Boutique advisory firms face ongoing challenges as private credit remains a drag on middle-market mergers and acquisitions, according to a note from Deutsche Bank analysts published Friday.
Analyst Nathan Stein told clients that quantifying how frequently private credit appears in M&A financing is difficult due to inconsistent disclosures and the potential for multiple loans to be embedded within a single merger agreement. That ambiguity complicates efforts to precisely measure the footprint of private credit in dealmaking.
Deutsche Bank's analysts said the impact of direct lending - used in the note as a proxy for private credit - is most evident in smaller transactions. The report states that direct lending plays a far greater role in the middle market and below, a dynamic the bank argues helps explain why deal activity has been uneven across transaction sizes.
The analysts contrasted the continued lag in middle-market deals with the relative strength of large and mega strategic transactions, noting the latter are less reliant on debt financing. This divergence in financing dependence has contributed to a slower pace of sponsor-backed middle-market activity compared with larger strategic deals.
Deutsche Bank's findings include a specific estimate for leveraged buyouts under $1 billion: direct lending has represented 30-35% of the total transaction value for sub-$1B LBOs over the past two years. The bank describes that figure as likely conservative.
Looking at implications for equity investors, Deutsche Bank warned that elevated losses on private credit portfolios or rising fund redemptions could create an additional overhang on boutique advisory stocks. Those firms tend to depend more heavily on sponsor-backed, middle-market transactions than their larger peers, making them more exposed to disruptions in direct lending availability or performance.
The note highlights measurement challenges and market structure features rather than asserting a single causal factor for current deal dynamics, reflecting limited public disclosure around private credit use and the concentration of direct lending in smaller transactions.