In a stalled exit market, sponsors are consolidating their way out

In a stalled exit market, sponsors are consolidating their way out World Models_Header image.png Emily Lai Mon, September 7, 2026 at 8:24 PM GMT+9 5 min read Jenna O'Malley/PitchBook News

European PE add-ons are stuck at decade highs for the obvious reason—sponsors playing it safe—but increasingly also because a consolidated platform is what enhances the chance to exit.

According to PitchBook's Q2 2026 European PE Breakdown, there were 2,121 add-on deals in H1 2026, reaching a decade high of 57.7% of the total European PE deal count. It's the third straight quarter the strategy has held near record levels.

Richard Damming, head of PE investments Europe at Schroders Capital, spoke with PitchBook News about why a consolidated platform may help secure an exit in the subdued market and how to create value in times of low financial leverage.

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PitchBook: Is the high financing cost the biggest challenge for value creation now in the lower mid-market?

Damming: Yes, definitely. Since 2022, when interest rates shot up and inflation was high, there has been a clear impact on the PE industry and financing has become more difficult. In the lower mid-market—where there are smaller transactions with typically lower valuations—you need less leverage, and they can typically be financed by private debt funds or even through local banks that are still active in that space.

You do not need to arrange huge syndicates of investors to take on that debt, which happens with the very large transactions. We continue to favor the lower mid-market in this environment: it is easier to finance, valuations are more attractive, there is more consolidation and value-creation opportunity, and it is more insulated from the geopolitical issues we have globally. In this segment, debt is usually more expensive, but we see some very high-margin businesses, so they do not necessarily have less buffer, they can service their interest payments quite well.

How can an add-on strategy help in times of high leverage cost?

Consolidating markets is a big theme; it creates a lot of value for larger buyers at exits. A lot of bigger corporates do not want to do that consolidation work themselves, so they are happy to buy something that has been nicely consolidated and integrate it into their larger organization, you are basically doing that work already for the future buyer.

It is also about generational transition. There are a lot of small businesses run by older people nowadays, and they need an exit route—they are happy to sell, and often not even maximise the price. So, typically, you might buy a platform at 10-12x EBITDA, but you buy these add-ons for 6x. You put it on the platform and it suddenly becomes worth 12 times, having been bought at 6 timmes.It is immediately very additive to the value.

Are GPs increasingly turning to alternative financing like preferred equity or vendor loans?

We have done a number of preferred equity investments since interest rates shot up, and we were actually surprised by how receptive the GPs were. A GP would come to us and say, "I would have loved to do this add-on, but I cannot finance it right now—the debt is already maxed out for that type of business. And when we say: "maybe we can think about a preferred equity instrument that helps you acquire that business and makes the business more valuable overall," and then we sell it in 18 months or two years—a lot of people are very excited by that.

They will use it if they really believe the add-on acquisition is going to be very accretive to the business, and obviously delivers more return than the cost of the preferred equity instrument.

AI can be a powerful, relatively low-cost value creation tool if used wisely. How do you rate AI adoption and potential in European companies now?

Some businesses are very good at it and quite advanced, and others are nowhere yet. Frankly, it is very much a topic people talk about, but in some cases more talk than action. And I think that can be a risk because if you do not do anything, you might start falling behind quite soon.

What we have started to do is come up with ideas of how to help businesses, because that is where we can provide value add as an investor. For example, we organized a forum for three CEOs of companies we have invested in, all in IT services, plus the GPs we co-invested with on those three deals, and we organized a discussion among them. We also invited a couple of businesses we are invested in that provide AI applications. It was great to see that had immediately led to a willingness to exchange ideas—they do not compete with each other because they are in different countries—and it led to an exchange of best practices and how to implement AI well. That created an immediate discussion and advancement that I do not think would have happened if we had not put these people in a room together.

With the changing macroeconomic landscape, do you have a different set of criteria when investing in GP funds?

The ones that have to adapt a little are probably the software-focused funds, because of the worries around AI. They are the ones who will have to come up with a strategy around AI first, they need to adapt earlier. [Otherwise] we prefer that people continue to do what they were already doing because that is the best way to analyze a track record.