Private Capital Finance: Outlook for 2026

As the private capital finance landscape and, in particular, the private credit market, continues its rapid evolution, what key themes will define the 2026 horizon? Drawing on our expertise across different financing markets and our experience across jurisdictions, in this blog we introduce our insights on the trends we believe will prove most impactful for our clients in the year ahead.

1. The continued evolution of private credit

   2025 continued to confirm the clear market trend: direct lending is a fully-fledged alternative to broadly syndicated loan financing and high yield bonds, continuing its foray into deals that used to be the preserve of the syndicated debt and high yield markets. Meanwhile, roles have begun to reverse as underwriting banks continue to look to re-gain market share, returning with a renewed risk appetite to underwrite for distribution, and establishing their own dedicated direct lending arms. Conversely, some direct lenders are now signaling a more cautious stance. For sponsors, the response has been pragmatic: keep both doors open. Our private equity clients are routinely running dual-track financing processes, having parallel conversations with private lenders and underwriting banks for loan and/or high yield financing. Direct lending has now cemented its place in the sponsor financing playbook, but 2026 is shaping up as the year underwriting banks fight back, with perhaps a greater risk appetite than they had in the last few years in order to compete with direct lenders and to win back market shares. 

2. Banks and funds: from competition to collaboration 

   Yet even as competitive dynamics sharpen in the loan and high yield markets, another trend is the increasing convergence between traditional banks and private credit funds. We expect this to continue in 2026 as banks and funds increasingly view the other as strategic partner rather than competitor. Partnership will continue to take any number of forms – formal joint ventures and other affiliate structures, co-lending platforms, referral or origination agreements, to name a few approaches seen to date – and present opportunities to optimize capital efficiency and extend the scope and breadth of financial solutions available to borrowers. With regulatory pressures and the ongoing shift of market share toward private credit expected to continue, partnerships in the form of larger, integrated platforms will demonstrate the benefits of scale and systemic processes around underwriting. More broadly, we expect terms and financing processes to continue to converge across both markets as the inherent competition among banks and funds goes hand in hand with their increasing collaboration. The asset-based lending space, for example, has been defined by these collaborations in the last year - read more below. In addition to partnerships focusing on origination, we expect to see an increase in portfolio sales and the continued growth of synthetic risk transfers permitting banks to shift risk from their balance sheets to private credit investors. 

3. The private credit focus on asset-backed financing

   The private credit market is undergoing a progressive shift toward asset-backed and asset-based financing (ABF). Investors are increasingly gravitating toward ABF for compelling economic reasons. This is mainly due to asset diversification, high asset quality and the often self-liquidating nature of assets, which make ABF transactions fundamentally decoupled from the corporate credit cycle and better performing during economic downturns. This structural resilience directly addresses investors' growing concerns about leveraged borrower health – with interest coverage ratios falling sharply and payment-in-kind facilities proliferating across direct lending portfolios.​ Further, several factors, including higher barriers to entrance compared to direct lending due to the complexity of these structures, contribute to expected higher spreads. We expect this trend to continue in 2026, in a collaborative ecosystem where credit funds will continue to partner with banks in the ABF space through portfolio sales and origination across multiple asset classes and transaction structures.  As it moves from a niche to a cornerstone of private credit portfolios, ABF is on course to challenge direct lending's long-held dominance. 

4. The evolving toolkit: bespoke capital solutions

   We expect 2026 to bring continued activity in the capital solutions space, as continuing demand from borrowers for bespoke capital solutions intersects with the broader trend within private credit of investment strategy diversification. In recent times, we have witnessed increased demand for capital from businesses that, while performing, have features that necessitate underwriting flexibility not offered by the traditional financing markets. Private credit, with its well documented ability to underwrite complexity and offer flexible solutions, has been the obvious provider of such capital. Managers with differentiated underwriting capabilities are looking to be rewarded with attractive risk-adjusted returns, ideally combining equity-like upside with debt-like downside protection. One such trend we expect to see continue is the issuance of payment-in-kind debt and hybrid capital, which has been used by shareholders to recapitalize businesses without diluting their ownership or increasing the businesses’ cash interest burden. One of the drivers behind this trend has been the extended asset holding periods seen during the latest phase of private equity’s market cycle, as private equity managers seeking to optimize exit timings have sought capital pending exit. Although short-term interest rates are now below their peak levels, we expect this trend to continue into 2026, particularly as businesses last financed during the zero interest rate era of 2020 to 2021 look to address debt maturities.

5. Growing traction of LMEs in Europe

   While liability management exercises (LMEs) have played a large role in the US debt market for over a decade, they have firmly established themselves in Europe, with deals involving companies such as Victoria, Hunkemöller, Selecta and Hurtigruten illustrating how swiftly US-style techniques are being adapted to local legal frameworks. European courts are now grappling with their first challenges to these structures, testing fundamental concepts such as abuse of rights, good faith and the prohibition of immoral transactions. The ongoing Hunkemöller and Selecta proceedings are emerging as pivotal test cases, with further litigation anticipated in 2026 and the prospect of long‑awaited judicial guidance. Concurrently, creditor co‑operation agreements (co-ops) – originally conceived to present a united front against LMEs – are themselves becoming targets of litigation, including on antitrust grounds, both in the US and in Europe as evidenced in the Altice USA, Optimum and Selecta cases. As such, we can expect that 2026 will see a rise in litigation surrounding LMEs in both the US (as private equity sponsors and companies seek to preserve access to existing flexibility in their debt documents by challenging creditor co-ops) and Europe (as new LME structures are tested for the first time across various local legal frameworks).

6. Debt-to-equity and debt-to-hybrid swaps in the European structuring playbook

   Deleveraging European balance sheets – particularly in Germany and France – will increasingly require creditors to move beyond simple amend-and-extend approaches and embrace bespoke debt-for-equity and debt-for-hybrid solutions. Drawing from recent cross-border restructurings, we observe sponsors and private credit funds deploying sophisticated capital structures that successfully reconcile balance sheet reduction with the need to preserve upside incentives. These innovative solutions encompass: (i) virtual profit-participation instruments and contingent value rights designed to provide creditors with equity‑like upside while mitigating (in the case of Germany, for example) equitable subordination risk; (ii) PIK and preferred equity instruments at holdco level which deliver non-cash coupons and strategically reshape priority without impacting operating liquidity; and (iii) earn-out style mechanisms aimed at re‑engaging out-of-the-money sponsors and management around defined value triggers. We anticipate that, in 2026, these hybrid structures – often stapled to reinstated senior debt and implemented across multiple jurisdictions – will define creditor-led solutions in the European mid- and large-cap markets.

7. Influx of insurance and retail capital

   The influx of insurance and retail capital is reshaping the private credit landscape, fueling an expansion in investment strategies and enabling certain private credit managers to scale to levels that are unprecedented outside the banking system. Private credit, with its ability to provide assets with long-duration, low volatility and stable yield, naturally attracts insurance capital. With the name of the game in private credit being scale, many private credit managers have expanded their deployment capability by bringing in more insurance capital, whether through insurance company ownership, partnership or management arrangements – we expect to see this trend continue. Another expanding source of capital is the retail investor base. Through structures like evergreen funds and private credit ETFs, individual investors’ access to private credit is growing. These vehicles offer investors the benefits of periodic liquidity, whilst also providing private credit managers with a more diversified investor base to continue to drive growth. 

8. Large scale investment grade debt and data center financing 

   Data center financing in different forms (including ABS and CMBS transactions, and project financing) has been on the rise for the last five years in the US and more recently in Europe and Asia. In 2025, the unprecedented data center expansion to meet AI demands saw different players approaching the financing market: investment-grade hyperscalers moving away from funding massive new developments entirely on their balance sheets and instead partnering with private capital through sophisticated financing structures. This shift is exemplified by recent transactions involving big tech companies that combine joint venture mechanics with special rights and the issuance of investment grade rated notes. Looking to 2026, we expect this model to become more common and to be an engine for both (i) a broader array of investors, including pension plans and more targeted participation from infrastructure funds through both increased activity and new, dedicated funds, to enter this space, attracted by potentially long-term opportunities with premier data center operators and (ii) hybrid financing forms to become more widely available for investment grade corporate entities even beyond the data center space.

9. New frontiers for private credit 

   2025 saw private credit enter new sectors and we expect this to continue, both with larger players diversifying beyond traditional areas such as tech and healthcare, and the establishment of smaller, dedicated funds. Sports has become a scalable and highly sophisticated asset class, with reliable, growing revenue streams from media rights, advertising and expansion of sports betting, and areas of untapped monetization potential (for example, women’s sport). Private credit can provide bespoke financing for stadium projects, franchise acquisitions and media rights deals. Meanwhile, with surging European budgets, defense is emerging as a strategic investment focus, although the sector’s long-term contracts and capped margins make operational efficiency – rather than maximizing growth – the priority. These evolving sectors offer opportunities, but navigating their complexities requires specialist expertise. With experience in both, we can help clients issue-spot and optimize transaction structures. 

10. Financing the 2026 IPO exits

    The private equity market is optimistic that 2026 will be the ‘year of exits’ after a period of subdued activity. Firms are keeping their options open as conditions for exit continue to improve, with many seeing IPOs as a key route. IPO debt facilities have historically been a bank driven market, but direct lenders may look to move into this space as they expand the range of their market activity. As public investors remain focused on leverage levels of the listed group, we expect holdco financings and margin loans to be valuable tools for private equity firms wanting to de-gear the listed entity while keeping overall leverage levels in the structure or to otherwise enable the private equity firms to further monetize some of their investments.

Look out for more in-depth commentary from us on these topics throughout 2026. To discuss how any of these trends may impact your business, please contact any of the authors or your usual Freshfields contact.