In Europe's direct lending market this year, fewer managers have been able to raise billions of euros quickly or to easily deploy large pools of capital, suggesting the market is heavily concentrated on a select group of players. Those outside that group are having difficulty raising funds and making deals.
The €10 billion raised by Arcmont in January and $4 billion by Eurazeo in May reflect the state of play in the market. In full-year 2023, 65% of the total capital raised in Europe came from the top three funds, according to PitchBook data.
Through July in 2024, of the seven direct lending funds raised, according to PitchBook data, only one has been launched by an emerging manager (defined as a firm that has launched fewer than four funds). As recently as 2022, a third of the direct lending funds raised came from emerging managers.
This activity equates to €17.1 billion of new money allocated to European direct lending funds in the year to July 31. However, 99.5% of this volume was raised by experienced managers, with just €81 million raised by a (solo) emerging manager.
“The market is bifurcating and focusing on managers that have the scale, track record, restructuring capability and origination network to execute reliably,” says Marc Chowrimootoo, managing director and portfolio manager for private credit at Hayfin. “They are the ones that are successful in fundraising and deploying capital in a competitive environment, and everyone else is struggling outside of that. And in the mid and upper-mid markets in which we operate, it is becoming increasingly clear who everyone wants to use.”
Pierre-Antoine Godefroy, managing director at Campbell Lutyens’ fund placement team, concurs. “There is a clear segmentation, and migration of capital around larger managers,” notes Godefroy, while adding that due to this situation, some managers have been forced to look at the core middle market because they have been squeezed out of larger transactions.
Chowrimootoo, meanwhile, says a group of managers have turned to the lower mid-market or more niche strategies, because they are finding it challenging to compete in the more traditional and resilient mid and upper mid-market space.
Shutting up shop
In some cases, managers have even had to shut up shop. For example, two managers in Europe have curtailed their plans and shut down — namely Fidelity International and Polen Capital, which both closed their European direct lending strategies.
Managers and advisors say multiple issues have led to the concentration of funds. Over the past year or so the market has been grappling with a slowdown in M&A activity, which meant institutional investors had issues with the returns on committed capital. Meanwhile, elongated timelines for closing deals are not helping to build investors' trust, either. “While deal momentum has picked up to some extent, it is taking a lot longer to close deals in the current environment, and some processes also fail to reach the finish line,” stresses Matteo Cupello, director at Lincoln International's capital advisory team.
Another reason is simply the preferences of borrowers, as they are increasingly looking to partner with lenders within their own pool, which they think are reliable and can bring security of capital. “From borrowers’ perspective, while they do lose out on having more participants or competition on deals, they are willing to pay up and have a more reliable source of capital,” added another direct lender.
Product offering
Amid increased competition, meanwhile — especially at the upper mid-market level — private credit lenders have been pushed back to their original playground the mid-market, but have found ways to improve their offering. They have also reviewed pricing and terms, and demonstrated flexibility by providing instruments such as holdco PIKs, delayed-draw term loans (DDTLs), and sterling facilities. “A DDTL is just another way to call an acquisition line,” says a lawyer.
In the first three quarters of 2024 (to July 26), the ratio of buyout deals financed by private credit when compared with the broadly syndicated loan (BSL) market was at 2.4:1 in favour of direct lenders, according to LCD — however, this is a lower ratio than last year, when the same measure stood at 5.2:1 in favour of direct lenders. This change in this ratio shows that, slowly but surely, the bank financing product is staging a comeback.
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