Raising the bar, but capital remains on tap

While there have been many sobering headlines around the financing of pubs, bars, restaurants, and broader hospitality businesses in the U.K., the reality is a much more nuanced situation – particularly when you take a look at the market with a debt-focused lens. 

Equity slowdown: With some exceptions – notably market-leading businesses, or operators relatively early into their growth journey – it’s fair to say that the mergers and acquisitions market for the sector remains relatively subdued. 

This can be largely attributed to material uncertainty in market conditions, leading to an understandable impasse between buyers and sellers seeking to find fair valuations that they are each comfortable to transact at. 

As a result, equity transactions have been harder to execute, with many shareholders electing to “wait and see”, unless there is a pressing need for funding. 

Stabilisation of debt markets: Conversely, managers of private debt capital continue to fund raise at levels faster than they are deploying. Banks continue to look for new lending opportunities, and the supply of debt capital is exceeding demand. 

This is good news for borrowers. The market’s expectations of future interest rates (the “interest curves”) is always a core consideration. At present, interest rate curves are flat, with the five-year swap rates of 3.7% not dissimilar to the Bank of England base rate at 3.75%. 

This alignment between current and medium-term rates is important for borrowers and lenders, as it enables them to be able to see through the noise of underlying macroeconomic effects, for now, at least. The geopolitical and macro environment – particularly in hospitality – is one where noise never seems to be far away.

Building on the subject of interest rates (and inflation), we believe inflation is likely to fall to the Bank of England’s target rate of 2% as early as this spring, and we envisage there could be further interest rate cuts in 2026 (before rates gradually elevate again, to align with the aforementioned flat interest curves).

In our view, these near-term cuts – alongside real wage growth for lower-paid workers – will drive more disposable income into the pockets of consumers, some of which will find its way to pubs, bars and restaurants, which remain vital to our national identity. 

Overall, we see positive economic drivers for sectoral demand and input inflation in a better place, alongside a significant supply of debt capital (and attractive terms for some), with many lenders actively deploying more funding into hospitality. Maybe not quite the vibe of a pub happy hour, but potentially positive for the sector nonetheless.

So what? So, what does this mean for borrowers? Applying these sector themes and insights from the transactional work we have been supporting, the following should be considered by operators and investors in hospitality: 

• Debt is on tap for many mid-market businesses. The bar is a little higher than it was pre-COVID, but the operators that prepare well – and are realistic about what they are seeking to achieve – should be able to utilise the debt markets to find the capital they need (or require for contractual reasons). 
   
• Debt has a core role to play in supporting rollout, capex and acquisition. While the valuation debate continues to evolve between buyers and sellers (and has the potential to stall progression or limit taking advantage of the growth opportunities that are out there), investors and operators in the sector can continue to grow their businesses and drive operational and financial performance.
   

When approaching lenders across the private capital and banking universe, which we comment on below, the following dynamics are all-important:  

• A clear and robust business plan, where lenders can readily follow the journey of cash over the life of the proposed debt facility
• A resolute and absolute focus on operations
• An economically incentivised leadership team
• Cash equity or book equity that shareholders will protect and grow
• A relevant business for an ever-fickle and demanding customer base
• And clear and reasoned trading scenarios to cover the “what if”.
   

Borrowers can – and should – get on the front foot to ensure they are heard (and heard by the right lenders). That brings us on to the final critical factor in our note of new year joy: relationships. 

A lending arrangement – historic, current or future – should be much more than a transaction. It should be enduring, and it should be authentic. It should be commercially balanced. Those are the key principles of a relationship, and all too often, they can be forgotten in the chase for capital. A lack of a relationship – or a poor one – can bite and bite hard at the wrong moment. 

Finally, a word on lenders and how they are referred to at times. Characterisations include high street lenders (think HSBC, Barclays, Santander, NatWest or Lloyds), challenger banks (think Shawbrook, Metro or OakNorth), and debt funds (think Ares, Barings, Cheyne or HIG). All are providing debt capital in the illiquid private capital sphere, and all compete with one another. Critically, all of them fund this sector and look for the same borrower traits and performance drivers that we note. 

Participants have slightly different preferences for lending structures and returns, but that divergence is not as great as many would anticipate. Businesses using debt capital should have a “whole market” mindset when undertaking their financings, as you may be able to unlock greater flexibility than you may have otherwise thought possible. Bringing all of this together, we are bullish in our outlook for the financing of the sector in 2026. Let’s drink to that. 
 

This article was first published in Propel Premium Opinion on Friday, 23rd January 2026