2025 marked another strong year for the broader European lending market. With record issuance volumes, tightening pricing, and continued growth in direct lending, we reflect on key developments shaping the mid-market financing landscape.

Key Insights:

• European Lending Activity Reaches Record Levels
  European direct lending volume achieved a record EUR 41bn in 2025, while total loan issuance reached an all-time high of EUR 141bn. The market saw increasing dominance of refinancings and non-sponsor-backed deals. Notably, in LBO financing, direct lending volume is now approaching syndicated bank loans at approximately EUR 22bn. We continue to observe margin and fee compression across both direct and bank lending segments.

• Interest Rate Outlook
  Markets anticipate widening policy divergence in 2026: the ECB is expected to remain on hold, the BoE may move toward earlier cuts, and the Fed signals one additional cut as US labor markets soften. Geopolitical uncertainty remains a significant factor affecting market predictability.

• Things to Watch in 2026
  European private credit deployment pressure remains high leading to funds with significant dry powder competing for a finite supply of high-quality transactions (larger funds dropping down into smaller deal sizes increasing liquidity). While this creates favorable conditions for borrowers (e.g., growing refinance pressure), it prompts more fundamental questions if these market conditions are sustainable.

European Debt Market – Q4 2025 Review

European loans maintained strong momentum throughout 2025, marking a second consecutive year of record gross issuance, with volume reaching EUR 141bn by year-end¹⁾. However, despite the increased European loans maintained strong momentum throughout 2025, marking a second consecutive year of record gross issuance at EUR 141bn. However, M&A activity remained subdued with refinancings dominating at EUR 86bn of non-repricing supply, while M&A volume increased slightly to EUR 44bn.

European direct lending accelerated toward year-end, driven by higher shares of refinancings and recaps:

• Total estimated volume of EUR 41bn across 160 transactions
• France overtook the UK with 24% market share (up from 17% in 2024)
• UK followed with 22% (down from 37% in 2024)
• Germany maintained third place with 14%

Throughout 2025, average spreads on European direct lending and bank loans tightened, compressing to around 125 bps difference compared with approximately 150 bps the previous year¹⁾. European private credit margins compressed for quality assets to as low as < 500 bps²⁾.

In Q4 2025, leveraged loan issuance declined slightly, falling from c. EUR 30bn in Q3 to c.
EUR 25bn. Direct lending rebounded from the summer slowdown, rising to c. EUR 10bn (vs.
EUR 8bn in Q3 2025). LBO activities picked up slightly in Q4 but remained moderate.

Source(s):
1) PitchBook Q4 2025 European Credit Markets Quarterly Wrap
2) Debtwire

Topic of the Quarter: Direct Lending vs. Bank Lending

Choosing the right type of debt provider: A borrower’s quick guide

Direct lending and traditional bank lending each offer distinct benefits, and the optimal choice depends on factors such as deal size, required flexibility, cost sensitivity, and information access considerations.

Direct lenders typically focus on the upper mid‑market, with loan sizes ranging from approximately EUR 25m to more than EUR 1bn. Bank lending remains most common in the EUR 1–250m range for LBO and acquisition financing. For borrowers who prioritize keeping deal information within a tight circle, direct lending or bilateral bank facilities are often the most attractive options, as they only involve a limited number of lenders.

Flexibility and speed

Flexibility and speed are key differentiators. Direct lenders are known for fast underwriting and bespoke financing structures, supported by concentrated decision‑making and quick IC availability, offering a compelling balance between agility and execution certainty. Usually, they can provide higher leverage, fund sectors in which traditional banks don’t engage and can be more flexible on the use of funds (for example, financing recapitalization). Traditional banks tend to offer less flexibility, often constrained by internal credit processes and regulatory requirements/ ratings. It should be noted, however, that in many cases longstanding “house bank” style relationships can be valued by borrowers – with bank lenders potentially also benefitting from a better understanding of a business gained over many years.

Pricing differences

Pricing follows a similar hierarchy: direct lending is usually more expensive, with banks generally providing the lower cost option, although the gap has narrowed for quality credits over the past 12-18 months.

Structural considerations

Other commercial considerations—including amortization, prepayment terms, and covenant structures—also vary by product. Direct lenders typically offer bullet repayments with no amortization – indeed, they usually apply prepayment penalties, particularly in the first 24 months. Banks, in contrast, especially when lending to smaller or higher risk borrowers, frequently require amortization but offer broader flexibility on prepayments.

Each financing route involves trade-offs. The right solution depends on a borrower’s priorities across certainty, flexibility, confidentiality, cost, and timing.

The DACH and UK lending markets are converging, with differences remaining

With the opening of Carlsquare’s Debt Advisory office in London, we are working more closely across both markets, supported by evolving market trends. Historically, the DACH lending market has been dominated by banks, whereas private credit was more established in the UK. However, this gap is narrowing as private credit continues to gain traction in the DACH region. Alongside the convergence, we also recognize differences between the two markets outlined below, our expertise in both markets enables us to navigate our clients through these dynamics.

Market maturity
The UK is Europe’s most developed direct lending market, having been the first to scale meaningfully after the Global Financial Crisis. Since 2012, the UK has recorded more than c. 2,000¹⁾ direct lending deals, significantly ahead of Germany’s ~800. Germany, however, has experienced rapid growth, with direct lenders increasing their market share from zero in 2012 to a projected 61% in 2025¹⁾.

Role of traditional banks
The UK banking sector is highly consolidated – far more so than the DACH region – which creates space for institutional capital, especially in the mid-market. With fewer banks competing, direct lenders have gained substantial market share. Germany, in contrast, has a fragmented system comprising regional savings banks and a number of commercial banks. This fragmentation historically created more competition for lending opportunities. However, tightening Basel III and capital adequacy requirements have pressured German banks and increased the relative cost of lending to middle market and leveraged finance opportunities, giving space to direct lenders to expand.

Funding structure
Compared to the German market, the relative dearth of bank lenders in UK and the predominance (>50%) of deals being done by private credit firms, has meant that borrowers have got used to an absence of amortization (on all but the smallest deals) and also for the debt to be provided by a single credit fund. Bank club deals are thus less common than in Germany, where building a bank club in the UK is perceived to be more difficult than fully filled offers from individual private credit funds.

Economic structure
The UK’s services-led economy also generally supports cashflow lending, with a greater share of potential borrowers in sectors with low ongoing CAPEX requirements, making it well suited for (potentially higher levered, higher priced) private debt solutions. Germany’s industrial- and manufacturing-driven economy typically involves higher capex commitments, with lenders likely to be more cautious about both cash flow impacts and potential cyclicality in capital goods sectors. That said, Germany’s asset light sectors continue to grow, improving the fit for private credit strategies.

Summary
Overall, the UK market remains larger, more mature, and more concentrated, with scale lenders driving deal flow, ample dry powder, and strong participation from domestic and US credit funds. Germany, meanwhile, is one of Europe’s fastest growing private debt markets, supported by structural bank retrenchment, expanding sector diversity, and increasing acceptance of private equity and private credit financing. Both markets continue to evolve, but the UK remains Europe’s benchmark for size and maturity, while Germany represents a high growth opportunity with a rapidly developing financing ecosystem.

Sources: 1) Deloitte Private Debt Deals Tracker Europe Autumn 2025; Pitchbook; Carlsquare research

Carlsquare Debt Advisory – A Strong 2025 with 8 Transactions and a New Debt Advisory Practice in London

Our team advised on multiple debt transactions throughout the year, with nearly 60% being buy-side LBOs, complemented by an equal distribution of refinancings, growth financings, and lender education mandates.

We saw strong deal concentration in business services and software, including the acquisition financing for Levine Leichtman Capital Partners on ENTRO Service GmbH and the leveraged buyout of MAIT for Deutsche Beteiligungs AG (DBAG). We also completed successful transactions in industrial tech and defense sectors, such as advising Bencis Capital Partners on the acquisition financing of Omega Group.

We have further strengthened our cooperation with our M&A sector teams, supporting sell-side processes including lender education for the sale of easybooking (zadego GmbH) to Zucchetti.

For any questions feel free to reach out to our authors Daniel Gebler, Head of Debt Advisory (Germany), Constantin von Wiedersperg, Director (Germany), and Andrew Hamilton, Director Debt Advisory (United Kingdom).