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Fixed Income

Investing in Late-Cycle European Private Credit

November 2019 - 4 min read

Adam Wheeler, Co-Head of Barings’ Global Private Finance Group, discusses the importance of discipline and risk management in today’s late-cycle environment.

What is your view of the private credit landscape overall?

Private credit is very much a global asset class and we see opportunities across the regions where we invest⁠—North America, Europe and Asia-Pacific. That said, the relative value of private debt investments in each region tends to shift over time depending on underlying market characteristics and dynamics.

North America, for instance, is the most mature market, and also the largest and most developed from both a borrower and investor standpoint. Most of the capital in the market comes from non-bank lenders.

In Europe, on the other hand, banks still provide a significant amount of financing for mid-market companies, although the market has evolved considerably over the last decade. Since the financial crisis, regulations have forced European banks to reduce leverage, which has impacted the banks’ ability to lend to borrowers and created a gap in the market for direct lenders to fill the shortage of capital.

Asia⁠—specifically Australia, New Zealand, Singapore and Hong Kong—is less developed than Europe, with most financing still provided by banks. The market has started to open up to non-bank lenders and more flexible financing solutions in the last couple of years, but it is still a relatively new, and emerging, opportunity set.
 

As you look across the European private credit market today, where are you seeing opportunities?

Broadly speaking, we can characterize much of the activity in the European markets into two distinct ends of a spectrum. At one end are banks, which have been restricted in the amount of debt they’re allowed to hold and in their ability to lend to borrowers. On the other end of the spectrum is the broadly syndicated loan market, a relatively liquid market where large pools of capital are provided to (typically) larger companies.

In between the two ends of this spectrum is what we view as the true mid-market⁠—a ‘sweet spot’ in terms of debt facilities, where private companies typically have enterprise values of €65–€250 million. This can be an attractive area for private equity sponsors, as it can give them the ability to work with just one capital provider to complete financing. It is also advantageous from an investor’s standpoint, as it can provide an opportunity to invest in high-quality companies, but through a private investment that offers a potential yield premium relative to the broadly syndicated loan markets, with greater downside protection.

Traditionally, the U.K., France and Germany have been the largest markets in Europe and continue to account for the majority of deal flow. More recently, we have begun to see attractive opportunities outside of these markets, including where the market share of banks continues to decrease. One example of this is in the Benelux region⁠—Belgium, the Netherlands, and Luxembourg⁠—where private equity sponsors are increasingly seeking financing solutions from non-bank lenders. Having traditionally sought the majority of their funding from banks, these sponsors are turning increasingly toward more flexible funding structures.

The Nordic region is another specific opportunity, in our view. Nordic banks⁠—traditionally the market leaders⁠—are unable to hold as much debt in transactions as they did in the past, which has opened the door to managers to compete for deals.
 

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