Deals seem to come in waves these days, feeding a hungry private credit market in Europe but also stretching the resources of their professionals. “Suddenly you're really busy with a few deals coming in at the same time but after having taken a closer look, the jungle clears quickly. Two or three deals get done and suddenly almost the entire deal pipeline is gone,” said a debt adviser.

At times there were up to two dozen deals coming in at once, but that wave ebbed off again, said the direct lending executive. “Apart from one or two situations that we’re looking at now there's not much left.”

M&A deals down

Expectations that private credit — spoiled by success from previous years — would skyrocket again in Europe after a sluggish 2023 had been crushed by early 2024: European private credit deals fell in number quarter-over-quarter, from 190 in Q4 23 to 155 in Q1 24, and dropped year-over-year from 177 in Q1 23, as reported in 9fin’s European Private Credit Review.

The main bottleneck for more private credit deals is a lack of M&A activity in Europe. Towards the end of last year there was an expectation that the prospect of lower inflation, falling interest rates, cheaper debt financing and better valuations for private equity-owned companies would finally let sponsors offload assets with more confidence.

But Q1 turned out to be Europe’s weakest quarter of M&A deal value since the Covid-19 lockdowns of early 2020, according to a report by Pitchbook. That’s mainly due to the absence of mega deals this side of the Atlantic, with only two €5bn-plus transactions recorded between January and March: telecom provider Swisscom’s €8bn takeoverof Vodafone’s Italian business and the $5.2bn acquisition of Russian assets of Dutch-registered tech giant Yandex, often labelled as ‘Russia’s Google’, by a consortium of Russian investors.

Europe is not the only place where impatience about deal flow is growing — in California at the Goldman Sachs Leveraged Finance Conference last week, investors and bankers alike were asking the same question: “When will sponsors find exits for their portfolio companies?”

They already do at a greater extent in some countries in Europe and in some sectors, that’s the good news for private credit. The UK has seen an uptick in (public, at least) M&A activity in Q1, reaching a deal volume of $21bn, almost half Europe’s total deal volume that quarter, according to a press release by law firm Linklaters.

Turning to better pockets

Take-privates of UK-listed companies have been a major driver for LBO deal activity in Europe this year, with video game services company Keywords Studios’ acceptance of a £2bn buyout offer from sponsor EQT being the latest example. Bids for London-listed companies this year have hit the highest level since 2018, the Financial Times reported. Private credit massively benefits from this — last year, 13 of the 14 British take-privates that featured debt financing did so through private credit, at times alongside banks joining in to act as direct lenders, as reported by 9fin late last year.

And while overall M&A activity might still be muted, some sectors are thriving. A wave of security and surveillance firms has washed over the European private credit market lately, 9fin reported in May. Since March 2023, 9fin has tracked more than 16 safety and security companies changing hands, or seeking debt. In general, tech deals are on the rise in Europe. The IT sector was the only sector with sequential growth in Q1 in Europe, with deal value up around 74% year-on-year and 24% quarter-on-quarter, as per the Pitchbook report.

Tech deals are a favourite of the private credit market, not only in the US but also in Europe, where Goldman Sachsled a €1.5bn private loan recently to German fintech firm SumUp, just another sign that direct lenders love tech.

There was also an increase in carve-outs this year, and last year’s largest private equity deal was buyout firm GTCR’s takeover of US payments company Worldpay from FIS Global, backed by a $4.4bn loan package, making carve-outs an obvious opportunity for private credit providers which specialise in more complex LBO situations.

So despite a slow first half of the year on the M&A side, there is plenty to choose from for private credit. And the second half of the year promises more LBO deal flow, especially towards December, not least because private equity firms are under pressure to return capital to investors, noted a recent report by asset management firm Fidelity International. Resilient economies, lower interest rates and improved business confidence could fuel LBO activity later this year, according to Fidelity.

In the meanwhile though, popular deals remain scarce in Europe, which means there’s a frenzy of competition on the ones that private credit firms like. “The deals now are either too small, too big, too bad or too competitive,” said the first direct lending executive mentioned in this piece.

“Direct lenders are stepping on each other’s toes. That makes it less appealing, very often,” said another senior private credit executive.

“So we're looking to team up with sponsors who we've worked with successfully before, not so much driven by general deal activity but by relationships with sponsors,” this source added.

Going back to networking could be the flavour of the summer months in private credit then — just to brace for that M&A dam to break.

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