From slowdown to rebound: UK mid‑market acquisition finance shows signs of revival

After a quieter start to 2025, early 2026 is a time for cautious optimism. The UK mid-market acquisition and leveraged finance sectors are experiencing a rebound in acquisition activity, driven by falling interest rates, competitive pressure among lenders and a shift towards more flexible, covenant-lite structures similar to large-cap deals.

While 2026 continues the shift towards disciplined, private credit-driven, structured deals favouring unitranche solutions for speed and certainty, banks are still competing fiercely.

With interest rates expected to ease, lenders and sponsors are demonstrating increased confidence, focusing on growth-oriented acquisitions and bolt-on strategies despite ongoing macro-economic and regulatory uncertainty. The market remains resilient, with strong demand for strategic acquisitions in sectors like tech, healthcare and business services.

Corporate lending

As we move through 2026, UK corporate banks are operating in an environment defined by rapid technological change, sustained competitive pressure and increasingly exacting regulatory expectations. For mid-market and regional corporate lenders in particular, the challenge is balancing innovation and growth with operational resilience, cost control and regulatory compliance.

From our experience advising banks, lenders and financial services businesses across the UK, the institutions best positioned for the years ahead are those taking a measured, legally grounded approach to transformation, embedding regulatory expectations into strategy rather than responding to them reactively.

Key trends and expectations for 2026

• Activity type:
  • A rebound in M&A is expected as rates decline, moving beyond the refinancing-heavy environment of previous years
  • Due to high valuation gaps for new platforms, many private equity firms are prioritising bolt-on acquisitions to expand existing portfolio companies
  • With few maturities in 2026–2027, the market is focusing on extending maturities, although a significant wall of debt matures in 2028–2029
• Interest rates: the Bank Rate is expected to fall towards 3.25% in 2026, supporting improved affordability and financing conditions
• Lender competition:
  • Private credit continues to gain momentum, promoting its ability to offer flexible, bespoke and faster-closing structures, while banks are actively competing for high-quality, smaller assets
  • A growing pool of undeployed capital (dry powder) is fuelling intense competition, forcing lenders to offer more borrower-friendly terms, including ‘high water marking’, ‘portability provisions’ and mandatory PIK (payment-in-kind) toggles (often 3–4% cash pay floor)
  • Lenders are maintaining strict scrutiny on financial covenants, with EBITDA adjustments and debt service cover ratios becoming standard in the mid-market. Covenant structures are shifting, however, with increased use of voluntary and automatic, ratchet-based covenant resets. EBITDA adjustments are facing tighter, more negotiated caps (10–25%)

• Market bifurcation:
  • A continued split in market performance is expected, where stronger credits secure better terms while lower-rated ‘CCC’ borrowers face challenges and potential distressed debt exchanges
  • Challenges persist in specific sectors like chemicals and healthcare, with potential for negative rating actions where companies experience slow deleveraging

• Structured finance solutions:
  • There is high demand for unitranche and club-style facilities, which offer flexibility in structures like delayed draws and earn-outs
  • Rise of insurance capital: insurance firms are becoming more active in providing direct, long-term capital, increasing liquidity in the mid-market

• Technological operationalisation:
  • Banks are moving from testing to deploying AI across the enterprise, including in lending, risk management and customer service
  • There is an increased use of tokenisation which is enhancing transaction speeds, liquidity and transparency
  • Hybrid banking experience: a shift toward ‘phygital’ (physical + digital) models, where AI-powered mobile apps handle daily tasks while human support is reserved for complex or emotional scenarios
  • Digital ecosystems: banks are creating unified digital ecosystems that blend traditional banking with embedded finance and API connectivity to third-party providers

• Sustainable finance: continued integration of ESG factors into investment and lending, with a focus on supporting the transition to net zero.

Conclusion

As 2026 unfolds, the picture across mid‑market acquisition finance and corporate lending is one of measured momentum. While challenges remain – from regulatory demands to sector‑specific pressures – lenders, sponsors and borrowers are increasingly equipped to navigate them with discipline, flexibility and strategic focus.

With easing rates, renewed competition and ongoing innovation in both structures and technology, the year ahead offers genuine opportunities for those ready to adapt and position themselves for sustainable growth in a market that is cautiously, but unmistakably, on the rise.