Private debt in transition?

The European private debt market is becoming increasingly established and mainstream. So, what shape will this more mature market take and what are the trends to watch over the medium term?

Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

A Q&A with Stephan Caron

The private debt market has grown rapidly in recent years, with investors increasingly allocating to private debt strategies in a bid to generate returns in a persistently low-yield environment. Yet, as signs emerge of an economic slowdown, can private debt funds continue to expand at the same rate? How will this affect lending conditions? And, following particularly robust growth in Europe, how will the industry settle and mature over the coming years? These are some of the issues we discussed with BlackRock managing director and head of European mid-market private debt, Stephan Caron.

Q: European mid-market direct lending has expanded rapidly. What would you say are the most important recent developments?

A: The market has certainly grown significantly. According to Deloitte, the annual growth rate was around 30 percent for the past five years. One of the biggest developments has been the emergence of a more pan-European opportunity set. While much of the initial growth was particularly UK-focused, we are now seeing healthy growth across Europe.

Our experience is reflected in Deloitte’s data, showing that the UK still accounts for around 40 percent of European private debt transactions; France now accounts for 25 percent and Germany 11 percent. Germany is one of the fastest-growing markets in Europe and so it is likely to have a much greater share over the next few years.

A recent report by GCA Altium showed that 50 percent of mid-market buyouts in Germany were financed with private debt – that’s up from just 16 percent in 2016, so it’s quite a shift. We’re also seeing growth in Benelux, Spain and Italy and early signs of development in the Nordics too.

This is good news for investors, many of whom were concerned that their allocations were too heavily concentrated in the UK, where there are attractive opportunities but also a high degree of uncertainty. Our direct lending strategy has approximately 20 percent exposure to the UK, which is relatively low for a pan-European strategy but aligns with our investors’ conservative view on the UK and their desire for a high degree of geographical diversification. We have been able to meet those goals thanks to our strong local presence in European markets.