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The ability of Europe’s non-bank lenders to build on their gains in 2021 will depend on how well they manage the damage done to their credit portfolios by the coronavirus pandemic.
With expectations for economic recovery buoyed by progress on mass vaccination programmes, the prospects for private credit firms looks rosy as long as they have done their homework on risk control, said Robin Doumar, who founded Park Square Capital in 2004.
“There are some lenders who have portfolios that are less good,” said Doumar, also managing partner of the London-based firm with about $10 billion of assets under management. “But for people who stuck to high quality businesses – and critically, in stable sectors – we are emerging from this much stronger.”
Private credit in general, and direct lending in particular, has exploded since the last financial crisis.
In Europe, private credit grew to $259 billion as of March 2020, of which, $142.7 billion was in direct lending. That’s up from $44 billion in European private debt a decade earlier, according to data provider Preqin.
Share of business
Following a pause to take stock after the pandemic first struck in March, direct lenders increased their share of business compared with banks in major European markets from Germany and France to the UK, according to GCA Altium, an advisory firm. In the syndicated loan market, typically arranged by banks and used to finance large-cap companies, issuance in Europe was down 27 per cent year-on-year, as of December 11, according to data compiled by Bloomberg.
In the UK mid-market – the largest in Europe for deals of between €20 million and €500 million – the market share for private debt funds rose to 72 per cent in the first nine months of this year from 48 per cent in 2019, GCA Altium data shows.
More trepidation
The historic banks are probably a little bit more careful, said Aymen Mahmoud, a partner with law firm McDermott, Will & Emery UK LLP in London. “I don’t think they know the extent of their exposure and so I think there is more trepidation.”
Private lenders backed mergers, shored up balance sheets and executed their largest ever deal this year, the Ares-arranged £1.875- billion debt financing for UK insurance broker The Ardonagh Group.
However, a key test looms for the industry as governments start to unwind the credit and tax-relief programs they put in place to help businesses weather the pandemic.
The European Central Bank predicts gross domestic product for the euro region will shrink 7.3 per cent this year. It sees real GDP to reach the 2019 pre-crisis level by mid-2022.
“It is going to be interesting how the next year pans out in the real economy as you see government subsidies and schemes start to leave the system,” said Taj Sidhu, managing director and head of The Carlyle Group Incs credit opportunities fund. All of these things are going to create capital needs.
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