The first quarter of 2025 has delivered a sobering signal from the private credit markets: unrealised losses at U.S. private credit lenders have deepened to their highest levels since 2022, according to Reuters. Simultaneously, a significant share of interest income continues to be paid in kind rather than in cash — a structural indicator of borrower stress that deserves careful attention from CFOs, General Counsel, and M&A Directors operating across European and global capital markets. Against this backdrop, Goldman Sachs projects that M&A volumes in 2025 could approach the record levels of 2021, creating a paradox that advisory professionals cannot afford to ignore: deal activity is accelerating even as the credit infrastructure underpinning many of those transactions shows signs of strain.

Private Credit Risk: A Transparency and Liquidity Reckoning

The deterioration in private credit portfolios is not merely a U.S. phenomenon. European mid-market borrowers and their advisors are increasingly exposed to the same dynamics, particularly where cross-border financing structures involve U.S.-domiciled private credit vehicles. The rise in payment-in-kind (PIK) interest — where borrowers defer cash interest payments by issuing additional debt — is a well-established early indicator of liquidity stress in leveraged portfolios.

For treasury management teams and CFOs, this raises immediate questions about covenant headroom, refinancing timelines, and the reliability of credit facilities that may have been structured under more benign assumptions. From a banking regulation perspective, European supervisors — including the European Central Bank and the European Banking Authority — have intensified scrutiny of banks’ exposures to private credit funds, particularly through co-investment arrangements and subscription credit lines. Firms with significant private credit exposure should expect more granular disclosure requirements under evolving AIFMD II provisions and ESMA guidance on liquidity risk management.

  • Action point: Conduct a full audit of private credit counterparty exposure, including PIK positions and second-lien holdings, before Q3 2025 reporting cycles.
  • Action point: Engage legal counsel to review covenant structures in existing private credit facilities, particularly where EBITDA add-backs may be masking underlying performance deterioration.
  • Action point: Model refinancing scenarios under both base-case and stress assumptions, incorporating the possibility of tighter underwriting standards from private credit lenders through 2025.

M&A Momentum and the Capital Markets Divergence

Goldman Sachs’ projection that global M&A volumes could approach 2021 record levels is a significant data point for financial advisory practices and corporate development teams. The 2021 peak was characterised by abundant cheap capital, compressed multiples, and a permissive regulatory environment. The 2025 iteration is structurally different: deal activity is being driven by strategic necessity — digital transformation mandates, portfolio rationalisation, and cross-border consolidation — rather than purely by financial engineering.

The consolidation trend is visible at multiple levels. In the U.S. wealth management sector, Osaic-owned CW Advisors has surpassed $14.5 billion in AUM following a $500 million addition, while Apella Capital added more than $1 billion in client assets — both reflecting the ongoing aggregation dynamic in advisory platforms. In capital markets, the near-$20 billion inflow into municipal fixed-income ETFs year-to-date signals that institutional and retail allocators are seeking liquid, regulated fixed-income wrappers as an alternative to less transparent private structures.

For European M&A Directors and board members, the implication is clear: due diligence on financing structures must now extend beyond the target’s balance sheet to include a rigorous assessment of how the deal is being financed and by whom. Private credit-backed acquisition financing carries different risk characteristics than syndicated bank debt, and those differences matter materially in a stress scenario.

Policy Competition and the Talent Dimension

Hong Kong’s reported consideration of waiving tax on fund managers’ performance bonuses introduces a geopolitical dimension to the capital markets story. If implemented, such a measure would intensify competition with established European financial centres — London, Luxembourg, Paris, and Amsterdam — for senior fundraising and portfolio management talent. For European fintech and asset management firms already navigating the post-Brexit talent landscape, this is a strategic variable that boards should incorporate into medium-term workforce planning and compensation benchmarking.

Implications for Decision-Makers

The convergence of private credit stress, robust M&A pipelines, and intensifying policy competition creates a complex operating environment for senior executives. The firms best positioned to navigate it will be those that treat restructuring preparedness not as a reactive measure but as a standing capability — maintaining live scenario models, pre-negotiated creditor relationships, and cross-border legal frameworks that can be activated quickly if market conditions deteriorate further.

Key takeaway: Private credit’s unrealised loss trajectory is a leading indicator, not a lagging one. Advisory firms, corporate treasurers, and M&A professionals who act now — stress-testing financing structures, reviewing covenant packages, and diversifying capital sources — will be meaningfully better positioned than those who wait for distress to become visible in public reporting.