• Despite challenges like slow economic growth and a muted M&A environment, the European direct lending market continues to grow, now exceeding 250 billion euros, with a trend towards safer, recession-resistant sectors like healthcare and technology.
• Direct lenders are differentiating themselves through competitive pricing, flexible terms, local presence, sector expertise, and the ability to offer a range of financing options, with speed and certainty of closing being as important as pricing.
• Looking ahead, there are limited geographic expansion opportunities but increasing interest in product diversification, including stretch deal structures, subordinated debt, and larger club deals, with growing traction in defence, cybersecurity, and sectors related to European sovereignty and supply chain resilience.

Russell Enright, Vice President at SS&C Intralinks, introduced the discussion on secure digital collaboration for high-stakes financial transactions.

Alan Bainbridge, Partner and Global Head of Banks at Norton Rose Fulbright, served as the moderator for the panel.

Panellists included:

• Felix Förster, BRIGHT CAPITAL
• Timothy Alexander, Jackson Square Partners
• Jared Root, StepStone Group
• Aymeric Martin, Tikehau Capital
• Allan Nielsen, Ares Management

Several key factors affecting the European direct lending market:

• Tariff overhang from the US impacting the European market
• Rate cuts influencing the macro environment
• Slow economic growth in Europe, leading to a muted M&A environment
• Reduced private equity fund distributions reflecting current economic conditions

Despite challenges, the European direct lending market continues to grow, with a size now exceeding 250 billion euros.

Trend towards safer, more recession-resistant sectors:

• Increased focus on healthcare and technology
• Preference for sectors viewed as more immune to economic cycles

Direct lending portfolios have been more resilient due to focus on stable, jurisdiction-specific businesses (e.g., UK insurance brokers).

Increased competition for high-quality assets, leading to competitive lending terms for “prized assets”.

Less than 25% of deployment comes from new M&A; more focus on refinancing and portfolio upsizes.

Ways direct lenders differentiate themselves:

• Offering lower margins and flexible fee structures
• Providing more flexible covenants, including covenant-lite transactions
• Offering flexibility on financial definitions (e.g., EBITDA, permitted additional indebtedness)

Pricing compression observed due to increased competition, especially in upper mid-market and large-cap segments.

Local presence in investment countries (UK, France, Italy, Spain, Germany, Benelux) seen as crucial.

Sector expertise and knowledge of the company/management team.

Speed and certainty of closing emphasized as important as pricing.

Importance of offering a range of financing options (e.g., from 5 million to 50 million) to support various growth strategies.

Building long-term relationships and being viewed as a trusted, commercially rational partner.

Limited growth potential in new geographies:

• Western Europe market largely exhausted
• Some opportunities in Central and Eastern Europe, but not expected to significantly increase deployment

Increased interest in broadening product offerings:

• More focus on stretch deal structures
• Growing interest in subordinated debt
• Continued market share gain from capital markets
• Larger club deals, potentially reaching 2-4 billion in size

Growing traction in defense, cybersecurity, and sectors related to European sovereignty and supply chain resilience.

Key differences:

• Sponsored deals: Benefit from established PE firms, professional management teams, and comprehensive due diligence packages
• Non-sponsored deals: Require deeper lender-led diligence, including financial, commercial, tax, legal, and ESG assessments
• Non-sponsored diligence takes longer but allows for better understanding of management and company dynamics

Also to note:

• Non-sponsored deals often present interesting, less competed situations
• They allow for more advantageous terms but are harder to execute and take longer
• Non-sponsored deals may lack the same level of governance and professionalism that good sponsors bring
• When issues arise in non-sponsored deals, lenders often need to take a more active role in problem-solving

Sponsored deals generally have lower idiosyncratic risk but often higher leverage and more aggressive terms.

Non-sponsored deals offer potential for bilateral situations and early exclusivity, providing greater negotiation power for lenders.

Non-sponsored deals typically allow for due diligence costs to be passed to the borrower.

Potential conflicts in mixing sponsored and non-sponsored lending, as non-sponsored deals may compete with private equity solutions.

Expectation of about 100 bps additional spread for non-sponsored deals, reflecting the elevated risk.

Tight covenants and lower leverage in non-sponsored deals can lead to earlier intervention and potentially better outcomes.

Evolving relationship:

• Banks and private credit firms are generally competitors
• Large investment banks are losing business to direct lending community, especially in left-fin business
• Banks are seeking ways to grow their business symbiotically with direct lenders
• As spreads tighten, the gap between private markets and broadly syndicated markets may narrow

Direct lending gaining market share over banks, especially in the middle market segment.

Increased competition leading to pressure on margins and deal terms.

Banks providing leverage facilities and warehouses for private credit firms

This shift allows banks to finance funds directly lending to deals, rather than lending to corporate borrowers

Mutually beneficial partnerships emerging, with banks earning fees and private credit firms accessing additional capital

Banks are increasingly focusing on servicing companies and making money through advisory services rather than direct lending.

No systematic softness in some portfolios, with higher EBITDA margins observed post-inflation and rate changes.

Loss rates remain within expected bounds for direct lending.

Sponsors continue to support portfolio companies, contributing to overall resilience.

Market has not seen the predicted increase in NPLs or significant credit profile deterioration.

The panel did not express significant concerns about NPLs becoming a major factor in the European mid-market private credit space.