Boom in European Private Credit Markets: CVC's Second-Quarter Report
Credit privacy demonstrates robustness amidst fluctuating tariff conditions
The European private credit market is experiencing a surge, with investors and borrowers increasingly turning to private credit funds to fill the gap left by declining bank lending, particularly in the mid-market segment. This trend, coupled with cross-border investment activity facilitated by regulatory harmonization within the EU, has made companies in Germany, France, and the UK more open to international private credit providers.
Southern Europe, including Spain and Italy, is also emerging as a hotspot, offering higher yields and less competition but with associated risks such as sovereign debt and currency fluctuations. Evergreen funds and perpetual-life business development companies (BDCs) are gaining traction, targeting private wealth and offering diversification opportunities.
The growth in the European private credit market is being driven by a favourable regulatory environment, macro-economic uncertainty, and structural shifts towards embedding private credit at the core of portfolios, particularly in the UK and Southern Europe. European private credit can offer higher average credit spreads compared to other markets, making it attractive for both European and U.S. investors.
Private credit markets provide a more stable financing option compared to volatile public markets like the BSL (Bonds, Loans, and Syndications) and high-yield bond markets. They offer flexibility, with private credit deals often including lender-friendly covenants and call protections, offering stronger safeguards than those in public markets. The durability of private credit is illustrated by the bypassing of originally chosen banks for high-profile transactions.
CVC's second-quarter credit report indicates an increase in European direct lending on both a volume and deal count basis. The alternative asset manager reported a 44% increase in European direct lending volume year over year and a 56% increase in deal count. The report also states that private credit managers provide liquidity and execution certainty.
Ongoing structural supply and demand imbalances, as suggested by CVC, indicate the ongoing relevance of the private credit sector. The European private credit markets may offer a more attractive premium compared to the US, according to CVC. However, the ability of private credit to maintain pricing discipline and execution may be tested if M&A rebounds sharply in the second half of the year.
The heterogenous nature of European private credit markets features more complex, structural inefficiencies that translate into enhanced yield opportunities. As the market continues to grow and evolve, it is expected to remain a valuable addition to portfolios for enhancing diversification and reducing reliance on public markets.
Finance plays a significant role in the European private credit market, with investors seeking returns as banks reduce lending, particularly in the mid-market segment. CVC's second-quarter report confirms this trend, showing a 44% increase in European direct lending volume year over year and a 56% increase in deal count, highlighting the sector's growing relevance and potential for yield opportunities.
