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In the race to secure business amidst paltry merger and acquisition (M&A) activity over the past few years lenders have eased up on some of the protective measures, they previously relied on, to make deals more attractive for borrowers. Though relatively restrictive covenants remain a staple in middle market private equity deals, that could change if the surge in M&A activity that the industry has long awaited finally comes to fruition this year –a likelihood that many industry experts are counting on.
Following multiple false starts, industry experts are optimistic that 2025 will finally be the point when M&A activity picks up momentum and the floodgates predicted for the past few years truly open.
“There are some real reasons why people expect 2025 to have the increased M&A activity that they have been saying is just around the corner for a while now. In private equity there is a backlog of deals and a lot of pent-up demand which, combined with a shift in valuation and factors such as a potential change in the political climate and interest rates coming down, makes it more likely that activity will pick up in the coming years,” says Caroline Sandberg, a partner at law firm Fried Frank.
“With more deal activity, if we assume that both the private credit and the syndicated markets are going to be available, that’s going to lead to more competition.”
And if that happens, she believes the result could ultimately be a further erosion of covenant protections.
For now, restrictive covenants and provision protections remain a staple part of deals. And despite all the concern surrounding headlines for last summer’s preferred equity financing for Pluralsight Inc., many industry experts believe the deal was merely an example of a blurring of the difference between covenants in larger syndicated deals and private credit deals.
In that deal, Pluralsight’s backer, Vista Equity Partners, used a drop-down transaction to secure additional financing for the educational platform for technology developers. What raised a red flag for existing lenders that had previously financed the company in 2021, a group that included Ares Management, Goldman Sachs, Blue Owl Capital and Golub, among others, was that Vista initially placed the company’s intellectual property (IP) within a restricted subsidiary.
Pluralsight’s original lenders ultimately prevented the company’s IP from being separated, but the deal’s structure resonated across the private equity lending community. In fact, industry experts say that the attention to Pluralsight has caused lenders to look more closely at incurrence covenants.
“The lesson of Pluralsight was such a concern that the Loan Syndications and Trading Association also addressed and introduced ‘best practices’ with respect to such transactions at the industry level with boilerplate language and a guide,” says Elina Yuabov, a managing partner at Yuabov Law Group. “Pluralsight raised preferred equity rather than ‘debt’.”
Lenders are cautious now. Depending on their credit risk appetite, they employ broader language to restrict their borrower – and their subsidiaries, now or in the future – from incurring debt, raising equity and other such ‘funding’ infusions, as well as restrictions in releasing funds in the form of dividends or expenditures. We’ll be reasonable, but also include a monetary threshold that, if crossed, requires the prior written consent of the majority lenders,” says Yuabov.
Fried Frank’s Sandberg, however, believes the Pluralsight deal structure was nothing more than an inevitable evolution where sponsors took advantage of flexibility that already existed in covenant packages both in broadly syndicated deals and private credit deals.
“People are thinking about what this technology provides, in terms of the outlook post-Pluralsight, but also in conjunction with what we are expecting to be a more active M&A market. I think we’re going to see a continued convergence between what covenants look like in syndicated deals and private credit deals,” says Sandberg.
As a result, she expects lenders across the board will be hypervigilant about deal terms moving forward, particularly as deal activity picks up and private credit deals face heightened competition from syndicated deals.
Her sentiment is shared by colleague Eliza Riffe Hollander, a partner at Fried Frank. “I don’t see people zeroed in only on Pluralsight. It is more that it is part of a full package of LMT (liability management transaction) protective provisions that they’re focused on,” says Riffe Hollander.
“LMT protective provisions are the one place where there has been a significant push by the lenders in both markets, and the place where we often see them holding the line is the J. Crew, Chewy, and Serta [provisions]… I think that’s the one place where, even in really competitive situations, they can usually maintain protections,” she says, referring to previous deals whose lending terms were so controversial that they have become standard within the industry.
J. Crew blockers – stemming from a 2016 deal where the popular clothing retailer moved IP, including the company’s trademark, into an unrestricted subsidiary— limit the transfer of IP and other assets to unrestricted subsidiaries.
Chewy blockers, which come from PetSmart’s 2018 acquisition of Chewy.com, where a significant percentage of Chewy’s equity shares were transferred to an unrestricted subsidiary, prevent existing guarantees of a subsidiary from being eliminated if it ceases to be fully owned.
And Serta protection, based on Serta Simmons’ 2020 effort to reduce its debt load and provide itself an equity injection by altering existing credit agreements, is a provision that prevents lenders’ debt or liens from being subordinated with their unanimous consent.
Restrictive covenants are not the only protective measure lenders are leaning on. “Equally important is the schedule of existing debt and liens that borrowers have to disclose with respect to themselves and their subsidiaries, and financial covenants that require a certain debt to equity ratio, an operating reserve, a collateral reserve and so on,” says Yuabov.
As people get back into the swing of things following holiday breaks and the new year gets into gear, the private equity industry will be keeping a particularly close watch on M&A activity within the first quarter. “It feels real this time. We are certainly seeing a big increase in grid activity and sponsors looking at assets in a way that I haven’t seen in recent memory,” says Riffe Hollander.
One major factor she predicts will spur deal activity is the industry’s overall optimism that the impending changing of the guard in the White House will yield a more friendly environment on the regulatory front.
Private equity isn’t just investing in digital infrastructure—it’s also exploring broader opportunities tied to AI’s rise. With more advanced applications, the demand for power is set to climb exponentially.
Since ChatGPT was first introduced at the end of 2022, the company has already released multiple versions of its model, with its most recent, ChatGPT-5, introduced in August 2025. Even so, roughly 80% of ChatGPT’s users employ it in a simple way, typically asking basic one-off questions. “That 80% of usage alone consumes the same amount of power as Germany,” says Mark Rossano, the founder and CEO of C6 Capital Holdings. He notes that if the same number of recreational ChatGPT users were to shift to more advanced usage, the AI platform would become the third largest power consumer in the world, behind only the United States and China.
“What a lot of people don’t appreciate is that as these [systems] get more powerful, they throw off more heat and you need more and more power to keep them cold, because operational efficiency is between 30 degrees Celsius to 40 degrees Celsius,” says Rossano. “When you look at where the power is going, it’s exponential. And it’s only going to continue to grow, because computational power is doubling every four months and that’s doubling the power demand almost every 1.5 months,” he says.
As all of the major technology companies vie to become the leaders in AI and are stepping up their AI training efforts the amount of data processed by AI models is exploding and is only likely to continue rising.
“With the data centers, where you’re going to have the need for a tremendous amount of power, there are grid concerns.
There are governmental concerns about the amount of energy that can even be produced, and it’s a subset of the energy space that’s very active,” says Mitchell Moses, a partner at law firm Duane Morris and founding partner of the firm’s Fort Worth, Texas office, pointing to additional ways that AI has changed the way the investment industry looks at the energy sector.
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