European direct lending: Three trends to watch

The direct lending market has undergone tremendous growth over the last 10+ years, with Europe accounting for a significant share. While still smaller than its North American counterpart, the European direct lending market today is estimated to be between $500 billion and $1 trillion.¹ Similar to North America, this growth has been driven primarily by the retrenchment of banks. As leveraged lending guidelines and other regulations have curtailed bank lending, opportunities have emerged for non-bank lenders to step in and finance the transactions that banks can no longer support.

For investors, it’s important to understand how the direct lending landscape has evolved in conjunction with its rapid growth, and to partner with managers that are well positioned to source attractive opportunities while effectively navigating risks. Along these lines, there are three key trends playing out across the direct lending landscape today that are worth monitoring for their potential to shape performance in the months and years ahead.

1. Competition is high, but there is a flight to top-tier managers

In Europe, the last five years have seen an influx of new managers into the direct lending market, and competition has increased as a result. That said, deal flow has continued to consolidate around fewer, large and more stable managers that have both scale and incumbency. In 2024, for instance, the top five managers accounted for roughly half of all transactions completed in Europe.² So, while competition is high, access points, particularly in the traditional or core middle market, have narrowed.

The heightened competition in the market, coupled with slower deal flow and muted M&A activity, has impacted deal terms and pricing structures, although the extent of the impact depends on where a manager is transacting. For example, while these dynamics have driven pricing tighter overall, margin compression is more pronounced in the upper middle market. In the traditional middle market, terms look more favorable. Despite tighter spreads, origination yields have remained robust due to still-elevated base rates, at roughly 9.5% for the last 12 months through March.³ The market also continues to offer a premium over the broadly syndicated market, to the tune of 250-300 bps—suggesting private equity sponsors remain willing to pay a premium in exchange for resilience, reliability and certainty of execution.⁴

It is also worth noting that muted deal flow has been a greater issue for platforms that are heavily reliant on M&A for origination and growth. It has been less of a concern for established lenders with large existing portfolios and the ability to source differentiated opportunities and deploy capital via off-market origination or add-on transactions. That is to say, when it comes to accessing the opportunity in the traditional middle market, incumbency and scale matter, and will likely continue to drive significant origination and opportunity as sponsors grow their investments. A stable and permanent capital base, particularly one aligned with a large and diversified portfolio of invested assets, can also provide an advantage, enabling managers to continue deploying capital at attractively priced opportunities, even as deal volume fluctuates.

2. The opportunity set extends beyond the UK

Five to 10 years ago, private credit was largely considered a satellite strategy, with most institutional investors allocating around 1% to the asset class—and that 1% was primarily in traditional, middle market direct lending. Today, many LPs have increased their private credit allocations to upward of 20%, often comprising a wide variety of sub-strategies and spanning multiple regions. Within Europe, for example, the UK was the first to adopt direct lending on a significant scale, and even up to five years ago, 70%-80% of the volume or loan issuance in the European market was happening in the UK. France, Germany, and the Benelux countries were next, followed more recently by southern European countries like Spain and Italy. While there are high-quality opportunities in all of these regions, 90% of the transaction volume we see is split among the UK, France and the DACH region, with the opportunity in the southern European countries continuing to expand.

Investors are also increasingly considering global strategies that look across North America, Europe, and Asia Pacific with the aim of capturing relative value across geographies. There are several advantages to a global approach, particularly as LPs look to map their broader corporate exposure. For one, it increases the opportunity set of potential investments and, by extension, allows private credit managers to invest more selectively. Because competitive dynamics ebb and flow (and differ) by geographic region, a global approach also allows managers to efficiently ramp a well-diversified portfolio without the pressure to invest in assets from a given region at a point in time when relative value is less attractive. The ability to shift allocations based on market conditions can also provide a natural hedge against region-specific risks.

But these strategies—whether pan-European or global—are complex. Each of these markets and jurisdictions has its own legal systems and tax regimes, underscoring the need for large and highly specialized teams with local expertise and linguistic skills, and a thorough understanding of the dynamics that drive each market.

3. Sponsors are doing more with fewer managers

Sponsors are increasingly expressing an interest in transacting with fewer managers and looking for strategic ways to add value and reduce their cost basis over time. For many, this means partnering with managers that have the ability to provide tailored solutions to support companies’ long-term growth trajectories, even as financing needs evolve. In some cases, this involves working with a global lender that can provide financing solutions in multiple currencies and across different jurisdictions. If a sponsor based in London is interested in pursuing a new platform acquisition in Paris or Boston, for example, there is a material advantage to working with an existing manager who can also fund in dollars and euros and who has deep knowledge of the North American or French legal landscape.

Additionally, many sponsors today are considering both current financing needs and future financing needs, sometimes looking out two to three years. Bank disintermediation is arguably still in the early stages, and as bank balance sheets continue to shrink, managers that can provide an expanded range of financing solutions will likely be at an advantage. In addition to senior direct lending, this could include areas like capital solutions, portfolio finance, asset-backed finance, and equity co-investments—all the way to public credit market financing support.

Ultimately, lenders with the capabilities and breadth to support these requirements are in a good position to serve as strategic partners to sponsors and source attractive, through-the-cycle investment opportunities for investors.

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Notes and references:

Orla Walsh is Managing Director & Portfolio Manager at Barings Private Credit.

1. Source: Preqin. As of March 2025.
2. Source: Houlihan Lokey. As of December 2024.
3. Source: Barings. As of March 2025.
4. Source: Barings, Credit Suisse. As of March 2025.

For Professional Investors / Institutional only. This document should not be distributed to or relied on by Retail / Individual Investors. Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 25-4562472