Debt Trends

2025 proved to be another year strewn with uncertainty in the face of persistent geopolitical crises, tariffs and macro-economic turbulence, resulting in continued implications for the M&A and debt markets. Many hoped the start of 2026 would see a calmer outlook and a more benign interest rate environment, but with a continuation of the war in Ukraine and the beginning of the Iran conflict, we have instead seen the return of inflationary pressures and a reversal of expectations on the trajectory of interest rates.

Notwithstanding the challenges faced by market participants in 2025, the mid-market remained steady and we did see an increase in M&A activity, particularly in the second half of the year, with primary buyout activity at its highest level since 2021.

Focus shifted away from software and towards business services, with accountancy roll-ups coming into vogue. Bolt-on activity also remained high, representing 60% of reported deals in 2025, suggesting a focus for sponsors on inorganic growth as they prepare assets for sale.

Last year remained a difficult year for traditional sales, with disposals to continuation vehicles accounting for a record number of exits in 2025. However, with Distributions to Paid-In Capital (DPI) an increasingly key performance metric for investors, 2026 could well prove to be the year in which sponsor-to-sponsor exits start to get away at long last.

Software Sell-Off

Following a real boom period for software, 2025 saw a decline in appetite for software assets and that has continued into 2026. Sponsors, buoyed by the sky-high valuations and the cheap debt which defined many 2021 vintage investments, surged into software businesses with the view that software would soon replace large parts of the human workforce. That fervour has now been tempered amidst fears around the challenges that AI presents for software.

The start of 2026 saw a software stock sell-off in the US, creating jitters in some corners, and requiring sponsors to scrutinise valuations in their portfolio as they look ahead to a potential exit. Whilst we are still seeing sponsors moving slowly and cautiously for high quality assets which are able to benefit from the continued growth of AI, gone are the days in which the general market consensus is one of software businesses representing a low risk, high reward, target.

 

Business Services in Vogue

With a fall from grace being felt in one sector, business services remains an attractive marketplace for many, accounting for 45% of deals completed in 2025.

Alongside acquisitions of legal and conveyancing firms, 2025 saw an increased popularity in wealth management firms and accountancy roll-ups. Coveted for their resilient earnings and strong cashflow, we have seen sponsors aggressively compete for the best assets, notwithstanding the sector being on the cusp of potential regulatory change following an FCA Paper in 2025 commenting negatively on increasing debt levels in typical structures and the potential for these debt servicing needs to create regulatory capital problems down the line.

Last year also saw successes in the industrials and consumer goods sectors, with the inference being that sponsors are returning their attention to established, high quality assets with a strong track record of profitability. In the event the Iran conflict continues for months to come, with the increased strain that will have on the cost of living for many households, it is expected that retail assets may fall in popularity until inflationary pressures ease and utility bills come down. Conversely, we expect some sponsors to capitalise on opportunities emerging in sectors such as defence and AI over 2026.

Working Harder Not Smarter

With continued challenges faced by sponsors owing to the increased costs of borrowing and persisting valuation gaps, sponsors are having to work harder than ever to return capital to investors. With opening leverage levels reduced, equity cushions typically sitting around the 50% mark, and interest rates still high, Bain believe that sponsors now need to achieve around 12% annual EBITDA growth to achieve the same IRR or multiple on invested capital they would have enjoyed with around 5% annual growth back in 2015.

 

Record Year for Continuation Vehicles 

With valuation gaps continuing to hinder sale processes in an already tricky market, 2025 saw many sponsors turn away from "traditional" exit routes and pivot their attention to continuation vehicles (known as "CVs"). Representing an alternative exit route, allowing sponsors to extend their ownership in select assets to support the realisation of further growth and value creation whilst also providing investors with a return of capital, CVs had a record year in 2025, representing 14% of all reported exits.

In the face of the struggles mentioned above, 2025 has sadly proven a step too far for a number of businesses, with an increase in material debt restructurings and defaults seen over the past year. We continue to observe a steady flow of covenant resets and a heavy reliance by some borrower groups on PIK toggles, with many instances requiring additional equity support from sponsors. On the rarer occasion, we have also seen restructuring implementation deeds put in place to preserve value in businesses before lenders take the keys.

Dry Powder: A Reason to be Optimistic?

As was the case in 2025, the continuing recovery of the loan markets will remain heavily linked to the success of the M&A market. UK Private Capital (formerly known as the BVCA) estimates that there is currently £190 billion of dry powder held by UK-based PE alone, with over half expected to be deployed in the UK over the next three to five years. 

Large swathes of dry powder also exists ready to be deployed by private credit lenders in support of the leveraged financing required in support of these envisaged acquisitions. Despite recent rumblings across the Atlantic, with the likes of Apollo and Blue Owl reallocating funds away from this asset class and a recent surge of "retail" investor redemptions in semi-liquid funds, we firmly believe there remains a solid growth story in private credit with latest estimates suggesting that assets under management will tip $3.5 trillion in 2028 versus $2.4 trillion at the end of 2025.

 

Will 2026 Prove to be the "Year of Exits"?

Latest estimates suggest that over half of all PE assets have been held for upwards of five years, and with average holds now approaching seven years, limited partners are clamouring for returns amidst sponsors sitting on an estimated $3.8 trillion of unrealised value.

As mentioned above, 2025 saw sponsors focusing increasingly on value creation – whether through bolt-on acquisitions or otherwise – and we expect that to continue into the coming calendar year before sponsors return their attention to fundraising following muted efforts in 2025 off the back of successive record breaking years.