EMEA Private Credit Review H1 2026: Private Credit Weathers the Storm as Deal Flow Increases, Bifurcation Accelerates, Software Sector Recovers

The European PCDO Team
Octus League Tables Team

Relevant Items:
European H1 2026 Direct Lending Analytics (PDF)
European H1 2026 Direct Lending Analytics (PPT)

Despite the geopolitical and macroeconomic events of the first half of the year creating a volatile environment, the European private credit market continues to demonstrate robust resilience. In fact, direct lending activity climbed to 494 deals in the first half of 2026, representing a 4% increase year over year. Deal flow has also seen increased momentum in the second quarter with 258 deals completed compared with 236 in the prior quarter, according to Octus’ H1 2026 Private Credit League Tables.

However, such momentum is not universal for all. “In contrast to the first-quarter, we saw fewer deployment opportunities in the second quarter principally due to the software sell-off and the Iran conflict. We were deliberately more cautious during that period, although we were still deploying,” said Marc Chowrimootoo, portfolio manager and co-head of Direct Lending at Hayfin. Dry powder is still being amassed on a large scale, as earlier this month, the lender closed its Direct Lending Fund V with more than €15 billion above its initial €10 billion target.

These volatile times are also presenting direct lenders with increased opportunities. For instance, “geopolitical and macroeconomic events in 2026, including the Iran conflict, have reinforced rather than weakened the case for ESG lending in Europe,” according to Adam Willmott, co-head of Origination at Colesco Capital. “Increased geopolitical instability has heightened concerns around energy security, supply-chain resilience and operational risks, leading lenders like Colesco to place greater emphasis on sustainability factors that enhance business resilience,” he added. This trend has not yet resulted in an uptick of activity, as ESG-related direct lending activity contracted in the second quarter of 2026, accounting for 17.1% of total market volume, according to Octus’ H1 2026 Private Credit League Tables.

Bifurcation

There is also a bifurcation in the market between the best assets and the rest. “Volatility continues to extract a risk premium across every sector, which then also perpetuates the market bifurcation between the consensus grade-A assets and everyone else,” said Jerrold Abbertson, founder and managing director of Long Lane Capital Advisory. “If you are part of the first group, record amounts of investment capital will chase you, but anyone in the second group faces much longer deal times and more stringent diligence – there is no real middle ground at the moment,” he added.

Top-quality assets are starting to reap the benefits of a recovering market. “Spreads have tightened for high-quality credits and a gradual recovery in M&A financing is returning, albeit still below 2021 levels,” according to Bart Mentink, director of Acquisition Finance at ING. It stands in contrast to the wider market where the average margin widened to 541 bps above the reference rate in the second quarter, fueled by margin expansion across both the mid-market and large cap segments, according to Octus’ H1 2026 Private Credit League Tables.

The popularity of high-quality assets can also be seen in the standout unitranche financings in the first half of 2026. The €1.5 billion refinancing for Global Gruppe stood out as the largest transaction completed in the second quarter. While other standout unitranche deals include a €1.2 billion financing for the acquisition of Karo Healthcare, a €600 million first out, last out unitranche for the dividend recapitalization of Opseo and the £525 million financing supporting Searchlight Capital Partners’ investment in CloserStill Media. In the first half of 2026, unitranche financing accounted for over 47% of all facilities closed, according to Octus’ H1 2026 Private Credit League Tables.

There is also a growing trend in Europe toward asset-backed financing, which “is part of a broader trend in which direct lenders are expanding beyond the traditional cash-flow lending perimeter into a wider range of asset classes,” according to Colesco’s Willmott. There are two specific reasons for this particular trend, according to Long Lane Capital Advisory’s Abbertson. “It is a positive response by alternative lenders to the continued pullback of banks from lower-margin but asset-rich industrials; and [it is] a ‘flight to safety’ reaction [partly] given the well-documented low recovery rates in the asset-light software sector.”

Software

No other sector has been more impacted by the rise of AI than software. There was an “initial pullback [of investment] as everyone tried to assess the impact of AI,” according to Abbertson. However, recent deals such as SnelStart and Easi “suggest a more considered swing back to the middle ground and a more pragmatic approach,” he added. “There’s all sorts of questions that will play out over the mid-term determining winners and losers, where for example margin compression and churn are likely amongst the most prominent first order effects,” according to ING’s Mentink.

Investors need to consider the following about AI when investing in software, according to Abbertson. “Does the borrower have a strong, defensible ‘moat’ that is difficult for someone to replicate (e.g. years of customer data; deeply embedded into complex processes; high cost to get it wrong) [and] “rather than being replaced by AI, does the borrower actually benefit from its growth (e.g. providing top-level cybersecurity; providing the infrastructure or rails for AI to operate within).

Another sector which has promised an uptick in investment in the second half of the year is defence. “We expect more potential for smaller defence businesses and companies operating within defence supply chains to come to market in [the second half of the year] and beyond, many of which will have grown very rapidly, with such deal-flow serviced by a subset of funds and LPs which deem defence to be within their mandate,” according to Colesco’s Willmott. “The tiptoeing around the European defence sector seems over,” according to Abbertson. “The renewed and increased NATO pledges, the modernization spend commitment, and regulatory easing all signal one important point: this is not a knee-jerk political reaction, it is a structural change in Europe’s posture towards defense.” JPMorgan has been mandated as sell-side advisor for the sale of Dutch radar systems maker Robin Radar Systems, which is expected to launch after the summer holidays.

Pricing

Mid-market pricing sat at about 40 bps above large cap in the second quarter of 2026, slightly up from the first quarter, and closer to its year-end 2025 position, according to Octus data. As investors reassess their exposure to the software sector and M&A volumes dropped sharply in the first half, competition for high-quality transactions has tightened debt pricing significantly year over year, with average pricing on software-related deals falling by nearly 50 bps, from 571 to 524 bps.

In contrast, an increase in deal flow across other sectors is reflected in wider margins. Octus data shows a clear uptick in pricing for business services-related assets, up 38 points year over year, and industrials and materials assets, up 25 points. Where AI can prove a strength, not replacement, for cycle-resilient business models, competition evidently remains fierce – further evidence of bifurcation between what Abbertson called “the consensus grade-A assets and everyone else.” We also see a continuation of the net-positive trend for mid-market premiums of recent years, rewarding mid-market lenders for taking risks with smaller tickets.

There is optimism from market participants for the continuation of this wider momentum in the market into the second half of the year. “Looking ahead, we believe risk appetite is likely to improve on the back of more moderate inflation expectations, consequent rates trajectory and reasonably solid earnings performance,” according to Hayfin’s Chowrimootoo.

Octus’ Direct Lending Rankings are compiled using a variety of public sources. Octus works in partnership with the markets’ most active credit funds, advisors and private equity funds to create insightful and impactful content.