GERMANY Law and Practice Contributed by: Michael Josenhans, Lucas Lengersdorf and Beatrice Zobel, Freshfields
Challenges in Fundraising Overall, fundraising has proven to be challenging, with the number of global funds closed in Q3 being the lowest in the last four years. Value growth has primar - ily been allocated towards large, established funds in the market. In contrast, the secondary market has remained at a high level of activity. Regulatory Uncertainty and Market Risk Transmission Increasing regulatory scrutiny of private credit, par - ticularly regarding its interconnectedness with the banking sector and institutional investors, could pose additional challenges. This scrutiny stems from concerns about risk transmission and early signals of stress, such as negative outlooks for private credit- backed instruments. Performance Fragility and Default Risks Signs of underlying fragility in the performance of portfolio assets have emerged, particularly in sectors that traditionally attract higher leverage. This fragility is further reflected in the increasing use of payment-in- kind (PIK) structures and credit facilities based on net asset value to address short-term pressures. 1.5 Sponsored/Non-Sponsored Debt Private credit providers in Germany primarily focus on private equity (PE) sponsors and their portfolio companies. This is evident in PE’s dominant share of sponsor-driven transactions, such as LBOs and add- on acquisitions. In the last twelve months, mostly PE- driven add-ons represented 31% of all financings in the German market. However, private credit has also extended its reach beyond PE sponsors to include public companies and founder-owned businesses. These segments are increasingly tapping into private credit markets for bespoke and flexible financing solutions. Founder-Owned and Management-Owned Companies Private credit providers are actively supporting man - agement-owned and founder-owned businesses, especially those seeking growth capital or refinancing without diluting ownership. Such transactions often involve innovative structures, such as unitranche,
This indicates that some private credit transactions have been replaced or refinanced by more traditional
financing sources. Overall Preference
While private credit remains a preferred form of acqui - sition financing for mid-market sponsor transactions and complex LBOs due to its flexibility and speed, public markets and bank debt have emerged as competitive alternatives, particularly for high-quality assets and larger borrowers. 1.4 Challenges Several challenges have impacted the expansion of Germany’s private credit market over the last year, a number of which are set out below. Aforementioned Competition with Public Debt Markets Despite private credit’s sizeable market share, syn - dicated loans and high-yield bonds remain a source of competition for private credit lenders, with public debt markets offering significant margin savings in certain instances. Furthermore, Germany’s SME sec - tor (its famous Mittelstand ) remains largely conserva - tive, favouring the strong domestic banking sector for financing. Longstanding relationships and trust in traditional banks often outweigh the appeal of private credit or public debt, posing challenges for private credit providers in a market dominated by established banking partnerships. Cost of Capital and Interest Rates Declining EURIBOR rates combined with private credit fund enthusiasm for deploying capital have led to many attractive, price-driven opportunities for bor - rowers in the first half of 2025. This trend also fuelled repricing activity in the first two quarters. Selectiveness and Lengthy Deal Timelines Private credit lenders have become increasingly selec - tive when originating new transactions, focussing on selected attractive sectors, solid underlying assets and strong outlooks and credit stories. This selective - ness, coupled with valuation mismatches and macro - economic uncertainty, has limited deal completion or at least extended completion timelines.
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