The return of the PE exit – What this means for Acquisition Finance in the UK Mid-Market

For much of 2022 to early 2024, UK mid-market private equity exit activity slowed. Rising rates, a widening bid-ask spread between buyers and sellers, and volatile debt markets made sponsors reluctant to bring portfolio companies to market, resulting in extended hold periods and a growing backlog of aged assets sitting in fund portfolios beyond their typical five-year hold horizon. The UK mid-market is, however, now seeing a genuine pickup in exit activity, namely, secondary buyouts, trade sales, and a resurgence of sponsor-to-sponsor deals. This article considers what the return of the PE exit means for acquisition finance: how debt is being structured on the buy-side of these deals, how vendors and their lenders are approaching exits, and what this shift means for banks, challenger banks, and direct lenders competing for mid-market mandates.

Why exits Are returning

Several factors are converging to unlock mid-market exit activity:

1. Pricing convergence. After a prolonged period where sellers anchored on historic (higher) valuations and buyers priced in higher cost of debt, a narrowing of that gap has made deals executable again.
2. LP pressure for distributions. Limited Partners, having experienced several years of subdued distributions relative to capital called, are pushing General Partners harder to realise assets, particularly ageing fund vintages approaching the end of their investment life.
3. Reopened acquisition debt markets. Both bank and direct lending markets have normalised pricing and, critically, are once again willing to underwrite acquisition debt at leverage multiples that make sponsor-to-sponsor and trade transactions viable, rather than requiring buyers to fund a much larger proportion of the purchase price with equity.
4. A more realistic view of EBITDA. Portfolio companies that have now traded through a genuine period of cost inflation and rate rises present cleaner, more “tested” EBITDA to prospective buyers and their lenders than businesses being sold on 2021-style forward projections.

What this means for buy-side acquisition finance

Renewed competitive tension between banks and direct lenders

As deal volume increases, competition to arrange the acquisition debt for mid-market buyouts has intensified again. UK clearing banks and challenger banks together with more specialist mid-market players and challengers are competing directly with an increasingly crowded field of direct lending funds for mandates in the £20 million–£150 million debt quantum range that characterises much mid-market buyout financing. This competitive tension is, in practice, compressing margins and loosening some terms (covenant headroom, leverage multiples) relative to the more conservative underwriting seen in 2022–2023, though not yet back to 2021 levels.

Leverage multiples normalising, but selectively

Sponsors bidding for mid-market assets are generally able to access higher leverage than was available eighteen months ago, but underwriters remain selective: businesses with resilient, recurring revenue (software, healthcare services, business services) are attracting leverage of 4.5–5.5x EBITDA from direct lenders, and correspondingly lower senior leverage from banks, whereas cyclical or consumer-facing businesses continue to see more conservative multiples and tighter structuring.

Structuring: unitranche remains dominant, but banks are clawing back share

Unitranche direct lending structures (a single blended senior tranche provided by a fund, avoiding the need for separate senior/mezzanine tranches) remain the default structure for UK mid-market sponsor-backed buyouts, prized for speed of execution and certainty of funds in competitive auction processes. However, as banks re-engage with the market, “bifurcated” structures combining a bank-provided senior revolving credit facility (for working capital) with a direct lending term loan are becoming more common again, allowing sponsors to access bank ancillary products (hedging, cash management) while retaining the flexibility of a fund-provided term facility.

Vendor due diligence and “bankability” as a differentiator

With more assets coming to market simultaneously as the exit backlog clears, sell-side advisers are placing greater emphasis on vendor due diligence packages that specifically address bankability, namely, clean, well-supported EBITDA, clear working capital analysis, and quality of earnings reports prepared to a standard that acquisition finance lenders can rely on with minimal further diligence. Assets that come to market with a robust, lender-ready information package are executing faster and, in a competitive process, are attracting more aggressive underwriting from lenders keen to win the mandate.

What this means for exit-side considerations

Refinancing existing acquisition debt as part of the exit

For the exiting sponsor, a sale typically triggers repayment of the existing acquisition facility (via change of control provisions in the facility agreement), meaning the incoming buyer’s new debt package effectively refinances the target’s existing capital structure.

Roll-over and continuation structures

Where a full exit is not achievable at a price the incumbent sponsor is willing to accept, mid-market sponsors are increasingly using continuation fund structures, transferring the asset from an existing fund into a new vehicle, often with the incumbent management team and some existing LPs rolling their position as a partial liquidity solution. These transactions typically involve refinancing existing acquisition debt alongside the continuation transaction, and require acquisition finance lenders comfortable underwriting to a business with a long operating history rather than a fresh buy-and-build thesis.

Earn-outs and vendor loan notes bridging valuation gaps

Even as pricing converges, some residual valuation gap between buyer and seller expectations remains common in mid-market deals. Vendor loan notes (deferred consideration structured as loan notes) and earn-out mechanisms are being used more frequently to bridge this gap, which has knock-on implications for acquisition finance lenders, who need to consider the interaction between senior/unitranche debt and any deferred consideration in their leverage calculations, and will typically require deferred consideration to be structurally and contractually subordinated to the new acquisition debt.

Practical implications for mid-market participants

For sponsors buying assets

1. Engage acquisition finance lenders (both banks and direct lenders) early in the process, ideally before final bids, to secure competitive, certain terms and strengthen the credibility of an offer in a competitive auction.
2. Consider a bifurcated bank/direct lending structure where ancillary banking products are required, rather than defaulting to a pure unitranche solution.
3. Ensure vendor due diligence and quality of earnings reports are lender-ready, minimising execution risk and supporting more aggressive underwriting.

For sponsors selling assets

1. Prepare a robust, lender-ready information pack well ahead of launching a process, recognising that bankability is now a genuine differentiator between competing sale processes in a busier market.
2. Consider the interaction between existing facility change-of-control provisions and the sale timetable, engaging incumbent lenders early regarding any consent or repayment mechanics required on completion.
3. Where full exit value is not achievable, evaluate continuation fund or partial realisation structures as an alternative to a full sale, factoring in the acquisition finance implications of refinancing existing debt as part of any such structure.

For lenders

1. Mid-market competitive dynamics mean both banks and direct lenders need to move quickly and decisively to win mandates in a reopening exit market, while maintaining underwriting discipline given the memory of the 2019–2021 vintage’s performance through a difficult rate cycle.
2. Structuring flexibility (bifurcated facilities, super-senior RCF tranches alongside unitranche term debt) is likely to be a key differentiator in winning mandates from sponsors who want both speed of execution and access to ancillary banking products.

Summary

The return of PE exit activity in the UK mid-market is a genuinely positive development for acquisition finance providers after a prolonged period of subdued deal flow. Direct lenders remain the default choice for speed and flexibility in unitranche structures, but banks and challenger banks are re-engaging with real competitive intent, particularly through bifurcated structures that combine bank ancillary products with fund-provided term debt.

For sponsors on both sides of a transaction, and for the lenders financing them, success in this market increasingly depends on early engagement, robust and lender-ready information, and a clear-eyed view of the leverage and structuring terms genuinely available in today’s market.

How we can help

Thomson Snell & Passmore’s Banking & Finance team advises sponsors, businesses and lenders on the financing arrangements supporting acquisitions, exits and refinancing’s. With experience across acquisition finance, leveraged finance, private equity transactions and secured lending, we help clients navigate complex funding structures, manage transaction risks and achieve their commercial objectives.