Headlines

• The full array of financing options is finally available again for financial sponsors
• Financing new deals will take centre stage as M&A markets show signs of recovery
• Sponsors will curate bespoke loan packages to maximise flexibility and pricing
• Sponsors will capitalise on opportunities to bring down financing costs across their portfolios

Private equity sponsors enter 2025 with a strong appetite to strike deals and take advantage of fully functioning debt markets.

The post-pandemic cycle of high inflation and rising interest rates caused private equity and broader M&A deal activity to wane. As a result, a valuation gap has emerged—vendors have been reluctant to sell assets during the downturn, while bidders remain cautious about overpaying in an uncertain economic environment.

Europe recorded two years of rapidly declining private buyout dealmaking in 2022 and 2023, according to Mergermarket. Although activity has improved in 2024—the aggregate value of all private equity M&A in EMEA in 2024 (€268 billion) was up by approximately a third year-on-year from 2023’s total (€201.6 billion)—there is still a lot of ground to make up, particularly in terms of deal volume.

The pause in buyout deal activity has created a backlog of unexited assets, which are sitting in portfolios as sponsors wait for market conditions to improve. According to Bain & Co, buyout sponsors are holding approximately US$3.2 trillion of unsold assets in their portfolios, a record high.

Pent-up demand to spur sponsors and lenders

Dealmakers are increasingly optimistic about a rebound in European buyout activity in 2025, propelled by pent-up demand, falling interest rates and, crucially, more stable valuations.

According to Dealsuite, the average European mid-market EBITDA multiple moved up for the first time in two years during H1 2024, supporting a corresponding uptick in M&A activity, which was especially pronounced in Q2 2024. As momentum builds, sponsors will take advantage of the reopened debt markets to negotiate optimal financing packages for new transactions.

Europe’s cycle of rising interest rates between July 2022 and September 2023 effectively shuttered broadly syndicated loan (BSL) markets, forcing sponsors to rely on private credit and alternative solutions, such as NAV loans, to finance deals and portfolios.

However, confidence returned to the BSL markets and high yield in 2024, offering sponsors a broad array of financing options besides private credit and fund finance. Overall, both European syndicated loan issuance and high yield bond issuance nearly doubled year-on-year in 2024. Combined issuance for buyout deals also improved, reaching €40.5 billion, surpassing the total logged in 2023 (€21.5 billion), though still far below pre-pandemic levels. 

Financing tailored to fit

With all the financing channels reopened, sponsors are focussing on aligning deals with optimal funding sources.

High-quality borrowers requiring a substantial amount of debt will often find the best fit in the BSL and high yield bond markets, which can efficiently handle large-scale financings. Meanwhile, more complex or higher-risk borrowers—whether due to their higher levels of leverage or operational complexity—might prefer private credit, where lenders undertake more detailed due diligence (and can do so in relatively compressed timeframes) and are prepared to price in additional risk.

Sponsors will also increasingly blend different sources of debt to optimise capital structures. For example, in a BSL, a sponsor-backed borrower/issuer could raise euro-denominated debt in public markets and rely on private lenders to pick up sizeable tickets in any sterling-denominated debt they may require.

As sponsors select ideal structures for deals, competition among lenders will intensify. The BSL markets are sharpening execution and offer more flexibility, while private credit players are tightening their margins and offering increasingly flexible covenants to win over borrowers.

Portfolio priorities

Kickstarting buyout deal activity will be the primary objective of sponsors in 2025, but private equity firms are also keeping a close eye on existing portfolios. As interest rates continue to fall in Europe, refinancing or repricing borrowings at more favourable rates is high on the agenda.

European loan refinancing and repricing deal flow surged in 2024, driven by lenders’ willingness to put money to work, even at tighter margins compared to the prior year. During the past 12 months, sponsors have increasingly pivoted from more costly private credit facilities towards lower-margin BSL products, and have leveraged falling interest rates to negotiate coupon discounts with incumbent private credit providers. 

One can expect sponsors to continue seizing opportunities to cut borrowing costs as market conditions improve. After more than two years of relatively limited financing options, sponsors are eager to get back to striking deals and maximising their portfolio companies’ value. Debt markets are well equipped to support those ambitions in 2025.

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