Private debt market participants remain hopeful on the prospects for the asset class as the year’s business gets underway, but continue to face challenges amid sluggish M&A activity. These include geopolitical uncertainty, persistently high interest rates, and intensified competition from cheaper syndicated loans and bonds — all of which can make it difficult for the private market to achieve stable growth.
Europe's private equity sponsors are seeking to adapt to these headwinds through innovative strategies such as continuation funds. “You see more and more companies being shifted to continuation funds, because sponsors can’t sell those assets and more often than not the unitranche is outed by a cheaper bank refinancing in such cases,” one lender said.
Looking at the two products' share of these transactions, LCD data shows the balance was in favour of the BSL market in 2024, with an average ratio of 0.68 across the year for direct lending versus syndicated loans (based on deal count) — though this measure tested parity in the third quarter.
“A lot of the low hanging fruit in terms of repricings has been done, so in order to have the same issue volume for 2025 we need an uptick in M&A. Sponsors have dry powder, interest rates are coming down, and there is plenty of liquidity — we just need the M&A now,” said Floris Hovingh, head of EMEA Debt Advisory at Perella Weinberg.
Reality check
The market is also adjusting to the new reality in other ways. Despite lower-than-hoped-for M&A supply the deals keep coming, and to maximise impact, different asset classes are now working together.
While the so-called the ‘golden era’ of the private credit asset class — supported by a dislocation in public markets following Russia’s invasion of Ukraine — has led to significantly larger private credit tickets, these bigger transactions in the ‘upper market’ are now less accessible for many direct lenders. Meanwhile, the resurgence of the broadly syndicated loan market has made it that much more difficult for those lenders. “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 could still qualify as mid-market.”
PIK financings
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 financings. In such cases, private credit provides a PIK while the banks syndicate a loan or bond. Situations that came to market late last year — 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 back 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.
Forging partnerships
Banks and private credit firms are also collaborating through partnerships, in a trend that’s expected to continue in 2025 as banks seek to strengthen their presence in the private credit asset class. An interesting aspect of this collaboration is the expected proliferation of JVs and partnerships between banks and private debt funds.
In such partnerships, banks get 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.
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