European dealmakers struck a cautious but hopeful tone at the recent IPEM Paris event, with M&A still slow to return and direct lenders under pressure to deploy against the backdrop of a narrowing but stubborn valuation gap for assets.
This year’s private markets conference hosted nearly 6,000 participants — including around 3,000 fund managers — who came together to discuss the ever-elusive rebound in M&A deals, as well as the continued growth of the asset class.
If there was one clear consensus among the asset managers LCD spoke with, it was that M&A activity has yet to rebound meaningfully. “What we’ve seen post-summer is a fair number of lender education processes and some deals getting done. But overall, it’s still below what we had hoped for in the mid-market,” said Jens Bauer, managing director and co-portfolio manager within Oaktree’s European Private Debt strategy.
Market participants also agreed that while the valuation gap between buyers and sellers has narrowed, it has still not closed sufficiently to deliver an M&A revival. For their part, LPs say they would rather have sponsors sell businesses at a slight discount now that suits their ‘mark’, instead of waiting.
Pipeline questions
The pipeline is also starting to fill — though there are questions about the quality of assets coming to market. “When I came back from my summer holidays, I didn’t expect to have so many deals on my desk,” said one lender, with this sentiment shared by lenders and sponsors alike during the two-day Paris conference. “However, it is a mixed bag,” said the same lender regarding the quality of assets on offer. “I think a lot of these deals are probably not so great and might stall before they even take off. However, it’s still a happy surprise to see so many deals.”
Appropriately for a Paris-based event, there were also discussions over a string of private credit deals in France. One reason for this deal flow, managers explained, is the looming French general election in 18 months and associated political risk, which was described by a market participant “as a game of two extremes that never goes well with business.” As a result, many lenders may want to exit French assets before then. “How many of these processes reach the finish line remains to be seen,” added another adviser.
Meanwhile, a British lender said it is inevitable that volumes will pick up at some point. LPs in private equity strategies will want capital to be returned, businesses will mature, and funds will get to the end of their natural life — and that will spur M&A activity.
But if the assets are not selling, “it’s still good for us because fund managers will want their assets to grow, and that often means more financing opportunities,” added the same lender.
Capital flows
Direct lenders have been busy this year — some have described it as a record period for deployment, as capital flowed into add-ons, refinancings, and recapitalisations.
“One of the things that has worked in our favour — and for managers with larger portfolios like us — is having a bigger pool of investment opportunities to draw on. That has supported much of the activity in quiet periods of new M&A, and as a result our year-on-year deployment has increased,” noted Marc Chowrimootoo, portfolio manager and co-head of direct lending in the Private Credit team at Hayfin.
Oaktree’s Bauer agreed, saying the year could easily be described as a record in terms of both deal volume and value: “When you look at add-ons and refinancings, the numbers point to a record year. But in terms of deal quality, it’s more of a mixed picture.”
Deployment pressure
In contrast, the market has not been easy for newer or sub-scale managers, as slower M&A and a difficult macro environment have made it more difficult to deploy, market participants say. Indeed, some managers are running out of options and compromising on quality — sometimes targeting deals in perceived ‘hot’ sectors such as healthcare and software, but lowering standards. “When you’re just desperate to do a deal and LPs want it to be in software, then there are some bad software deals out there — and there’s a market for those transactions now,” added a lender.
The pressure to deploy is also pushing some lenders to take on trickier assets in sectors they would usually avoid. For example, a recent financing of a consumer firm by a tier-1 lender was priced at E+800 bps. “There is a lot of liquidity in the market and there is a price for such deals, and some direct lenders are willing to do them,” said an adviser.
In this environment, market participants say “irrational things” are happening, as lenders desperate to deploy lack the benefit of a broad portfolio that would allow them to put capital to work more safely and less competitively. “The market is highly polarised between deals that everyone can access, and proprietary flows that only two or three managers can touch.”
Spread dynamic
This same pressure on lenders is also impacting terms and spreads for European deals. The aggressive return of the broadly syndicated market — where B2 rated names are now pricing from around E+325 — has taken away large-cap deals from many direct lenders, making it harder for them to compete. This situation also has a knock-on effect, in that larger direct lenders are now not shying away from opportunities in the mid-market space. “If you speak to the PE guys, most of them will tell you they have been given more flexibility in terms of ticket sizes, terms and pricing,” noted a direct lender.
Many lenders are now saying 475 bps is ‘the new 500 bps’ for pricing in the European mid-market for the most popular assets, due to increased competition, while some even say they have seen pricing as low as 450 bps.
While spreads are compressing, the illiquidity premium is still there. “In Europe, we’re probably looking at around 200 bps of premium relative to broadly syndicated markets,” another lender said.
Some direct lenders are meanwhile set on staying above the 500 bps threshold and are pricing deals around 500-535 bps. “We rarely go under 475 bps, and only for an asset that is worth it,” another lender said. At least two lenders told LCD they had drawn a line at 500 bps.
Stress signs
Against this backdrop, market participants are also talking about stress brewing in the asset class. LCD recently reported signs of strain in European private credit, with a raft of debt-for-equity swaps this year and sponsors negotiating behind closed doors.
Some sources also say they have seen more structures with junior PIK, PIK toggle, or mezzanine over the past three to four months than in the last two years. “Snippets of information like these would suggest there is more stress,” noted a direct lender.
“I don’t see a stressed market any time soon, but I am mindful of the potential challenges that could emerge for private credit — particularly around certain vintages and the number of transactions reaching maturity in the next couple of years,” said Nael Khatoun, managing director within Oaktree’s Global Private Debt strategy. “The reality is we’ve started to see sponsors hand back the keys, something that simply wasn’t happening before.”
As public and private markets converge, private companies are staying private for longer, and no longer tapping public markets. This has a major impact on GP/LP relationships, while institutional investors are becoming more active, and greater access is allowing high-net-worth individuals to enter private markets. That state of play creates tension between the aims of increasing sophistication and broader democratisation.
However, such market analysis always boils down to the distributed to paid-in capital (DPI) measure. “LPs are going to look at DPI, and if they deem it unsatisfactory, they will not renew their investments,” confirms one M&A banker. “You can hide behind the continuation fund gimmick, but it won’t work forever.”
“I think we can expect more consolidation to come, both in private equity and private debt funds,” added another lender.
Road ahead
Another big topic at the IPEM conference was AI, and although the subject is still in the “talking” stage, some funds have already taken significant steps to account for its inexorable march. Funds such as Apollo and Blue Owl have started investment-grade deals, mainly for the enormous data centres that will sustain the development of this new technology.
As for the broader outlook, this time last year, market participants were highly confident about 2025, but the year hasn’t necessarily played out as they expected. “This year, people are a bit more cautious on the outlook, and it’s more like we hope 2026 will be a good year — but what it really holds remains to be seen,” said a private equity sponsor.
“Everybody talks a good game about when more M&A deal flow is coming. At some point, someone who says it is going to pick up is going to be right, as M&A keeps evading us from one quarter to another,” concluded another direct lender.
