Macro-economic headwinds have caused liquidity to dry up in European credit markets, leaving corporate borrowers and private-equity sponsors few options to turn to for financing. But we believe this environment has created an opportunity for private direct lenders to step in and benefit from an attractive opportunity.
- Europe is facing disruptions from geopolitical tensions, high inflation, economic uncertainty, and tightening monetary conditions—all of which have largely obstructed financing to large, mid, and small borrowers. Combined with secular shifts—such as the retrenchment of banks and the growth of private equity—these conditions can create an opportunity for private lenders to finance companies directly.
- Direct lending differs from traditional means of financing, such as broadly syndicated loans and high-yield bonds. It can offer many borrowers a source of capital with benefits (e.g., customization, flexibility, certainty of closing, speed, and a partnership with the lender). Direct lending also can offer lenders key structural protections and the ability to charge premiums.
- For investors that can allocate portions of their portfolio in illiquid assets, direct lending may provide rising income streams, inflation protection, enhanced diversification, and opportunities for potential alpha compared with traditional fixed-income investments.
- Investors may have underused private credit investments in their portfolios amid more than a decade of low interest rates, but the environment has changed. We believe that European Central Bank (ECB) interest rate hikes, current dislocations in Europe, and subsequent volatility have coalesced to create a compelling entry point today, an opportunity underpinned by the confluence of strong secular changes in favor of private credit.
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