Investment opportunities for European special situations credit funds have doubled since the Covid pandemic, with 2026 likely to see an equal or greater wave of stressed assets, according to industry insiders.
The pipeline of special situations debt opportunities currently sits at around £100bn, compared with £50bn–£60bn pre-Covid, driven by market volatility, according to Eric Larsson, co-head and portfolio manager for global alternative credit manager Alcentra’s special situations funds.
“Since Covid, after that initial reaction, the market turmoil was fantastic for us and following that we saw interest rates step up,” Larsson said. “The supply of opportunities for us has on average doubled since that period.”
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Larsson explained that Alcentra measures each quarter the volume of European high-yield bonds and leveraged loans trading above a 12 per cent yield, with an issue size greater than £100m. That figure currently stands at around £100bn and has remained relatively stable, he said.
“Volatility creates risk, but it also creates opportunities,” Larsson added.
Jamie McFarlane, portfolio manager for special situations at Polus Capital Management, echoed this view, suggesting that the opportunities the firm is evaluating and “ultimately executing on has nearly doubled over the past few years compared to pre-Covid”.
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“We think 2026 could bring a similar if not greater number of stressed and distressed situations to the forefront compared to 2025,” McFarlane said. “Sub-investment grade borrowers have now had to endure several years of higher borrowing costs, cost inflation, geopolitical uncertainty, etc. It’s hard to see how much further the rubber band can stretch before companies are forced to deal with unsustainable debt loads and/or sub-optimal business models in a rapidly changing world.”
Yet, both Larsson and McFarlane said the market has not yet reached its peak, with the former describing the current conditions as “maybe seven or eight on a scale to 10”.
The increase in opportunities comes as more asset managers expand their platforms to launch special situations strategies. Partners Group, for example, launched its first strategy in the space in January.
