coming year.”
Price point
Price tightening has been a major market theme this year, with the broadly syndicated product pushing aggressively, against a backdrop of increased competition for deals amid a lack of meaningful M&A supply.
Indeed, such competition means that 475 bps has become the ‘new 500 bps’ for European private credit in terms of pricing for a large-cap deal this year. This level was also evident in some of the highly competitive mid-market deals, participants say — adding that they expect a similar trend to continue next year, and until the market sees more M&A.
“Pricing has certainly continued to tighten given there is strong competition between the broadly syndicated loan and private credit markets, and still relatively subdued M&A deal flow,” said Nicola Noël, partner in the London Finance Practice at Weil Gotshal & Manges. “It will be interesting to see if that trend continues in 2026.”
An adviser added that even in the current environment, 450 bps might not be the headline number for pricing, but that it’s possible to get to that level with some ratchets. “If there is a flex on synergies, expected deleveraging happens quite quickly, and then there’s typically only a six-month holiday,” the adviser explained. “So then you might not be at 450 bps on the headline pricing, but you can quickly find yourself there.”
Another manager noted that margins and fees are probably the tightest they have seen in both the syndicated and private credit markets. “Sometimes you might see tightening in one of these markets, but to see tightening in both at the same time is telling us a bigger story about the broader financing options available to sponsors,” he added.
Adapt and survive
One area of the market that neatly showcases the private credit market’s adaptability is sponsorless deals. Indeed, the number of sponsorless deals is rising throughout various jurisdictions in Europe, with the German Mittelstand and Northern Italy particular champions for such transactions.
Sponsorless lending is growing because business owners are warming to flexible and fast financing, while investors value the diversification these deals offer beyond traditional sponsor-backed transactions — especially in a competitive environment. As it offers new forms of capital for borrowers, sponsorless lending is a good alternative that can provide exit opportunities for investors amid a lighter deal flow. It can also feed future buyout deals, thereby boosting the broader private capital ecosystem without displacing private equity.
Flexible thinking in terms of market sectors is another strength of the private credit asset class as participants prepare for 2026. Private credit has traditionally looked at non-cyclical and strong credit stories, with technology, software and even pharmaceuticals companies tending to become the go-to investments for private capital — and of course the sector spotlight will shift as the market adapts to change. “A few years ago, we may have looked at a nursery or a nursing-home asset, for example, but now we stay away from those as they are too closely linked to government policy,” another lender explained.
Sector shift
However, perhaps the most surprising sector shift has been how AI has completely changed the way lenders look at technology and software companies. Furthermore, while the clamour for software firms seen over the last few years appears to have cooled, sectors that private credit funds would not have touched previously — such as defence — are now more popular, with the recent Mecachrome deal a case in point.
“Maybe two years ago, the things to look out for in a software credit were quite clear, and if the asset ticked a certain number of boxes, you could be fairly confident,” a direct lender said. “While it might come with high leverage, there would typically be a defendable set of cash flows you could lend against, but that calculus is changing now.” The lender added that he is now spending much more time thinking about and discussing AI risks. “As we move into the next year, this is going to be top of our agenda,” he confirmed.
Noël at Weil Gotshal & Manges concurs that market participants are increasingly considering the impacts of AI on their businesses. “I think that will be a theme for next year. Investment committees will scrutinize how any particular business may be affected by AI, and what that could mean,” she said.
Among other themes to watch in 2026, sources flag market consolidation as a key factor. “Some of our long-standing market competitors have disappeared,” said Arcmont’s Maier-Krug. “It’s not dramatic, but a country team here or an office there can fall away.”
Meanwhile, fundraising is going to be more difficult for managers with a poor track record, say market participants. They also note that sponsors are becoming picky about who they work with, often preferring more established managers as they’re perceived to offer certainty of capital in the long run.
“Managers will either need to focus on more specialized opportunities or risk a struggle to raise new funds, as the larger players continue to outgrow them in an environment where there is poor M&A and increased competition on deals — and that dynamic is expected to continue as we move into the next year,” concluded a market participant.
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