Public Fixed Income

Post-COVID European Private Credit: A Higher Quality Market?

October, 2020 – 7 min read
On the back of COVID, transactions in the European middle market are showing decreased leverage levels, stronger documentation and improvements in pricing—suggesting a rebasing of the market from where it has been for the past several years.

The private credit market that has emerged in the wake of COVID looks somewhat different, and in some ways more attractive, than that which preceded the pandemic. Specifically, in the months following the initial shock, the quality of deals coming through, broadly speaking, has improved, with many exhibiting lower leverage levels, tighter documentation and better pricing. In our opinion, these are encouraging signs for how the market may continue to develop in a post-COVID world, and suggest that we may continue to see higher quality opportunities going forward. However, with a number of uncertainties on the horizon—including around the pandemic itself—we believe a disciplined investment approach, with a focus on capital preservation, will be crucial.
 

Key Market Movers

There are a number of key drivers shaping the opportunity in private credit today. Many of these have been apparent in the market for a number of years, but have been exacerbated or enhanced as a result of the pandemic.

Regulatory Pressure

Over the last decade, increased financial regulation in Europe has continued to limit the lending activity of banks, creating a gap in the market for direct lenders to fill the shortage of capital. As a result, non-bank lenders have continued to grow their market share—from roughly 40% two years ago to just over 60% today.1  And we do not expect this to wane anytime soon. In fact, institutional market share in Europe remains well below that in the U.S., where it is closer to 90%, suggesting there is further room to grow as banks continue to pull back from middle market lending.2

At the same time that supply has been decreasing, demand for private financing—particularly to support buyouts—has continued to grow. Indeed, as of August, dry powder in Europe had reached a record €194 billion.3 This suggests that even as regulatory pressure and challenging market conditions on the back of COVID have impacted banks and other lenders, borrowers and private equity sponsors continue to seek financing solutions and certainty of execution from non-bank providers.
 

1. Source: AlixPartners Mid-Market Debt Report. As of December 31, 2019.
2. Source: S&P LCD. As of Q1 2020.
3. Source: Preqin.

Want to read the full article?

View PDF

Adam Wheeler

Co-Head of Global Private Finance Group

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.

Related Viewpoints