Corporate finance in Europe is undergoing a quiet revolution.
As traditional lending channels tighten, a growing number of businesses, particularly in the middle and lower market, are turning to private credit for flexible, long-term capital solutions. With direct lending now accounting for $1.4 trillion of the $2.1 trillion global private credit market according to Macquarie, its rise is no longer a side story: it's the main act.
Europe’s middle-market and lower middle-market comprises a rich ecosystem of companies that lack the size or the credit quality to consider traditional capital market options. Stepstone Group notes that the European Small Market opportunity set alone consisted of approximately 3,600 companies as of January 2025. In the second edition of Pemberton Asset Management’s European Direct Lending Report, the firm points out that it continues to see “compelling growth opportunities in the core European mid-market, where successful privately-owned businesses are being brought together to embark on expansion journeys to become Europe’s future champions.”
Within the middle and lower middle-market, borrowers are able to benefit from greater deal certainty, faster speed of execution, bespoke solutions and, crucially, unilateral relationships with lenders – this is important when it comes to strengthening relationships. It often gets overlooked that direct lenders will refinance the same companies multiple times over an extended period. These are not simply one-off transactions; they are long-term strategic partnerships.
Having that implicit trust has helped private credit strategies deliver to investors an attractive premia to BSL market returns. From a historical performance perspective, Pemberton’s report notes that vintages between 2011 and 2020 generated a median net internal rate of return (IRR) of 8.2%. And there is no shortage of future opportunities for new fund vintages to continue to deliver strong performance. As Macquarie’s paper illustrates, over $100 billion in principal repayments are due to mature in 2028, potentially presenting a significant wave of middle market refinancing opportunities to direct lenders.
The Role of Relationships and Origination
However, while the opportunity set may be expanding in Europe, the ability to stand out from the crowd remains a significant challenge as competition intensifies and deal terms tighten.
Successful selection of the most attractive companies - i.e. those with an EBITDA of EUR10 million to EUR50 million – hinges on building and maintaining a strong pipeline of relationships with private equity sponsors, intermediaries, and management teams.
By focusing on relationship-driven origination and deploying geographically dispersed teams, lenders can access a broader array of opportunities, particularly in fragmented markets. Expertise in specific sectors, such as healthcare, technology, or industrials, allows lenders to better understand and meet the unique needs of middle-market borrowers. Active management of the pipeline through robust CRM systems and regular data analysis helps track relationships, monitor deal progress, and identify areas for improvement, ensuring no opportunity is missed.
Proactive outreach through networking, conferences, and targeted marketing, combined with strong relationships with financial advisors, accountants, and M&A boutiques, can help broaden the base of potential deals and sustain a high-quality pipeline.
Kroll Bond Rating Agency (KBRA) is a global full-service rating agency with a unique insight on private credit markets. The firm has rated hundreds of feeder notes, CFOs and NAV facilities as well as over 50 private asset managers and over 30 BDCs.
“These ratings relationships give us unique insight and data about an otherwise opaque private credit landscape, all of which informs our research and analysis on over 2,000 unique sponsor-backed middle market borrowers. We will provide credit and default data broken down by size and sector related to over 2,000 private credit leveraged loans, representing over $1 trillion of private credit borrowing,” explains William Cox, Senior Managing Director, KBRA.
Europe’s Mid-Market: An Engine of Activity
The middle-market is the core engine of activity within the private equity industry. As the direct lending space becomes increasingly sophisticated, and specialised, it is subsequently bringing PE sponsors and lenders into closer alignment, with some of the world’s largest GPs leveraging both their buyout investment teams and, separately, their credit platform teams, to support management teams.
Such is the allure of staying private for longer that between 2013 and 2023, approximately 97% of all buyout deals in the US and Europe happened in the mid-market. In the US, 87% of companies with revenue exceeding $100 million are privately held.
Competition and high amounts of dry powder have led to some degree of margin compression in 2025 in the core and upper mid-market segments. According to Pictet, spreads have tightened by up to 100 basis points over the past year. That said, the lower middle-market has remained more insulated with only modest margin compression and a continued risk-adjusted return premium, as fewer private credit funds operate in this space and banks remain cautious about lending to smaller companies, according to Pictet.
Asset selection will remain a key priority for investors.
Even if credit fundamentals improve in 2025, investors will need to be more selective, focusing on managers with strong origination capabilities and robust risk management to preserve returns in an environment of tighter pricing and increased competition. However, should inflation pressures pick up again and/or, rates remain higher for longer, companies will come under greater pressure to service their debt. KKR wrote in a recent article that at the end of the day, private credit is a storage business. They made the following key observation: “This isn’t trading - we own these loans until we get repaid. So, structure, documentation, and fundamental risk are our north stars.”
The Case for the Lower Mid-Market
The lower middle-market has proven durable over time, experiencing less volatility in valuations, lower losses and defaults, and historically higher risk-adjusted returns relative to the upper middle market and other areas of public credit, with average yields currently ranging from 11%-12% according to Pinebridge. This makes it, in their view, “particularly compelling today”.
Asset selection and sourcing prowess take on even greater importance in the lower middle-market, with less capacity for companies to take on debt at a sustainable level. These smaller companies might have strong fundamentals – low debt, recurring revenues, stable customer bases – but lenders have to be laser focused on ensuring the loans they underwrite are properly protected to mitigate downside risk. As any direct lender will assert, it is all about loss avoidance. Which in turn relies on disciplined underwriting.
With less competition, there is greater emphasis on direct lenders taking a more proactive stance when developing their target pipelines.
Indeed, success in the lower middle-market is less about waiting for deals to come to you and more about tracking the right borrowers, understanding their needs, and moving swiftly when the right opportunity arises. Unlike the upper middle-market, where scale and brand recognition often drive deal flow, Lenders must rely on a combination of deep market intelligence, strong local networks, and creative structuring to originate and execute high-quality transactions.
When seeking out suitable targets, the higher the barriers to entry the better.
For now, Europe’s middle-market is firing on all cylinders, creating a timely window for direct lenders to capitalise on sustained investor demand.