Beyond bank loans: Alternative financing fuels German M&A

Despite three interest rate cuts from the European Central Bank in 2024, nearly three-quarters of respondents (74%) to a recent Ansarada and Mergermarket survey are expecting the cost of financing from major banks in Germany to rise over the next 12 months. Nearly one in four of all respondents expect them to increase substantially. 

This anticipated increase in borrowing costs explains why banks rank relatively low in terms of attractiveness for German M&A financing, with only 18% of respondents placing them among the top two preferred funding sources.

These insights have been gathered as part of our 2025 German M&A Outlook Report, developed in association with Mergermarket. The report takes the pulse of 50 corporate and private equity (PE) dealmakers’ headquartered in Germany and shares their sentiment of the market in 2024, while looking ahead to what’s in store for 2025.

The rise of private credit

According to the survey, dealmakers are increasingly turning to alternative financing sources, with private debt emerging as the most favored option, with 56% of respondents ranking it among the top two. This reflects the rapid growth of the private credit market in Germany, mirroring a global trend. 

In the first half of 2024, 52 of the 371 European private debt deals tracked by Deloitte were based in Germany, highlighting the increasing significance of this financing source.

Equity and other sources

Equity financing also holds significant appeal, with 48% of respondents placing it among the top two most attractive funding options. This includes both public and private equity sources.

Private equity, in particular, is poised for growth following a period of challenging market conditions. Fundraising for European buyout funds has remained strong, and with a significant amount of dry powder available, private equity firms are actively seeking investment opportunities.

High-yield bonds (34%) and cash (32%) are also considered viable financing options. The increasing popularity of high-yield bonds reflects a recovery in the European market, with issuance increasing significantly in Q2 2024. The emphasis on cash likely reflects a cautious approach by some respondents, given the current economic uncertainty.

Challenges to M&A financing

Tightening credit conditions and high interest rates are viewed as the most significant challenges to M&A financing in the next 12 months, cited by 66% and 54% of respondents respectively. Uncertain economic growth prospects, limited capital availability, and regulatory constraints also pose challenges to deal financing.

Sidebar: The rise of the data room

Virtual data rooms have become indispensable tools for M&A transactions. These platforms facilitate secure and efficient sharing of sensitive information between buyers and sellers.

Key features of modern data rooms include:

• AI-powered automation: Streamlines due diligence processes and enhances efficiency.

• Enhanced security: Robust cybersecurity measures, such as multi-factor authentication and digital rights management, ensure data integrity and compliance.

• Improved user experience: Intuitive interfaces and user-friendly features enhance ease of use for all stakeholders.

For respondents to our survey, AI automation and efficiency were the most important factors when selecting a data room. Ease of use and robust cybersecurity and data compliance also ranked highly.

What’s in store for 2025 

Looking ahead to 2025, while a volatile interest rate environment, economic uncertainties, and geopolitical tensions persist, the German M&A market is poised for increased activity. A majority of dealmakers anticipate a more dynamic market in 2025, driven by the continued growth of private equity investment, a focus on strategic acquisitions to enhance competitiveness and address supply chain challenges, and a gradual easing of inflationary pressures.