It’s hard to ignore the growth both in absolute and relative terms that the European private credit market has witnessed in recent years. Although European bank market share has declined 10 percentage points since the global financial crisis, it remained at a high of 76%¹ in 2024 (vs 21% in US). This compares with non-bank lending market share in Europe and the UK which currently stands at 12% vs 75%² in the US, indicating that the market in Europe and UK for non-bank lenders has room for substantial growth.

Further still, despite the European and UK economies (US$23tn)³ approaching the size of that of the US (US$29tn),⁴ its combined private and public leveraged credit market comparatively stands at only a quarter of the size. With ongoing anticipated growth comes maturation. This article highlights a growing convergence between private and public credit markets as defined by pricing, risk assumed and addressable market; a trend we expect will continue.

We focus on a subset of the private credit market, namely direct lending which makes up c. 50%⁵of global private debt assets under management. Direct lending transactions can range vastly, both in terms of size (€25m-1bn) and price (margins ranging from 4.5-8%). Reflecting an acutely different macro backdrop, the European direct lending market saw a substantial shift in use of proceeds in 2024. Whereas 2021 and 2022 activity was fuelled by post COVID deal making activity and funding a surge of leveraged buyouts (LBOs), current sponsor backed deal flow is centred around refinancings, recapitalisations and bolt-on m&a. An active asset raising environment in recent years together with an evolving addressable market has resulted in a pile of dry powder.

This sizeable dry powder has resulted in both the direct lending and broadly syndicated debt markets often competing to underwrite the same exposure, risking a ‘race to the bottom’ in economics and legal protection. In a world with a structurally higher cost of funding, credit investors must assess their a) ability to be repaid (= cashflow analysis) and their b) remedies in a downside case (= legal analysis). With that in mind, understanding the convergence between private and public markets becomes important. 

The meteoric rise in direct lending has created a ‘need’ to deploy. During its 2024 investor day, Ares estimated the quantum of dry power as being as much as €70bn. This has manifested itself through a series of ‘forward flow agreements’: arrangements where banks originate loans on behalf of private credit buyers. Recent examples include, Oaktree-Lloyds, PNC-TCW, Arini-Lazard and AGL-Barclays. Indeed, many borrowers are able to pursue dual track processes whereby terms are negotiated between arranging / syndicate banks and direct lenders, in seeking the most optimal borrowing terms. A borrower may be able to choose between high yield bonds, leveraged loans and/or private debt – all competing to underwrite the same risk.

According to data aggregated by Debtwire, despite the rise in AuM and therefore dry powder, direct lending activity still dwarfs that of broadly syndicated debt (c. 10-30% on a quarterly basis over the last 16 quarters), which may result in more aggressive underwriting going forward.

Notwithstanding the earlier mentioned evolving use of proceeds, according to Debtwire, more than a third of direct lending proceeds in 2024 were allocated to LBOs, while high yield and syndicated leveraged loans accounted for less than 10%. The shift away from public market funding underscores the fact that sponsors are increasingly turning to unitranche and club financing solutions, potentially for greater flexibility on structuring. It is worth noting that the distressed debt market is peppered with a pipeline of LBO vintages of 2021-2022, coinciding with a post pandemic boom and access to cheaper financing. 

Approximately 50%⁶ of direct lending deals in Europe during Q125 were used for refinancing activity. Growing pressure from private credit funds to refinance broadly syndicated debt is evidenced with the refinancing of the UK retailer, The Very Group’s £575m high yield bond with a £600m private credit transaction at a sizeable uplift in the cost of funding. Further, the deployment of dry powder has resulted in an appetite for larger transactions, such as the €2.3bn public to private funding for Hargreaves Lansdown earlier in 2025. Octus estimates that roughly 11% of European direct lending deals in Q125 were greater than €500m in size, or 39%⁷ by volume (vs 13% in 2020).

The period over which the European direct lending market saw substantial growth coincided with a structurally lower risk-free rate environment. Whether debt is broadly syndicated or not, the cashflows afforded to the borrower remains unchanged. Put simply, interest coverage ratios and therefore sustainable debt capacity works the same whether the borrower issues a high yield bond, leveraged loan or a unitranche loan. In particular, the earlier mentioned surge of LBO fuelled underwriting will be hitting a maturity wall in 2026 and 2027, potentially against a much higher cost of funding backdrop.The cracks in public markets are often clear to see with an active secondary trading market, although greater transparency has also begun to emerge in private credit more recently.

Bloomberg news reported in May 2025 that Apollo is partnering with JP Morgan, Goldman Sachs and three other banks to trade private credit and syndicate investment grade debt on a broader scale. Apollo CEO Marc Rowan predicted that in 18 months some investors won’t be able to tell the difference between private and traditional credit. On the more distressed end of the spectrum, one needs to look no further than French headquartered telecom equipment distributor Netceed, which saw a significant portion of its €1.8bn debt structure held by traditional direct lenders, and subsequently traded in the secondary market at approx. 30c in Q125 as it heads for a comprehensive financial restructuring. According to Macfarlanes, whilst private credit secondary has tripled in two years, it remains only 2-3% of total private credit AuM.

An April 2024 report from JP Morgan private bank, citing research by the Federal Reserve based on data from the rating agency KBRA, showed that direct lending exposures are typically marked at materially higher prices in the months preceding a default.

The more mature market in the US shows direct lending losses match that of syndicated debt markets over a prolonged period, suggesting comparable underlying credit quality as the market has grown.
In Europe, there are a growing number of cases where direct lenders are enforcing and taking ownership of borrowers, such as HPS and Permira taking the keys of UK holiday home operator Away Resorts, or Pemberton taking over German job site Univativ in October 2023, and more recently Carlye is rumoured to be in talks to hand over Dainese, the Italian sportswear company, to creditors HPS and Arcmont in one of the first potential private credit takeovers in Italy (as reported by Bloomberg). Direct lending mandates will inevitably evolve to accommodate for enforcement downside, as has been seen within public credit over the last decade.

According to Latham & Watkins “there is a growing alignment between private credit and syndicated loan markets, with private credit adopting similar covenant structures, pricing, and terms”. The development of stronger relationships between direct lenders and private equity sponsors has resulted in more flexible funding structures for borrowers. Covenant dilution exists across syndicated and non-syndicated markets. Post crisis, a typical direct lending transaction may have benefitted from 4+ covenants vs 0-1 financial covenants in more recent deals. Pay In Kind (PIK) toggle (i.e. the ability to defer cash interest) features remain a differentiating factor in private credit deals and has largely fallen away in primary market syndicated debt deals.

Finally, we are increasingly seeing opportunistic private credit funds providing new money financing (often on a super senior basis) to stressed public market corporates. A volatile macro backdrop, induced by trade policy uncertainty, is likely to see this trend continue. The provision of fresh capital by one or a small number of third-party creditors may provide the shareholder(s) with optionality for future financial restructurings. Such examples include the provision of €200m super senior financing to French PVC producer, KemOne, as announced in Q125 or the more recently announced £130m credit line provided to British carpet maker, Victoria, both to replace existing revolving credit facilities and the provision of fresh liquidity. 

In conclusion, we see the growth of the European direct lending market resulting in greater overlap with that of the more established public credit market. As European direct lending continues to mature, we expect there to be smaller inefficiencies able to be captured, particularly on larger transactions – evidenced through looser documentation and tighter pricing. Given we consider syndicated and non-syndicated markets to behave similarly in a structurally higher cost of funding environment, the greater liquidity and transparency of public markets should be appealing to investors. 

^{1 Pitchbook, Bloomberg, ECB}

^2 Apollo

^{3 IMF data as of December 2024}

^{4 IMF data as of December 2024}

^{5 Preqin, Q125}

^6 Debtwire

^7 Apollo

This is an opinion piece by Kunal Shah, PVTL Point. PVTL Point LLP (FRN 1034789) is an appointed representative of G10 Capital Limited (FRN 648953) which is authorised and regulated by the Financial Conduct Authority.

Direct lending transactions can range vastly, both in terms of size (€25m-1bn) and price (margins ranging from 4.5-8%).