Europe’s Private Credit Moment: Why 2026 Could Redefine the Asset Class

As banks retreat, valuations recalibrate, and artificial intelligence reshapes risk assessment, Europe’s private credit market is quietly entering its most consequential phase yet.

Europe’s private credit market is no longer operating in the shadow of its US counterpart. Once perceived as a niche alternative to traditional bank lending, the asset class has matured into a central pillar of corporate financing across the continent. Heading into 2026, private credit managers, allocators, and borrowers are navigating a market defined by cautious optimism, sectoral realignment, and intensifying competition.

Despite persistent uncertainty around global M&A volumes, many dealmakers believe private credit is structurally better positioned than private equity in the current environment. As one adviser told PitchBook, “There is a healthier dry powder position in private credit than in private equity,” a sentiment increasingly echoed by institutional investors reallocating capital toward predictable yield and downside protection.

Consistent Returns in an Inconsistent World

At the heart of private credit’s appeal is return stability. Unlike private equity, where exit timing and valuation multiples can dramatically alter outcomes, private credit offers contractual cash flows and relatively consistent net returns.

“In private credit, returns are fairly steady,” one adviser noted. “From an allocator’s perspective, that reliability is proving more attractive than some private equity strategies over the last five to ten years.”

This shift is visible in allocation trends. According to PitchBook data and LCD commentary, US institutional investors are increasingly deploying capital into European private credit funds, seeking geographic diversification and exposure to what many view as a more politically stable operating environment.

“It has been a great year for Europe,” said Marcus Maier-Krug, Partner at Arcmont. “Europe has been perceived as more stable than the US, which has clearly influenced capital flows.”

A Maturing Market Under Regulatory Scrutiny

As private credit grows in scale and significance, it is also attracting greater regulatory attention. The failures of companies such as First Brands and subprime lender Tricolor exposed vulnerabilities across lightly regulated credit structures, even if not all risks were intrinsic to private credit itself.

Regulators are responding. The Bank of England recently introduced an “exploratory scenario” stress test aimed specifically at private credit markets, reflecting a broader global trend toward transparency and systemic risk assessment.

“This is a market that needs continued investor education,” one adviser emphasized. “Opacity is no longer acceptable at this scale.”

Paradoxically, increased scrutiny may strengthen the asset class by improving disclosure standards, underwriting discipline, and institutional confidence.

The M&A Bottleneck—and Why It Still Matters

The most pressing challenge facing private credit in Europe remains deal supply. While 2025 saw a rise in direct lending transactions, much of that activity came from refinancing, add-on acquisitions, and portfolio-driven deals rather than fresh buyouts.

“There is still insufficient deal flow to meet lender demand,” said Dan Matthews, Head of EMEA Leveraged Finance at SMBC.

High-profile stalled processes, including Kersia and Solina, underscore the disconnect between seller valuation expectations and buyer appetite. Sponsors facing return hurdles are reluctant to exit assets at compressed multiples, even as financing conditions improve.

Yet optimism persists. Matthew Theodorakis, Partner and Co-Head of European Direct Lending at Ares Credit Group, believes pressure on aging private equity vintages will eventually unlock activity.

“There’s mounting pressure to realize investments,” he said. “That should accumulate into stronger deal flow in 2026.”

Pricing Compression: The New Normal

One of the most defining trends in European private credit is pricing compression. Increased competition from broadly syndicated loan markets has driven margins downward, particularly in large-cap transactions.

Market participants now describe 475 basis points as the “new 500,” with some deals effectively pricing closer to 450 bps through ratchets and performance-based adjustments.

“Margins and fees are probably the tightest we’ve seen in both syndicated and private credit markets at the same time,” observed one fund manager, calling it a signal of broader financing abundance rather than weakness.

This environment favors scale, speed, and reputation—advantages typically held by established managers with strong sponsor relationships.

Sponsorless Deals: Flexibility as a Strategy

One of the most notable adaptations within private credit has been the rise of sponsorless lending. Particularly prevalent in Germany’s Mittelstand and Northern Italy, these deals allow business owners to access flexible capital without private equity involvement.

For lenders, sponsorless deals provide diversification and new deployment channels in a constrained M&A environment. For borrowers, they offer speed, customization, and control.

Importantly, sponsorless transactions often serve as precursors to future buyouts, feeding the broader private capital ecosystem rather than displacing it.

Sector Shifts: From Software to Security

Perhaps the most striking transformation in private credit underwriting is sectoral. For years, software, technology, and healthcare were viewed as near-ideal credit stories, offering predictable cash flows and non-cyclical demand.

Artificial intelligence is changing that calculus.

“Two years ago, software underwriting was relatively straightforward,” said one direct lender. “Today, AI disruption has introduced a new layer of risk that investment committees are scrutinizing closely.”

Simultaneously, sectors once considered untouchable—most notably defence—are gaining traction. The Mecachrome transaction exemplifies how geopolitical realities and government-backed demand are reshaping credit risk perceptions.

“I now spend significantly more time assessing AI-related risks,” one lender admitted. “That will be a top agenda item in 2026.”

Consolidation and Survival of the Fittest

As competition intensifies and fundraising becomes more selective, consolidation is emerging as an underappreciated theme. Smaller managers with weaker track records are struggling to raise capital, while larger platforms continue to attract commitments based on scale, certainty, and execution history.

“Some long-standing competitors have disappeared,” noted Arcmont’s Maier-Krug. “It’s not dramatic, but it’s noticeable.”

Sponsors, too, are becoming more selective, often favoring managers who can commit capital reliably across cycles.

A Global Inflection Point

Europe’s private credit market in 2026 will be defined less by volume and more by discipline. Adaptability—across sectors, deal structures, and risk frameworks—will determine success.

As traditional banks retreat and public markets remain volatile, private credit’s role as a stabilizing force in corporate finance is becoming clearer. What was once an alternative is now essential.

And as AI, geopolitics, and regulation reshape the financial landscape, private credit’s next phase may not just be about filling gaps—but about redefining how capital is deployed in a more uncertain world.

Sources

• PitchBook (a Morningstar company), 2026 European Private Credit Outlook
• LCD (Leveraged Commentary & Data)
• Bank of England, Private Credit Stress Testing Framework
• Ares Credit Group commentary
• Arcmont partner insights
• Weil Gotshal & Manges, European Finance Practice analysis