European private debt: Resilience and opportunity

August 22, 2025

If you have any feedback on this article or are interested in subscribing to our content, please contact us at opinions@muzinich.com or fill out the form on the right hand side of this page.

--------

Improving pipelines and expanding global investor interest are creating a solid environment for European direct lending, as Kirsten Bode and Rafael Torres explain. 

Despite geopolitical turbulence and periodic episodes of broader market volatility, European lower-middle-market direct lending continues to demonstrate resilience in 2025. Deal flow remains steady, fundraising momentum healthy and innovations such as evergreen structures are broadening the appeal of the asset class.

Concerns over US trade policy and the impact of reciprocal tariffs have invariably led to questions about the effect on European private credit. Yet the primarily domestic and regional focus of the European lower middle-market segment means we have to date seen little, if any, disruption. The slowdown in April and May reflected seasonal factors, such as public holidays, rather than anything policy-related, with activity rebounding strongly in June and July.

In our area of focus, the lower-middle market, we have continued to see a steady volume of opportunities, with notable strength in markets such as France, Italy and Spain, although the UK has been somewhat quieter. Despite political uncertainty and ongoing macro challenges, the lack of a slowdown in deal activity points to the resilience and maturity of the asset class.

That said, the level of new deal activity post the usual summer lull will provide a clearer view of sentiment. Any protracted tariff disputes could introduce hesitation, particularly for companies with international supply chains, but momentum in the domestic-oriented lower middle market appears strong, in our view.

Growing global interest

Fundraising conditions in Europe have slowly but surely improved this year. The first reason for this has been some pickup in M&A activity. As investors receive distributions from successful exits, they have been redeploying capital into private strategies. Shifts in interest rate expectations have also influenced allocations, with lower rates prompting investors to seek higher-yielding, illiquid strategies to meet their return targets.

Notably, interest from international investors in European private debt continues to grow, particularly from Asia and the Middle East. This can be explained in part as a response to a re-balancing away from North American assets by institutional investors. While it remains to be seen whether this is a temporary tactical move or part of a longer-term structural shift, the trend has created new relationships and diversified capital sources for European managers.

The combination of healthy deal flow, competitive returns and diversification benefits is helping maintain investor confidence. Private credit’s illiquidity premium remains a meaningful advantage, even if, at times, competition in the upper mid-market compresses pricing toward broadly syndicated loan levels. In the lower middle market, where competition is less intense and deals are often less correlated with public markets, the premium has remained largely intact.

The technology factor

With the rise of artificial intelligence (AI) permeating every walk of life, it is also becoming an increasingly relevant factor in credit analysis. As lenders, we are looking at AI primarily from a downside risk perspective, given its potential to disrupt certain business models. Some sectors, such as language translation services, have already been materially affected as technology has made traditional offerings less viable. While AI may present operational efficiencies for some companies, as lenders, it is important to focus on identifying where it could erode revenues or margins over time.

The broader macro backdrop also invariably continues to influence underwriting. Volatility, however, while a source of uncertainty, can be positive for private lenders by creating opportunities when banks pull back. This dynamic was briefly visible during the April tariff shock, when traditional lenders became more cautious. In such periods, private credit providers often benefit from stronger origination pipelines and improved terms. More generally, unexpected events - rather than predictable interest rate changes - tend to generate these windows of opportunity.

From a portfolio management perspective, the normalisation of interest rates has not diminished the relative size of the illiquidity premium. For investors targeting minimum return thresholds, private debt also remains a compelling proposition, particularly in a lower-rate environment where public credit markets may offer reduced yields.

Making it evergreen

One of the most notable shifts in recent years is the growing adoption of evergreen structures in private markets. These vehicles allow capital to remain invested indefinitely, offering investors continuous exposure. For institutional allocators comfortable with a manager’s strategy and investment philosophy, the appeal lies in reducing the administrative burden of reinvestment.

Evergreen strategies can start off as a feeder into an existing closed-end funds, with the potential to evolve into a standalone vehicle over time. As a result, managers are increasingly looking to position these alongside their traditional closed-ended funds.

However, it is important to highlight the difference between evergreen private credit funds and semi-liquid structures. In a private debt evergreen fund, capital remains fully invested, and redemptions are managed over a multi-year run-off period following a decision to exit. This contrasts with semi-liquid funds, which offer more frequent liquidity and pricing mechanisms, but also have public assets invested alongside the private ones to provide additional liquidity. Clear communication on this distinction is important to ensure investor expectations align with a strategy’s design.

While evergreen models could theoretically eventually fully replace fixed-term funds, investor preferences remain mixed. Some institutions value the finite life and return of capital inherent in closed-end structures, while others favour the permanence and flexibility of evergreen commitments.

Change becomes opportunity

The European lower-middle-market private credit sector stands at a point where resilience, adaptability and innovation converge. While macroeconomic and geopolitical uncertainty will continue to have an impact, the fundamentals driving deal activity, investor demand and strategic evolution remain strong.

The growing role of evergreen structures, the ability to use episodes of volatility as an opportunity and the influx of global capital suggests a market not only capable of weathering challenges, but also of capitalizing on them. For investors seeking stable yields, diversification and a proven capacity to navigate change, we believe the asset class will remain a compelling proposition in the years ahead.

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of August 2025 and may change without notice.

--------

Important information

Muzinich and/or Muzinich & Co. referenced herein is defined as Muzinich & Co., Inc. and its affiliates. Muzinich views and opinions.  This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you.   performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall.

Any research in this document has been obtained and may have been acted on by Muzinich for its own purpose. The results of such research are being made available for information purposes and no assurances are made as to their accuracy. Opinions and statements of financial market trends that are based on market conditions constitute our judgment and this judgment may prove to be wrong. The views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity, they are for information purposes only.

This discussion material contains forward-looking statements, which give current expectations of future activities and future performance. Any or all forward-looking statements in this material may turn out to be incorrect. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Although the assumptions underlying the forward-looking statements contained herein are believed to be reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurances that the forward-looking statements included in this discussion material will   prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation that the objectives and plans discussed herein will be achieved. Further, no person undertakes any obligation to revise such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

United States: This material is for Institutional Investor use only – not for retail distribution. Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission (SEC). Muzinich & Co., Inc.’s being a Registered Investment Adviser with the SEC in no way shall imply a certain level of skill or training or any authorization or approval by the SEC.

Issued in the European Union by Muzinich & Co. (Ireland) Limited, which is authorized and regulated by the Central Bank of Ireland. Registered in Ireland, Company Registration No. 307511. Registered address: 32 Molesworth Street, Dublin 2, D02 Y512, Ireland. Issued in Switzerland by Muzinich & Co. (Switzerland) AG. Registered in Switzerland No. CHE-389.422.108. Registered address: Tödistrasse 5, 8002 Zurich, Switzerland. Issued in Singapore and Hong Kong by Muzinich & Co. (Singapore) Pte. Limited, which is licensed and regulated by the Monetary Authority of Singapore. Registered in Singapore No. 201624477K. Registered address: 6 Battery Road, #26-05, Singapore, 049909. Issued in all other jurisdictions (excluding the U.S.) by Muzinich & Co. Limited. which is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ, United Kingdom. 2025-08-18-16781