INTRODUCTION Contributed by: Stelios G Saffos, Dan Seale, Peter Sluka and Alfred Xue, Latham & Watkins LLP
Continuation funds Additionally, in a market that has seen subdued M&A levels, sponsors have been holding assets for longer periods, leading to a rise in the use of continuation funds. Direct lenders are increasingly supporting the financing of such vehicles, particularly in the middle market. Market participants expect limited partners to continue backing continuation funds when valua - tions are independently validated and general partner economics are clearly aligned. Direct lenders are also pitching pre-IPO junior, equity-like debt solutions to help sponsors de-lever prior to a listing, responding to expectations of an uptick in IPOs in 2026. UK and European trends and developments The UK and European private credit markets are expe - riencing their own set of trends. Pricing in European private credit has continued to tighten, with median spreads on senior and unitranche loans declining. New regulations in Europe have widened the scope of assets in which individuals can invest, accelerat - ing a drive towards retail and private wealth inves - tors alongside open-ended funds. Insurance balance sheets and wealth investors are set to play a larger role in private credit fundraising, while strategies such as NAV financing, asset-backed lending and signifi - cant risk transfers (SRTs) are converging with the asset class. Terms, covenants and documentation The growth of private credit was driven by lend - ers acting as principal investors and negotiating for tighter terms, covenants and documentation, coupled with strong returns. As the market has evolved and matured, and competition intensified, these terms have been adjusting to reflect increased competition
both from new entrants and from public market debt products. To close deals in 2025, private credit lenders evolved from just having the capacity to deploy large quantities of dry powder, and the best private credit lenders have focused on being able to deliver greater capabilities across a wider spectrum of deals and also marketed their ability to deliver certainty of terms and funding. Private credit agreements continue to fea - ture bespoke terms tailored to the borrower’s specific needs and the lender’s risk appetite, but private credit providers are now able to provide greater flexibility on terms, metrics, covenants and PIK options. Looking further into 2026, market participants expect increasing discipline, underwriting and diligence. The most sophisticated and established private credit pro - viders are likely to continue to place greater empha - sis on the quality of underwriting and documentation, with sole underwriters or tighter club deals remaining a focus and preference over larger, more aggressive deals that resemble broadly syndicated transactions. Conclusion 2025 showed that private credit is resilient, defying some gloomy predictions and sensationalist head - lines, but the private credit market endured and con - tinued to grow. If 2026 proceeds as predicted, with an increase in M&A activity, strong IPO markets, and continued strong refinancing and recapitalisation activity, we expect to see private credit continue to deliver steady returns for investors and retain a low default rate. We hope that this 2026 edition of the Private Credit guide can help market participants better navigate the opportunities and challenges that lie ahead.
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