European dealmakers are gearing up for a busy first quarter in 2025 supported by lower debt costs and increased macro stability, especially in the wake of the US elections. After 12-18 months focused on refinancing and "buy and build" strategies, the market is eager for a return of new money deal flow.
This was one of the main talking points for the recent SuperInvestor conference in Monaco. “It’s much improved after two years of significant slowdown,” commented one private equity sponsor at the event.
“We’re seeing positive momentum across Europe and have a robust pipeline. There’s real optimism for recovery,” they added.
Amit Bahri, co-head of European direct lending at Goldman Sachs Asset Management, agreed. “M&A has definitely picked up over the course of this year with a number of large deals announced over the summer. There’s a slight lull before Christmas, but next year’s pipeline is robust,” he said, adding that valuation gaps are closing.
Bain & Company estimates that 53% of companies in buyout portfolios have been held for four years or longer, suggesting that funds will need to ramp up asset sales to generate adequate DPI.
“With the US election behind us, the forward looks positive,” Bahri continued. “With normalizing rates and stable macros, market recovery should continue,” he added.
Valuation gaps remain sector-specific, with industries like software seeing stronger activity, market participants say. Long-awaited large cap M&A activity has begun to pick up. Notable examples include Nord Anglia, which was acquired by a consortium of Neuberger Berman, EQT and CPP Investments for $14.5 billion; Cinven’s acquisition of Idealista for around €2.9 billion; and more recently CD&R’s agreement to take a controlling stake in Sanofi’s consumer healthcare unit as part of a €16 billion deal.
Changing dynamics
The return of the broadly syndicated market at the start of the year has reintroduced fresh competition, challenging direct lenders that last year dominated the bulk of transactions. “Where 90% of deals were once private credit, it’s now 50-50,” noted one private equity sponsor, adding that spreads have tightened because of that.
Indeed, since the start of Q3, 49 deals have been tracked in the BSL market (48%), and 54 (52%) in the private credit market. Data shows that private credit is still funding the bulk of LBO deals in Europe — with 69 buyouts in 2024 to the end of October, versus only 22 in the BSL market.
Amid slower overall deal flow, large fund managers (both private equity and credit) that were last year more focused on large deals, are now turning to smaller deals in the middle market, increasing competition in that segment. “Large-cap capital markets teams are pushing big-cap terms and docs into the mid-market segment,” explained a lower and middle-market lender.
“We have more pressure to accept on terms like no EBITDA caps, only one leverage covenant, among others,” added another lender.
Direct lenders have also adapted to coexist with the broadly syndicated market in jumbo deals through hybrid structures. In large software deals this year, for example, direct lenders have provided junior debt tranches alongside banks underwriting the senior secured debt.
Among recent deals, Goldman Sachs led a group providing over €1 billion in PIK financing to support CD&R’s carve out of Opella from Sanofi. Other deals, such as those for Nord Anglia and Idealista, have similarly featured substantial PIK components. Goldman Sachs declined to comment on specific deals.
“PIKs have become a feature in large, high-quality deals with high EV multiples,” Bahri said, adding that in high-performing assets there is room for combined structures of public and private credit. In these structures, the senior debt goes to broadly syndicated loans, while junior debt remains in private credit.
That said, the increased availability of debt and low deal volumes have made the market more borrower-friendly. LCD news has reported on the tightening pricing, with upper-market deals now at 475-525 bps, while middle-market transactions are in the 525-600 bps range.
Portability
Another trend gaining traction is portability, as sponsors are holding assets for longer. LCD recently highlighted how portability is showing up more in loans as sponsors seek this feature to retain flexibility amid a backlog of unsold portfolio companies.
Portability allows a sponsor to sell its portfolio company without triggering a change-of-control put on its debt. “Portability isn’t yet mainstream but is appearing more in direct lending deals,” commented one private equity sponsor. “It’s not standard, and certainly not for all companies. In this market, we are able to get it because there is competition,” the sponsor said. “If the market tightens, it’ll likely be the first feature to go.”
Bahri added that portability’s prevalence has increased over the last year. “It’s more common in refinancing structures, with specific guardrails legislating leverage and buyer criteria,” he noted, adding that, “You are not going blind in portability.”
Clouded outlook
Not all participants are fully convinced of an M&A recovery. M&A is still not where everyone wants it to be, said a lender. “There aren’t enough assets on the market to satisfy the abundance of lenders eager to deploy capital,” the lender added.
Another sponsor added that while deal flow has increased, fewer processes reach completion.
Still, market participants acknowledge a large pipeline of companies waiting for the right moment to sell. Although valuation gaps persist, the return of liquidity in the broadly syndicated and high-yield markets has spurred competition, which in turn is fueling M&A activity.
“This is good for business as it means lower pricing amid lower rates, and is helping to bridge the valuation gap between buyers and sellers,” a sponsor said.
Bahri is optimistic about a pickup in new deal volumes next year. "We expect to see more new LBO deals and fewer refinancings, as many companies have already addressed debt maturities this year," he said.
In its credit market update published on Nov. 14, Albacore said that while activity overall is muted due to a lack of agreement on pricing, it expects a significant uptick in 2025. “2025 may be a more constructive environment for deal making activity as the uncertainty posed by a year of record levels of elections is left behind. Next year sponsors will also be able to present a year of clean financials not skewed by the impact of rapidly rising inflation and interest rates,” the note added.
Bain & Company in its report, however, cautioned that while dealmaking will get a boost in the coming months, selling companies will remain challenging. To begin with, the report said there is going to be a massive overhang of unexited companies.
“It almost guarantees that the market will be flooded with assets when dealmaking picks up, making it increasingly difficult to stand out from the crowd,” the report said.
Yuichiro Chino/Getty Images
Learn about our editorial standards.
