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Private credit boom continues; pressure builds on Europe's debt market

Private credit is expected to maintain its strong momentum for several years amid an ongoing shift away from traditional lenders, according to The Wall Street Journal.

The boom in private credit was driven in large part by aggressive interest rate increases that started in early 2022, which forced more borrowers to seek alternative lending sources. The pressure from higher rates, compounded by the recent collapse of several regional banks in the US, prompted some traditional lenders to unload assets or exit business lines.

The pullback opened up opportunities for alternative asset managers to snap up assets from banks and gain a foothold in the hot market. It is "one of the reasons you are hearing more about asset-based finance [lending secured by equipment, inventory, real estate and other assets] as a long-term alternative strategy," Castlelake LP co-CEO and Chief Investment Officer Evan Carruthers said during a Sept. 19 panel discussion hosted by WSJ Pro.

"As [banks] are pulling back, we're moving into the space, because there's a really attractive risk-return there," added Sara McGinty, a managing director in Ares Management Corp.'s credit arm.

Amid the retreat and expectations of a prolonged period of retrenchment for banks, private asset-based lending has more room to run, and the opportunity for private debt lenders could last for years, panelists said.

DATA WATCH

– Europe's private credit market is starting to see signs of funding stress heading into the final quarter of 2023. Default rates are expected to pick up if central banks either opt for higher-for-longer interest rates or if rates are cut, which would imply a slowing economy. The trailing 12-month default rate for European leveraged loans was up 1.27% as of August from 0.41% in January, according to Fidelity International.

– The volume of European leveraged buyouts declined in the year to Sept. 14. Loans backing new buyouts in the region were down to €5.16 billion from €16.76 billion a year earlier, according to Fidelity. However, as the gap in valuation expectations between sellers and buyers narrows, more acquisition activity is likely to kick off in the fourth quarter of 2023 and especially in the first half of 2024.

– The pace of fundraising has also been slower since the start of 2023, with European private debt funds closing on €9.6 billion as of early June, according to Preqin data. Despite the slowdown and higher default risk, the European private credit market remains relatively resilient and the outlook is optimistic, thanks to the estimated $2.72 trillion of global dry powder that private equity sponsors are sitting on as of early September.

FUNDRAISING AND DEALS

– Société Générale SA and Brookfield Asset Management Ltd. are joining forces to launch a private debt fund that will seek to raise €10 billion over four years. The vehicle will be seeded with €2.5 billion in capital, which will be spread between real assets credit and fund finance.

– Helaba Landesbank Hessen-Thueringen held a first close for Infrastructure Debt Fund I, which will provide financing across digital infrastructure, renewable energy and other asset classes. Launched with backing from a Canadian institutional investor, the vehicle is the first infrastructure debt fund under HLB Private Markets, the German bank's new debt fund platform.

Deutsche Beteiligungs AG agreed to take a majority stake in German private debt provider ELF Capital. The private equity firm plans to coinvest up to 100 million in funds of ELF Capital, which provides private debt financing to midsize businesses in Germany, Austria, Switzerland, Belgium, the Netherlands, Luxembourg and Scandinavia.

COMMITMENTS

– Mubadala Investment Co. PJSC made a $1 billion commitment to Blue Owl Capital Inc.'s private credit platform. The initial mandate will focus on Blue Owl's lending strategy that provides debt capital to technology and software businesses.

– The recapitalization of Veridian Healthcare LLC by Advantage Capital, HealthEdge Investment Partners LLC and United Western Group received financing from Bow River Capital's private credit team.

Tresmares Capital provided The Rug Co. Ltd. with a senior term loan to refinance its existing credit facilities, along with an accordion facility to fund future acquisitions. The designer rug brand is a portfolio company of Palamon Capital.

INDUSTRY NEWS

– Blackstone Inc. restructured its corporate credit, asset-based finance and insurance businesses to form a single unit, Blackstone Credit and Insurance. The newly formed unit, together with Blackstone's real estate credit business, offers an opportunity for the firm to hit its next $1 trillion over the next 10 years, CEO Stephen Schwarzman said.

– Deutsche Bank AG formed an investment management firm that will focus on private credit investment opportunities. Operating independently of the German lender, DB Investment Partners will invest globally across corporates, real estate and asset-based finance.

– With backing from the Rabobank Group, private credit specialist Colesco Capital introduced a direct lending platform that aims to provide debt funding solutions to help middle-market businesses in Europe achieve their sustainability goals.