The question of how the private debt market is adapting to the geopolitical risk and the current volatile economic environment, was one of the key topics of conversation at the Funds Europe High-Level Dialogue on Private Markets held in Luxembourg recently.
Independent consultant William Gilson noted that private debt managers, shaped by lessons from the Global Financial Crisis and subsequent market upheavals, have remained steadfast in their adherence to fundamentals. “They’re really focusing on the sectors they like and on idiosyncratic risk,” he said. Rather than shifting dramatically in response to current geopolitical risks, Gilson emphasized that the approach has been one of continuity – carefully selecting entities based on deep expertise and sectoral familiarity.
While geopolitical considerations such as tariffs may now feature in diligence processes, Gilson doesn’t see a sweeping departure from strategies that have defined the last five years.
Nick Tabone, a Deloitte partner, struck a more cautionary tone, suggesting that beneath the surface, the health of many existing loan portfolios may be more fragile than they appear. “There’s a section of non-performing loans [NPLs] that will come about,” he warned, arguing that banks are moving more slowly than expected in addressing underperforming credit.
Despite this, Tabone expressed confidence in the readiness of the private debt market to absorb these troubled assets. A “significant amount of funds” have already been raised specifically for this purpose, he explained, signalling a robust appetite for distressed opportunities – particularly in Europe.
Gilson, however, offered a counterpoint, suggesting that while some stress may be visible in consumer credit like mortgages and car loans, there hasn’t been a major uptick in corporate NPLs. He did concede that some specialist managers – like those focusing on distressed debt– might find this environment more favourable, as a broader pool of troubled assets finally becomes available.
The Refinancing Wall Approaches
Looking ahead, both Tabone and others raised concerns about a looming wall of refinancing. A large swathe of corporate debt is set to mature between 2026 and 2027, creating pressure for renegotiation, particularly as interest rates fluctuate.
“There’s a lot of negotiation starting with lenders and banks to refinance on more favourable terms,” Tabone said. This dynamic could present both risks and opportunities for private debt investors, especially those positioned to offer flexible capital solutions when traditional lenders retreat.
KPMG partner Jonathan De Hemmer Hamborg highlighted the core advantage that’s driving private debt’s growth: flexibility. Unlike standard bank products, private debt structures can be quickly tailored to address specific risks and borrower needs.
“You can play a little bit more with the pecking orders and the exact events that could happen,” he said, adding that the asset class has in certain sectors outperformed its equity counterparts recently —most notably real estate.
This agility is especially valuable in volatile environments, allowing private debt providers to fill the financing gap left by increasingly risk-averse banks.
A Structural Shift in Capital Markets
The evolving role of private debt fits neatly within broader regulatory ambitions in Europe with moderator Mark Latham noting that the market appears to be doing exactly what the European Commission has long hoped for: reducing dependence on bank lending and moving toward a more U.S.-style capital markets union.
M&G Europe chief executive Micaela Forelli echoed this, pointing out that while Europe still lags the U.S. – where 70% of lending originates from private sources versus just 30% from banks – the continent has made significant progress. “Europe was at 10% just a decade ago,” she said, and this figure has steadily climbed as both demand and supply in the private debt market accelerate.
Forelli also noted a record issuance of European high-yield bonds, citing rising interest in both private and public debt markets. This dual momentum is giving borrowers more choice, especially those with strong balance sheets. However, for more leveraged firms, private lending remains an essential – and often more accommodating – option.
As investor sophistication grows, so too does scrutiny on private debt managers’ ability to handle stress scenarios. “You now see due diligence processes that place a lot more emphasis on managers’ restructuring experience and sector knowledge,” said Gilson.
Stephane Pesch, chief executive of the Luxembourg Private Equity and Venture Capital Association, reinforced this sentiment, citing a KPMG study from 2024 showing that private debt funds now manage more than €510 billion in Luxembourg alone – making it one of the fastest-growing asset classes in Europe.
Pesch praised the sector’s maturity, noting that fund managers are increasingly implementing rigorous covenants, tight structuring, and thoughtful collateralization strategies.
“This market may be “young”, but it’s ultra-mature already,” he said. “It’s very institutional and has really become a credible alternative for SME and real economy financing.”
Looking to the U.S. for inspiration, Tabone pointed to a nascent trend: partnerships between traditional banks and private debt managers. These collaborations allow banks to leverage their client base while tapping into asset managers’ structuring capabilities. “It’s starting in the U.S., but we haven’t seen it in Europe yet,” he said, attributing the lag to European banks’ more conservative stance.
Still, if the European market continues its current trajectory, such partnerships may be on the horizon—marking yet another milestone in private debt’s evolution.
A Market Coming of Age
There is currently estimated to be around $1.7 trillion of unspent capital “dry powder” in the coffers of general partners and this led panellists to discuss whether the backlog is creating problems for the industry and whether GPs should make changes to their portfolio-building strategies.
While such a staggering figure might trigger fears of inefficiency or mismanagement, panellists argued that the backlog reflects discipline, not dysfunction.
“It’s not a problem in itself,” said Pesch, acknowledging the long-standing debate over whether that number is accurate. “That capital is waiting to find the right target,” he said, emphasizing that the key to deploying it lies in “entry pricing and asset quality.”
Pesch’s comments highlight a prevailing view: dry powder isn’t idle due to negligence or poor planning, but rather due to increased selectivity in a crowded and competitive marketplace. With high valuations, risk aversion, and fierce competition, GPs are facing intense pressure to allocate capital carefully, not quickly.
A Symptom of Growth, Not Failure
Meanwhile, Tabone offered a broader industry context, pointing out that the volume of dry powder is in part a reflection of private markets’ ongoing expansion. “Allocations from pension funds and insurance companies have increased,” he noted, adding that although these allocations still make up a relatively small proportion of institutional portfolios, their steady growth has helped fuel the accumulation of dry powder.
He also observed that the rise in dry powder is not only about inflows but also about the structure of the market itself. “There are more funds, more asset managers,” Tabone said, but not all of them are successful. “Some are not able to raise a second fund,” he explained, noting that these firms often face consolidation or closure, further contributing to the uneven deployment landscape.
For many around the table, the key issue was not the existence of dry powder but the expectations surrounding it. Pesch warned against applying liquid-market pressures to private capital. “I’d honestly prefer that they take more time and have something which really goes in the direction they had expected,” he said, rather than rushing to invest in mediocre opportunities.
De Hemmer Hamborg echoed this sentiment but acknowledged a tangible impact: “There are more parties bidding for the quality assets,” he noted. The result is a bifurcation in deal activity – top-performing and distressed assets are seeing action, while mid-range companies are struggling to attract attention. “People don’t necessarily want to realise money that’s struggling a bit more,” he said, adding that this dynamic has supported a recent uptick in valuations, particularly over the past six months.
The Bottleneck of Exits
While capital inflows have increased, deal exits have lagged. “The problem is in private equity,” moderator Mark Latham summarised, citing recent commentary in the Financial Times and the Economist. “GPs can’t return money to their investors,” he said, pointing to bottlenecks in monetising existing investments as a key cause of the dry powder build-up.
This inability to recycle capital through exits affects more than just headline figures. “One impact for fund managers is that their fees might turn off at a certain point,” said Gilson, noting that some managers continue to oversee assets without drawing management fees, all while trying to maintain investor confidence for future fund vintages.
Gilson added that some of the dry powder may not be as “dry” as it seems. “There’s clearly a large amount that’s never going to be used because fund life ends,” he said, adding that some of it is also double-counted – capital that remains committed but is essentially paused while earlier investments mature or “grow into their valuation.”
The Feedback Loop
According to De Hemmer Hamborg, the dry powder dilemma is part of a self-reinforcing cycle. The volume of available capital affects deal activity, which affects exits, which in turn affects fundraising – and back again. “It’s all linked,” he said. “It would be interesting to see, when more deals are being done, how that will impact the amount of dry powder.”
De Hammer Hamborg even suggested a paradox: more deal activity could actually increase dry powder, at least temporarily. “If you’re getting more money back and you don’t immediately reinvest it, it just flows back into the system,” he said.
This idea – of dry powder as a fluid, not static, metric – helped reshape the narrative. Rather than being a buildup of stuck capital, much of it may simply be capital waiting for the right moment to re-enter the market.
Back to Basics
The discussion also touched on whether the pressure to deploy quickly undermines the fundamental mission of private equity – building value in portfolio companies over time.
Latham suggested that perhaps the current environment would push the industry “back to its core aims,” focusing less on short-term gains and more on operational improvements and long-term value creation.
Pesch supported this idea, noting that GPs should not be judged solely on how fast they invest. Instead, quality and strategy should guide decision-making. “You have time to build it up,” he said, advocating for discipline in a market where the best returns are often realized over years, not quarters.
Scale and Strategy Matter
As GPs navigate this new reality, being either large and multi-strategy or small and hyper-specialized may become the key to success. Pesch emphasized the importance of thematic differentiation and deep local expertise. “You can distinguish yourself by being a big player with multiple strategies or by being a highly specialized reference in a specific segment,” he said.
This dual-path approach may explain why consolidation is accelerating in the industry. Tabone pointed out that many newer or underperforming asset managers are being absorbed by larger firms with greater resources and investor trust. “It’s a slow death for some,” he said, “but others are getting sucked up into bigger platforms.”
A Measured Outlook
Tabone provided a data-driven perspective: $1.7 trillion in dry powder, when compared to an estimated $14.3 trillion in private markets’ total assets under management (AUM), accounts for just around 12%. “It’s not that alarming,” he concluded. “You need a bit of firepower at some point in time.”
And therein lies the consensus: dry powder is not an existential crisis, but rather a symptom of a maturing and increasingly complex market. For GPs, the challenge is not just to deploy: it’s to deploy well. And in the private capital world, quality still trumps speed.
In the first quarter of 2025, global private equity exits tallied an impressive $186.6 billion across 402 transactions, signalling strong value realisation. Yet beneath the surface, the picture is more nuanced.
While exit values rose, the number of deals declined, and dealmakers are forecasting a continued slowdown. This tension between rising valuations and falling exit activity has prompted a shift in how general partners (GPs) manage liquidity—raising both innovation and concern.
Increasingly, private equity firms are turning to alternative liquidity solutions, notably net asset value (NAV) lending and continuation funds, as traditional exit pathways remain constrained. These mechanisms can offer GPs more time and flexibility, but they also raise serious questions about transparency, potential over-leverage, and investor alignment.
Betting on the Future: NAV Lending
Of the two strategies, NAV lending is the more contentious. It involves borrowing against the value of the remaining assets in a fund to generate liquidity — essentially, betting that those assets will appreciate or exit in the future at a strong price.
“I think it’s a concern,” said Tabone, who expressed unease over the growing use of NAV lending. “You’re betting on future prices,” he noted, contrasting it with more traditional forms of short-term fund financing like capital call bridge loans. Unlike those, NAV loans are not backed by incoming commitments, but rather by the expected realization of assets still in the portfolio.
While NAV lending has not yet overtaken mainstream fund finance, it is gaining traction. “It’s becoming more and more common,” Tabone observed, particularly as managers prepare to launch new vintages and need to demonstrate liquidity or return capital to investors.
For now, he noted, NAV lending has built-in limits. “There’s a threshold that’s not passed… it’s not on the full size of the fund,” he said. However, that safeguard is no guarantee of prudence. The real issue, according to Tabone, is transparency. “As long as people are transparent, it should be fine,” he added, acknowledging that investors ultimately bear the cost of such financing—though in exchange, they may receive distributions more quickly.
Continuation Funds: Extension or Escape?
A less risky, but equally delicate, alternative is the use of continuation funds. These allow GPs to roll high-quality or long-hold assets from a maturing fund into a new vehicle — often with new investors, while giving existing ones the option to stay or exit.
Pesch described these vehicles as part of a broader “liquidity evolution.” While they can be valuable tools for preserving upside in assets that are not yet ready for exit, he warned that they should not be misused. “It should facilitate the value creation and strengthen the portfolio company, never be used to mask liquidity problems,” he said.
Pesch emphasized that private equity is evolving from “just financial structuring and an extensive use of leverage” to a more operationally engaged model. Continuation funds, if used properly, can support that shift—buying time to execute on value-creation strategies. But he cautioned that any use of alternative liquidity tools must come with “very transparent” communication and an avoidance of misalignment of interests.
That misalignment is a real risk, especially when fees, valuations, and investor incentives don’t neatly align. If some investors want to cash out while others prefer to hold on, it can create friction and complexity. “You should never find yourself in a misalignment of interest,” Pesch reiterated.
Investor Trust on the Line
For De Hemmer Hamborg, the continuation fund model also holds promise — but it comes with strings attached. “It’s quite an attractive proposition,” she said, especially for firms that already enjoy strong investor loyalty across fund vintages. By rolling over quality assets into new vehicles, asset managers can avoid scrambling for similar investments in new funds and “capitalize on the work that’s already been done.”
However, De Hemmer Hamborg was quick to flag the ethical and structural landmines. The reuse of assets between funds, the entry of new investors mid-cycle, and selective liquidity options all present scenarios where conflicts of interest can easily arise. “You need to tread very, very carefully,” she said, emphasizing the importance of GPs maintaining a neutral role.
Hamborg warned that straying from the fund’s original mandate can be “tricky.” Deviating from the prospectus or private placement memorandum “can be done with proper governance and process,” he acknowledged, “but it’s difficult to keep everybody happy.”
Luxembourg in the Middle
Moderator Latham questioned whether NAV lending and continuation funds were taking root in Luxembourg one of Europe’s key fund domiciles. While still considered niche, there is clearly growing appetite among Luxembourg-based bankers and fund managers.
“There is some appetite rising,” confirmed one participant, who noted that NAV lending is increasingly being handled locally rather than outsourced to foreign affiliates. “It shows the maturity of Luxembourg,” they added, pointing out that even syndicated structures are now on the table as smaller banks look to partner with peers to offer such financing.
This trend highlights Luxembourg’s transition from a passive domicile to an active centre of financial structuring. But with that evolution comes responsibility — especially as the global fund industry grapples with questions of leverage and liquidity.
A System Under Pressure?
While some argue that these tools are necessary adaptations to a changing market, others worry they may be used to paper over structural challenges. “We’re not seeing the same volume of exits,” Latham noted, referencing industry commentary that suggests private equity firms are struggling to return capital at scale. That, in turn, places pressure on fundraising and future vintages.
If used too aggressively, strategies like NAV lending and continuation vehicles could undermine the very principles that private equity is built on: long-term value creation, prudent leverage, and strong alignment between fund managers and their investors.
Proceed with Caution
The panellists agreed on one point: these tools are not inherently problematic—but they must be used wisely. Transparency, investor alignment, and ethical use of leverage are non-negotiables. As the industry adapts to a post-2020s reality of slower exits and higher scrutiny, the use of NAV lending and continuation funds may become a permanent feature.
But whether they will be seen as responsible tools for flexibility or shortcuts to mask deeper issues depends entirely on how they’re deployed.
For now, as private equity stands at a crossroads between innovation and overreach, the message from insiders is clear: **be careful not to trade liquidity for trust**.
After years of riding high on global capital flows, U.S. markets are showing signs of strain, with a growing number of asset managers shifting their focus toward Europe —a region once seen as stodgy, overregulated, and fragmented.
But with trade tensions escalating, a ballooning U.S. deficit, and unpredictable political leadership, the conversation at a recent industry roundtable centered on a pressing question: is this just a tactical pause—or the beginning of a structural pivot?
From Exceptionalism to Erosion
“The assets and the liquidity are still in the U.S.,” noted Gilson, underscoring that American capital markets continue to be unmatched in scale. “So to me, it’s just an asset allocation decision at this point.” But as the discussion unfolded, it became clear that this rebalancing may reflect deeper concerns.
Forelli pointed to rising uncertainty in U.S. macroeconomic and political policy. “The administration gives signals that are not consistent,” she said, referencing erratic tariff policy and unclear trade strategies. “In this uncertainty, investors don’t like it very much.”
In contrast, Europe is increasingly perceived as more stable and under-allocated. “There are structural shifts that call for adoption of broader market strategies in Europe,” Forelli added, highlighting infrastructure investment, climate transition goals, and regulatory alignment with long-term capital deployment as key drivers.
Evidence of a Strategic Shift
While the pivot may still be early-stage for private markets, Forelli pointed to telling signs: “Just this month, we announced a new partnership with a Japanese life insurance company that took a 15% stake in our firm,” she revealed. “They had significant allocations to U.S. asset managers and now want to diversify—also into Europe.”
That sentiment isn’t isolated. “It seems more than a transition,” she concluded. “It seems structural… a rebalancing.”
Some of that sentiment is even visible in currency markets. “The dollar just hit its lowest point in 50 years, year-to-date,” she noted. For Forelli, this reflects the reality that global investors are pulling back from U.S. assets.
Europe’s Moment of Reinvention?
Tabone took the point further, arguing that this isn’t just about U.S. missteps — it’s about Europe stepping up. “There’s a once-in-a-lifetime shift happening in European policy,” he said. “For 20 years, Europe has just regulated, regulated, regulated. But now there’s a will to change. It’s happening.”
This shift, Tabone suggested, is not moving at breakneck speed, but its direction is clear. “European authorities want money to come in. They’re signalling that Europe is now a business-friendly place—which wasn’t the case a few years ago.”
The timing is significant for Luxembourg. Growing US unpredictability — on tariffs, taxation and international alliances—is further accelerating Luxembourg’s appeal as a fund jurisdiction. “What’s happening in the US is helps that,” said Tabone. “Like Brexit, it’s an accelerator. It’s not the core reason but it pushes the shift forward.”
Turning Risk into Opportunity
From another angle, Pesch saw opportunity in the uncertainty. “Transforming U.S. risks into European opportunities could finally give Europe the role it should always have had,” he said. From defence agreements to economic strategy, Pesch argued that the EU is making moves that may reinforce its position as a global investment destination.
“The number one private equity players are still American,” Pesch admitted. “But if investing in the U.S. becomes too complicated, too erratic, investors will start looking elsewhere — and Europe is a natural alternative.”
The shift is also being noticed by American GPs themselves. “We’ve heard from U.S. private equity firms and VCs that they now find the European market attractive,” Pesch shared. “That’s a positive sign — and not something you heard five years ago.”
More Than a Capital Reallocation
De Hemmer Hamborg provided a broader geopolitical lens. “Rather than simply being a reallocation from the U.S. to Europe, I think we’re seeing the next phase of globalization,” he said. In his view, the real opportunity isn’t just capital flows—it’s resilience.
“With rising uncertainty, investors are looking for businesses with strong supply chains, backup systems, and diversified sourcing,” he said. Europe, with its predictability and multi-lateral trade relationships, is increasingly well-positioned to host those businesses.
De Hemmer Hamborg also cautioned that U.S. political risk remains highly unpredictable. “We have political candidates—on both sides—who would not be good for balance,” he warned. “Politicians can quickly change the investment landscape.”
A New Investment Geography?
While shifts in public market flows are easier to track, changes in private market exposure take longer to see—and even longer to confirm. But the panel agreed: we’re not just looking at a blip.
“This is not a short-term reaction,” Tabone said firmly. “It’s a medium-term rebalancing at the very least.”
Others nodded in agreement. From currency devaluation and tariff unpredictability to fragmented policy signals and mounting deficits, the U.S. is still an economic giant—but one with growing vulnerabilities.
Meanwhile, Europe is finding its voice — whether through sustainable infrastructure, coordinated policy initiatives, or a growing willingness to welcome foreign capital.
The Bottom Line
For decades, U.S. markets have been the default destination for global investors. But the events of the past few years — from pandemics and populism to trade wars and fiscal instability — have chipped away at American exceptionalism.
At the same time, Europe — often dismissed as overregulated and politically sluggish — is showing signs of a quiet resurgence. Investors are noticing, and capital is beginning to follow.
Whether this pivot becomes permanent will depend on what happens next in Washington, Brussels, and Beijing. But one thing is clear: Europe is no longer just the diversification sleeve. It’s becoming a destination in its own right.
The panel:
Jonathan De Hemmer Hamborg, partner KPMG Luxembourg
Forelli, CEO M&G Europe
William Gilson, certified director
Stephane Pesch, CEO Luxembourg Private Equity and Venture Capital Association (LPEA)
Nick Tabone, partner Deloitte Luxembourg
Mark Latham, deputy-editor, Funds Europe (moderator)
