GERMANY Law and Practice Contributed by: Michael Josenhans, Lucas Lengersdorf and Karl Kuhn, Freshfields
1.6 Sponsored/Non-Sponsored Debt Private credit providers in Germany primar - ily 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 30% 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 management-owned and founder-owned busi - nesses, especially those seeking growth capital or refinancing without diluting ownership. Such transactions often involve innovative structures, such as unitranche, mezzanine debt, and PIK tranches, which offer tailored solutions to these businesses. Public Companies While less common compared to sponsor- backed deals, public companies are increas - ingly considering private credit as an alternative to traditional syndicated loans or bond markets. In Europe (not including the UK), 18% of deals in the last twelve months were accounted for by sponsor-less private deals. Private credit gen - erally offers greater structural flexibility, faster execution, and the ability to customise terms; these advantages are particularly attractive dur - ing periods of market volatility.
• growth capital – companies requiring financ - ing for expansion often turn to subordinated and mezzanine debt for its flexibility; and • recapitulations and refinancings – hybrid capital products are frequently employed to provide liquidity for shareholders or restruc - ture existing debt. Rise of PIK structures Holding company (HoldCo) PIK loans and similar hybrid instruments have gained traction as spon - sors seek ways to manage cash flow constraints amid elevated interest rates. PIK structures allow borrowers to defer interest payments, preserving liquidity during periods of economic uncertainty or business transitions. These structures are particularly favoured for non-sponsored trans - actions or companies undergoing transformation projects. Flexibility in capital deployment as competitive advantage Private credit providers are increasingly compet - ing with traditional banks by offering bespoke junior capital solutions. The ability to structure financing creatively – through combinations of senior, subordinated, and hybrid instruments – has become a differentiating factor in Germany’s competitive mid-market landscape. Challenges in the hybrid capital market Despite their strategic value, the higher cost of capital caused by rising interest rates, has impacted the attractiveness of junior and mez - zanine products. Borrowers are increasingly cautious about taking on subordinated debt, as it comes with higher costs. This trend has led to a more selective deployment of hybrid instru - ments, favouring quality assets and sponsors with strong track records.
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