Private debt growth fueled by European activity, according to new research

A new study published by European private debt manager Pemberton and the Saïd Business School, University of Oxford, charted rapid growth in the private debt market that totals $887 billion as of last year, reflecting growth of over $612 billion since the global financial crisis (GFC) in 2009. The rise of the U.S. private debt market predates the European market expansion, according to researchers, but the European private debt market grew significantly faster during the years after the GFC, mainly driven by direct lending, a sub-strategy within private debt. Accounting for just 2% of private debt funds raised globally in 2009, direct lending raced to become the dominant strategy, at 34% of private debt funds raised by 2016, according to figures cited by the research paper. European direct lending only really started around 2012, making the figures all that more impressive. Officials noted that the asset class appears to have been materially less volatile than public markets during the COVID-19 pandemic and for the funds raised through the GFC have performed particularly strongly when compared to earlier later vintages. Vintages raised before the GFC returned 5-6% IRR. Contractual returns are typically 200-350 basis points higher than comparable syndicated loan deals, this compares to 35 basis points uplift in the U.S. in 2020. 2020 was an unprecedented year in European direct lending as Founder and Managing Partner at Pemberton Simon Drake-Brockman observed last year in an interview with Alternatives Watch, adding that September and October represented the biggest pipeline of leveraged loan deals in the $10 billion firm’s six-year history. “I have seen and participated in the dramatic growth of European direct lending as an asset class over the past decade,” said Drake-Brockman. “This has led to institutional investors making European direct lending a core part of their asset allocation and has provided European mid-market companies the capital to grow and expand their business.” If market penetration of European direct lending grows in line with current U.S. levels by measure of AUM as a percentage of GDP, it is possible that this geographic segment of private debt may grow up to 50% in the medium term. According to the study, continued pressure on European bank profitability suggests that the banking sector may continue to consolidate leading to even more opportunity. Based on previous published research, it also seems that non-bank borrowers do not default significantly more than bank funded counterparts. Going forward, there is plenty of optimism for European lending. Officials said that if direct lending can reach a similar market penetration in Europe as in the U.S. there may be large, untapped potential for future growth. Yet, is still early days for direct lending on the continent. Unlike other private debt strategies, direct lending has yet to be tested in a high-default credit environment in Europe. The report concludes that it remains to be seen how the strategy performs in a down cycle.

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