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As spreads have been cut to the bone over the last 12 months, direct lenders are now going loose on arrangement fees, with some having lowered them all the way down to 0.5% in the most extreme cases, sources told 9fin.

Even for the most margin-aggressive funds, it’s difficult to go below 500bps to 475bps, but the unforgiving M&A drought has created a market where lenders have to cut the price where they can in order to win the deals.

This is especially true for the larger deals where private credit is competing with the syndicated market. Fees in the BSL space are averaging around 1% and margins around 350bps to 400bps, according to 9fin’s database.

“We are definitely noticing pressure on [private credit] fees. Lenders want to protect a book that shows a 500bps-margin, maybe for some lenders 475bps. It's just easier optically to cut fees than margins,” one direct lender said.

Of course, the cases showing 0.5% arrangement fees are rare and only applies to the most competitive deals, so it may not be a completely accurate representation of the market.

However, fees are being squeezed across the board, with most direct lenders 9fin have spoken to saying they are seeing fees averaging between 1% and 2%.

“Now that margins have come down to a level where funds cannot go any lower, arrangement fees are where they see the opportunity to cut the cost. Even the most disciplined funds have lowered their fees from 3% to 2%,” one private equity sponsor said.

If we are to compare it to previous years, arrangement fees were averaging between 2.5% and 3% in 2022 and 2023, which was a bit higher than an average of 2% to 2.5% in 2021, sources told 9fin.

“For it now to have dropped to below 2% shows how competitive the market is right now — it’s not uncommon to see fees at 1%,” a direct lender said.

Even compared to the syndicated market, private credit arrangement fees are rather competitive.

“I’ve seen direct lenders offering 1.75-2% fees — that’s lower than some banks,” one syndicated banker said, foreseeing problems down the line as a result.

“It doesn’t work for their returns, so they are going to be stuck with hung deals. They proactively repriced down to 475-550bps but they can’t sustain it,” the source continued.

One direct lender however, said the reason the private credit market is pricing so tightly — both on fees and margins — is because the BSL market is pricing even tighter, with OIDs being completely at par on some syndicated deals.

“At the end of the day, on these deals with very low fees, private credit is competing with the BSL market. Most of the deals where we have seen super aggressive fees have been deals that were initially planned for BSL, but where private credit took the opportunity to be competitive and gain some market share,” they said.

One question the reporters at 9fin are asking ourselves is: what next? Margins and fees have already come down a lot — and rather rapidly — but will the market settle here? Or may we even see some funds drop OIDs altogether?

A number of market sources have already reported rumours of some lenders dropping arrangement fees in very specific circumstances, but whether that becomes a reality we’ll have to wait and see.

One thing that remains true though, is that in order for competition to ease off and margins to rise, we need more M&A.

Is Europe the place to be?

Earlier this week, Pemberton Asset Management released its second European Direct Lending report, in which managing partner Symon Drake-Brockman stated that, as a result of Donald Trump’s tariffs, investor focus is returning to Europe.

“Trump’s agenda has prompted a pivot from austerity to fiscal stimulus across European governments, which we believe will drive growth,” he said in a release.

As European governments are going all in on economic growth and offsetting tariff-related consequences, some direct lenders believe that the region’s economy is becoming pretty attractive to invest in.

On the deal side, lenders are reporting that activity is picking up in the European regions, in particular for mid-market businesses not impacted by tariffs.

“We have seen a record-high number of introductions in March, April, and May,” Boris Harmsen, head of origination at Pemberton, said. “We are seeing a lot of focus on regional, European businesses in, for example, the business services, IT, transformation, and digitisation sectors. There’s a strong equity and credit thesis because a lot of those businesses have little to do with the US and tariffs.”

A similar story is being told on the fundraising side.

“We have noticed a tailwind when fundraising because the appetite for US funds is decreasing with the Trump administration,” one direct lender said. “We are seeing US investors turning to Europe now because the uncertainty in the US, and all the talks about tariffs, is increasing LPs’ wish to diversify across regions.”

Pemberton’s Harmsen agrees: “What I’m hearing from institutional investors is that they are wondering how to explain to the people for whom they are investing capital that they are allocating capital to a region that is currently experiencing significant uncertainty and market volatility.”

Last week, 9fin covered the UK government’s latest agreement with the country’s pension funds to double their allocation to private capital from 5% to 10%, and the rest of Europe is also introducing fiscal stimulus measures.

For example, in response to the tariffs, the European Central Bank, cut its main interest rate by a quarter to 2.25%.

In Germany — whose automation industry has been hit particularly hard by the US tariffs — the government has set up a new €500bn infrastructure fund to finance new projects within transport, healthcare, energy, education, research and digitalisation. The country is also increasing its defence spending and loosening its government borrowing constraints.

At the same time, the Swedish government has proposed to cut the corporate tax to 20% from 20.6% in its 2026-budget in order to boost the country’s economy.

European private credit pipeline

It is rather fitting that the 9fin team has reported on a number of mid-market deals this week, then.

Ardian placed a pre-emptive bid for Andera Partners’ French electrical supplies company MasterGrid earlier this week. The sale process reached the second round of bids and pricing for the debt package is expected around Euribor+500bps.

The seller marketed the company off €15m EBITDA and enterprise value was expected at 13x-15x and as high as 16x.

In the Netherlands, Founder-owned car leasing software firm CarWise is attracting strong lender interest for its primary LBO process. Ares, Bridgepoint, and Arcmont are all pitching staple financing packages for the sale — priced with a cash margin of around E+550bps and levered at approximately 6x.

Also in the Netherlands, a host of sponsors and lenders are showing strong interest in Levine Leichtman’s sale of Dutch metrology services firm NMi, with Eurazeo, Cinven, and ECI Partners among the buyers interested in the sale.

You can read our weekly updated pipeline of new and in-market deals in the 9fin platform — get in touch below for a free trial.