It has been a heck of a year for the more than $2tn direct lending market, with geopolitical events and increased scrutiny changing the conditions for the asset class and pushing some investors towards Europe. Aysha Gilmore reports…

Europe has become a more attractive market for investors looking to gain exposure to direct lending as the US continues to battle numerous headwinds, from concerns over the extent of its software exposure to geopolitical constraints.

The risk of AI disruption has been putting pressure on business development companies (BDCs), while high-profile bankruptcies such as First Brands have also weighed on what has been the “bread and butter” of private credit.

As these events change the dynamics of the US market, investors are looking beyond direct lending’s biggest geography.

“Europe is definitely flavour of the month at the moment,” comments Nicolaus Loos, founder, managing partner and chief investment officer at Deutsche Credit.

The shift in appetite towards European direct lending among institutional investors was initially driven by the events surrounding Liberation Day in the US, according to those within the sector, as many investors looked to the market to diversify their portfolios ahead of the rollout of sweeping tariffs.

Overall, these events mark the beginning of a “structural shift that Europe is becoming much more important on the global landscape when it comes to direct lending”, Loos tells Alternative Credit Investor.

Record European raises

The most recent indicators of the shift are general partners (GPs) on the continent setting some of the biggest fundraises of 2026 within European direct lending. Alternative manager Hayfin is perhaps the most notable, raising more than €15bn (£12.8bn) for its fifth direct lending fund, more than doubling the €6bn raised for its previous vintage.

Other notable raises include UK-based manager Bridgepoint, which attracted €5.1bn for its focused strategy, and Parisian manager Eurazeo’s €3.9bn final close for its flagship fund.

A tailwind for Hayfin’s fundraise, explains Marc Chowrimootoo, portfolio manager and co-head of direct lending, was Liberation Day and the geopolitical uncertainty that followed, making “European private credit a really nice diversification tool” for institutional investors.

Recent scrutiny of the market also played into the success of the fundraise, explains Chowrimootoo.

Particularly in the US, concerns over credit quality and direct lending’s exposure to software have resulted in wealth investors pulling back from the asset class. This is evident in the high levels of redemptions from BDCs over the last two quarters of 2026.

“Towards the latter end of the fundraise, the volatility issues that you saw in the US, were also favourable to us,” Chowrimootoo tells ACI. “The greater exposure to software in the US versus Europe, the issues around valuations in BDCs, the gating that we have seen and the fact that we are 100 per cent institutional all acted as a tailwind, given the stability of our platform and the resulting ability to be patient investors.”

Read more: Jefferies reaches $4bn in European lending capacity

Political volatility

Meanwhile, a source within the industry tells ACI that some of the political volatility in the US is exacerbating the trend and turning some European institutional investors away from the market.

Instances such as threats against Greenland, the war in Iran and the US capturing former Venezuelan leader Nicolás Maduro are making some institutional investors think twice about taking US-focused managers to committee, the source says.

Edward Green, chief executive of Equipped, explains that following the scrutiny of the US direct lending market, the return premium available in Europe may now be more attractive.

“I think Europe could be a beneficiary of concerns over the US private credit market,” he tells ACI. “If you scroll back three or four years ago, there was a compelling return profile in larger, bulge-bracket US private credit (9-11 per cent net), which made a push into European private credit to secure slightly higher headline returns (two per cent plus net uplift) for a more nuanced strategy, less compelling.

“Some limited partners are increasingly scrutinising whether projected returns from highly competitive US direct lending strategies will translate into realised investor outcomes.”

Green said that recent scrutiny of direct lending is also filtering into limited partners becoming more selective over specific funds, “whereas if you scroll back six or seven years ago, it was a much more favourable fundraising environment”.

However, some within the industry suggest that the appetite for European direct lending is not solely down to investors looking beyond the US but also reflects the market becoming better understood.

For direct lending, and private credit more generally, the US has always been ahead of Europe, with a more mature and established market that has often been favoured by investors. Yet that sentiment is starting to change.

Bill Ammons, partner and portfolio manager at AlbaCore, notes that the previous negative perception of Europe from the US in particular “has changed, where people have seen the volatility in the US, whether that is in the direct lending market or the political environment, and that has made Europe a more attractive place to invest, which has accelerated over the past year”.

“From a structural perspective, Europe has become much more understood,” adds Chowrimootoo. “There has been a global rebalancing, driven by global institutional investors, shifting away their exposure from the US and private equity.”

Read more: Managers hunt for software winners and losers amid AI panic

The deployment challenge

Despite European direct lending gaining increased interest from institutional investors, it continues to have its own challenges. The challenges persist in deployment, with some of the top deals on the continent experiencing high levels of competition.

“The big question on my mind is will the managers be able to put the capital in the ground as prudently as in the past,” said Fabian Körzendörfer, partner within the private debt research team at Stepstone. “Specifically, GPs that have raised funds that are slightly larger than previous iterations.”

Chowrimootoo explains that Hayfin had already deployed 50 per cent of commitments at the time of its final close within European middle-market and upper-middle-market businesses, with that figure now more around the 65 per cent mark.

However, a sluggish merger and acquisition (M&A) environment is limiting deployment opportunities for European direct lenders.

Recent research by PitchBook suggests that deal volumes this year are still 29 per cent below 2025 levels. While volumes are starting to recover, there is overall a smaller pool of transactions for lenders to deploy into, creating increased competition.

There is currently a “bifurcation in the European market”, explains Patrick Marshall, head of private credit at Federated Hermes, which invests in mid-market businesses on the continent. Within Europe some businesses are extremely popular and can get relatively cheap financing, while others are not, and are struggling to get any sort of financing.

“If a business is in a good sector of the economy, and it has performed well, you will see very aggressive terms coming out,” says Marshall. “If a business is in an unfashionable sector of the economy, or has got history to it, it’s just not being able to finance at all.”

“There’s so much money chasing for so few deals, that, in effect, people are coming in very aggressively,” he adds.

Greg Betz, head of direct lending at Investec, suggests the same phenomenon: “There is quite a bifurcated market with extremely competitive terms around the strongest assets. And a lot less interest in the perceived slightly weaker businesses.”

Not all bad news

Nevertheless, despite the increased focus on Europe, the US remains the largest market for private credit, accounting for 73.1 per cent of total capital raised within private debt overall this year, while Europe accounts for 22.4 per cent, according to PitchBook data.

Within direct lending, fundraising is also strong, though it has shifted very much towards institutional capital since the retail pullback. Churchill Asset Management, for example, took in $16bn (£11.7bn) for its North American middle market senior lending strategy this year, while Crescent Capital took in $10.8bn for its US lower-middle-market strategy.

Alongside this, despite the volatility experienced in US direct lending, managers note that pricing has widened in certain parts of the market.

Redemptions from US retail investors in BDCs have prompted some larger alternative managers focused on this investor base to pull back from pursuing bigger deals, causing prices to widen.

“Now there has been a pull back from those players, it is requiring more lenders, and that last dollar really matters on those big deals,” explained an industry source. “So, we have seen the larger deals priced wider.”

Shannon Fritz, deputy chief investment officer at Antares Capital, noted that “the market is seeing some correction, and we think it is a good time deploy”.

Overall, it is clear that despite the pullback from direct lending by certain investors like those in the wealth channel, there are new opportunities in other regions of the direct lending market.

For European GPs, it’s a positive shift as they can attract more capital – a trend that’s set to continue over the next year. But they need to ensure they remain disciplined as competition grows and the amount of dry powder dedicated to the region increases.