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Private Credit

Private credit comes full circle in Europe, but managers remain optimistic

The resurgence of the broadly syndicated loan product has taken many direct lenders back to their original playground in the mid-market.

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Private equity and private credit players recently gathered at the SuperReturn International conference in an event that has been coined the "Coachella" of private markets, as the asset class faces a challenging environment and shifting deal landscape.

The mood was nonetheless optimistic, as more than 5,000 market participants assembled at the annual event in Berlin, with attendees also treated to some lavish parties. Underlying the buzz, however, was managers' restlessness to get deals done amid a stressed M&A environment, and a need to reassure nervous investors eagerly awaiting returns. What's more, as interest rates remain elevated, cracks have started to appear in the market, many participants told LCD.

“We are seeing defaults and distress pick up — it’s not huge, but it is visible in public markets and occasionally in the private markets,” said Tristram Leach, partner and co-head of European credit at Apollo. “And the stress is not in the cyclical companies. Instead it’s been in the highly levered companies, mainly operating in industries that investors viewed as safe.”

Another direct lender added that so far this year, there have been more than a dozen companies for which lenders have taken the keys, but declined to divulge further information. And it is not just firms that are facing tougher times, as fundraising has also been more difficult, while players such as Fidelity have exited the asset class (last month, the manager halted its European direct lending strategy less than a year after its first close).

“This is not a market for first-time funds, this a market for established lenders,” said Tara Moore, managing director, head of European originations at Golub Capital. “We are seeing the start of the sector maturing, just as it has in the US. Established players, scaled players are the ones that are progressing. Scale is everything for managers at the moment.” 

“Some 60% of the market is in the hands of the top-ten managers in Europe,” another lender noted on the same theme.

New reality
If the M&A downturn wasn’t enough of a challenge for private credit, the resurgence of the broadly syndicated loan (BSL) market has ushered in a new reality for upper-middle-market managers that chased big deals last year in the absence of alternatives for certain borrowers. Against this backdrop, it is no longer a walk in the park to win big-ticket deals with jumbo clubs.

This state of play is taking direct lenders back to their original playground in Europe's mid-market, with the caveat that they are now operating in the upper end of that space. Indeed, the very definition of 'mid-market' has evolved since the GFC, when a €10 million EBITDA company was typical for such deals, but this has since shifted to €50 million, a lender explained.

“Mid-market activity and deal flow has come back strongly since the beginning of the year, while large-cap direct lending is establishing itself as a permanent alternative to the syndicated market,” noted Patrick Ordynans, co-head of European direct lending at Goldman Sachs.

“What happened after the GFC was a structural shift in the mid-market, where the direct lenders disrupted the landscape. While not as structural in nature the depth of large-cap direct lending has been put to a test last year and passed — as the BSL offering is coming back we are entering an era of co-existence, between both banks and private lenders across all deal sizes,” added Ordynans.

Taking European LBOs as a case in point, in Q4 2023 there were 21 private lending deals versus 2 syndicated deals, or a 10.5:1 ratio in favour of the private lending asset class, according to LCD. In the year to date (to June 10), however, there have been 10 LBOs financed by the BSL market, compared to 11 across the whole of last year. With the private credit market funding 26 LBOs in the same YTD period, the ratio is much tighter at 2.6:1. 

Quantum of solace
Furthermore, deal sizes have shifted for those private credit players looking at the middle market. Back in Q4 2020 the median deal size for direct lenders was €89.7 million, and the median EBITDA was €18 million. Fast forward to Q2 2024 so far, and the median deal size is a chunkier €300 million, while the median EBITDA is €40 million.

LCD data also shows the share of European LBOs financed by the broadly syndicated market has gone up. Some mid-market managers confirm this, and say larger managers have now shifted their focus down from the large-cap space.

For example, the median EBITDA of deals done by Arcmont Asset Management has fallen from the highs of 2022/2023, as the firm re-focuses on its core middle market. “The vast majority of the deals we do are with companies with between €25-100 million EBITDA. Last year, we flexed it up a bit, but we don’t do that anymore as we don’t compete with the liquid market because the structures, terms, and pricing just don’t work for us,” said Mattis Poetter, partner and co-CIO at the firm.

Others sources agree, and one big-ticket lender added that the median EBITDA of deals they've financed this year is roughly €50 million, down from €100 million last year.

Hope springs...
Despite the challenges facing private credit, there is optimism as the M&A environment has picked-up slightly, especially in the second quarter of this year — though it remains difficult to get deals done. 

“Q2 has been busy everywhere, and for us, it is one of the busiest we have seen. PE sponsors are getting back to it, and there is a lot more confidence in terms of the inflation outlook and interest rates,” said Andrew Cleland-Bogle, head of direct lending at Bridgepoint, adding that the M&A slowdown last year was due to a valuation mismatch between sellside and buyside, combined with uncertainty over the market outlook.
“The reason many PE investors were not transacting in 2023 was due to lower levels of conviction. Now there is a lot more confidence in valuations, and sponsors have confidence that if they bring assets to the market now, they are less likely to get tainted or for the process to fail,” he added.

Arcmont’s Poetter notes the number of new deals his firm has done this year has doubled compared to 2023, and at the same time the firm is able to return capital to investors as they are seeing a lot of exits.

Stephan Caron, head of European private debt at BlackRock, notes that while M&A activity has picked up slightly, the market recovery will happen in 2025 as EV multiples haven’t come down yet. “While the pipeline looks quite rich, the actual [number of] deals that have reached completion so far are not as high.”

Back to the future
Looking ahead, further challenges are expected that are likely to have an impact on the industry. At the moment, some of these are still buzzwords that remain in the realm of speculation, and it is therefore difficult to assess what that impact will look like. Among these emerging themes are digitalization and AI, as well as the de-globalization of markets, some lenders suggest.

On a more granular level, another emerging topic that caught the eye during the SuperReturn International event was the distributed to paid-in capital metric, or DPI, which seeks to measure actual cash returns received by investors relative to the capital they've committed. 

During the event, private equity players mulled a shift towards the usefulness of DPI versus the internal rate of return (IRR) measure, which some say works more like a forecast — and this change could potentially have a big impact on valuations, as well as on market financings.

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  • Francesca Ficai
    Written by Francesca Ficai
    Francesca Ficai is a managing editor overseeing private credit in Europe. She joined LCD in January 2020 after working for Debtwire and Mergermarket. She started her career in policy, working for the European Commission and the House of Parliament, and is fluent in four languages.
  • nishant.jpg
    Written by Nishant Sharma
    Nishant reports on the European private credit market for LCD in London. He joined from With Intelligence, where he covered private equity, focusing on the EMEA and US regions. Prior to that, he was with Bloomberg’s erstwhile India partner BloombergQuint, now BQ Prime, as a special correspondent covering the mobility sector and startups/tech in the venture capital ecosystem.
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