Private market financings, deals and fundraisings are continuing to progress despite a clear shift in market sentiment since the start of the year. However, deals are taking longer to execute and only the highest quality opportunities are making it across the finish line.
Investors are more discerning, insisting on increased due diligence to ensure businesses have strong fundamentals and an underlying resilient business model, especially amid ongoing macroeconomic uncertainties. Simultaneously, there is a lot of dry powder in the system which is increasing competition for the best assets.
Our current read on private markets was reiterated by the general partners (GPs) who attended our private equity roundtable to discuss the current challenges and opportunities in mid-market deals.
Lending and leverage
Mid-market lenders and borrowers have found themselves in an unusual position in recent months. Tariff uncertainty and stock market volatility have disrupted syndicated loan and bond markets and increased caution among investors.
Some of the worst fears about the impact of the first US tariff announcements have abated. The direction for UK and European interest rates is still downwards and we are not in recession territory. Uncertainty, however, looks here to stay. It is still too early to predict where everything will land.
On the other hand, there is still ample liquidity available to finance deals, driving stiff competition among private credit funds and banks. Factor in interest rate cuts in the UK and Europe, and the financing backdrop for private equity is favourable.
However, GPs are sensitive to debt servicing costs and as a result are taking a conservative approach to leverage multiples. Increasingly, lenders are winning credits by offering better terms and pricing, rather than the most leverage.
And while lenders will run hard at select deals, there is still sensitivity around default risk, even though default rates have been relatively benign.
Fitch is forecasting a default rate of 2.5 -3% for European leveraged loads in 2025 and a 5 – 5% default rate for European high yield bonds in 2025.
In the event of difficulties arising for a borrower, some lenders are willing to extend maturities or offer covenant flexibility, when working consensually with a GP and when there is a clear understanding of the long-term plan for the business. In a volatile market, lending relationships matter more than ever.
New lenders and financing options
There are opportunities for new lenders to break into the market, but the bar for entry is very high. Previous relationships carry unprecedented levels of weight, and new franchises will almost always have to rely on the networks of their founders and partners to bring in business from GPs they have worked with previously. Track record is paramount.
New lenders are emerging as another funding option, typically offering very attractive terms. With a new brand, you must complete extensive referencing and due diligence to gauge how they will behave. It is often, however, very relationship led - built on historical experiences with individuals albeit the brand above the door is a new one. We are always open to working with new lenders however, the bar is very high and it is still likely you will usually go with someone you trust and have an existing relationship with.
There is, however, openness among GPs to working with new lenders who are providing alternative financing options to senior debt.
The uncertainty in markets observed during the first half of 2025 has seen senior lenders take a more conservative stance on leverage multiples and headroom, opening opportunities for providers of products such as hybrid financing – a capital tranche that sits behind senior debt but ahead of equity. The appetite for alternative financing options is reflected in private debt fundraising in the first quarter of 2025, which was driven by large increases in fundraising by distressed debt and subordinated debt strategies, rather than senior debt strategies. In Q1 2025 distressed debt and subordinated debt accounted for 32% and 30% respectively of all fundraising compared to 11% and 19% in 2024.2
54% of UK survey respondents expected private debt providers to offer narrower margins and looser terms
With respect to terms on offer to private equity borrowers, 54% of UK survey respondents expected private debt providers to offer narrower margins and looser terms, with more than a third of European-based GPs (35%) expecting margins and terms to move in favour of borrowers.
Our panel discussion found that the outlook has become less clear-cut. Panellists reported incumbent lenders are taking a more conservative approach to underwriting in the face of volatility. However, new entrants have continued to step up and compete on terms and covenants to gain market traction.
GPs will consider working with new players offering attractive terms but will undertake extensive research on a new lending partner before proceeding, and are unlikely to max out on leverage with a new provider until the relationship deepens.
NAV lending
Some forecasts see potential for the NAV market to expand seven-fold between 2022 and 20303. NAV finance can provide an attractive way for lenders to deploy capital in an uncertain market as NAV loans are cross-collateralised against multiple assets in a fund, defaults tend to be very low and recoveries are high.
Limited partners (LPs), however, are paying close attention to how and why GPs are using NAV finance and are likely to be sceptical when NAV loans are used to artificially inflate distributions or add additional layers of debt financing to already highly levered portfolios. There is also closer scrutiny from investors on the specific assets within a fund that NAV facilities will be secured against.
When NAV facilities are used for the right reasons, rather than to “game” the system, LPs are likely to be more supportive. Examples of use cases that will secure LP blessing include raising NAV to support the financing of a bolt-on acquisition for a portfolio company or smoothing out distribution flows to investors.
Learn about your M&A options
Kate Gribbon
Head of Financial Sponsor Coverage & Origination
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Innovations and exits
The biggest priority for GPs coming into 2025 was to exit assets at attractive valuations, and the survey findings reflected GP optimism that exit conditions would improve in 2025.
The first quarter of 2025 saw managers secure sizeable exits, such as Insight selling Dotmatics to Siemens for US$5.1bn, and EQT selling stakes in IFS for €3bn and Karo Healthcare for €2.6bn. First-quarter European exit values were also higher than the previous year4.
High-quality assets are still coming to market and trading at good multiples. Only top-tier assets are selling, however, and the risk of a broken process is high unless an asset is pristine.
Only the very best businesses are going to sell in this uncertain period in markets. An asset must tick all the boxes for acquirers and the preparation that goes into selling a business in this market will be far greater than what vendors was acceptable in the past four to five years. If a company isn’t of the highest quality, don’t’ go to the market now.
The workload to land an exit is also escalating. Bidders are understandably cautious and taking their time to cover off all possible scenarios and risks in due diligence. Vendors are accepting that processes are going to be much longer than the market has been accustomed to.
Informal, pre-process market testing is also a must. Selling firms and their advisers are spending more time with potential bidders prior to the launch of a formal sale to gauge interest and buyer conviction. This testing phase will now usually involve sharing some financial information and providing early access to management to nurture bidder conviction.
Vendors, however, will only bring assets forward if they believe it is worth exiting at this point in the cycle. They will entertain inbound interest and front discussions if they feel it is worth selling now but won’t be in a rush to sell an asset unless the valuation is appropriate.
Recent market uncertainty means GPs will continue to explore all exit options open to them, but there is a recognition that certain exit pathways could be more fruitful than others. Equity market volatility is expected to limit the scope of trade buyers to pursue mergers and acquisitions (M&A), as volatile stock markets constrain their access to liquidity. Private equity firms, particularly US houses, are now able to pay higher multiples than trade buyers, and could prove the most fruitful exit route through the rest of 2025.
Strong processes do currently exist in the market – for top quality assets – but these processes are typically taking longer to conclude. There is more work going into preparing an asset for sale pre-process, and potential bidders are being given an early look at due diligence and access to management to lay the foundation. By the time a process is formally launched, you want to know exactly who your bidders are going to be.
The liquidity pressures that supported higher continuation vehicle (CV) volumes throughout 2024 have further intensified, indicating sustained tailwinds for CV deal volumes.
The majority of GPs are now very well versed in how the CV structure works. The market has matured, and processes have become more rigorous and transparent. CV processes now look very similar to sophisticated M&A processes, with the wrapper of a fundraising.
In 2024, weak M&A and exit activity saw GPs explore alternatives in ever greater numbers. Bain & Co analysis found that almost a third (30%) of buyout portfolio companies underwent some kind of liquidity event in 2024, with sponsors raising $360bn via GP-led continuation fund secondaries deals, dividend recaps, NAV loan finance and minority stake sales5.
Our survey highlighted strong ongoing momentum for both single-asset and multi-asset continuation fund deals as exit routes. These options will almost certainly be key exit routes throughout the rest of the year.
46%
40%
CV deals, however, must be thoughtfully structured to secure alignment between the GP, incumbent LPs and incoming investors. Landing a CV deal will typically require the GP to include a trophy asset or assets in the vehicle, make a significant GP commitment (typically up to 5%, but often more) and roll over a meaningful portion of carry.
LPs are warming to the CV, with the survey findings showing that 32% of LPs are more enthusiastic on CVs, compared with 20% who are less enthusiastic. LPs, however, require conviction that a CV will provide a strong return relative to the other options.
Flexible debt provision, innovative approaches to deal structuring and experienced, well-considered advice is more important than ever.
Learn about your options
Stefano Manna
Head of GP Advisory
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Footnotes:
1 BVCA
2 Private Debt Investors Fundraising Report Q1 2025
3 Pemberton NAV Financing – Evolution within Fund Financing February 2024
4 PitchBook Q1 2025 European PE Breakdown
5 Bain & Company Global Private Equity Report 2025
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