After a slow start to the year, Q2 24 was a record quarter with a loan volumes hitting €1.6bn in southern Europe — up more than 200% year-over-year from €517.5m in Q2 23, according to 9fin data and as illustrated in the chart below. While still a relatively small private credit destination compared to the UK, Germany, and France, southern Europe has seen its market share increasing over the past quarters, as highlighted in 9fin’s European Private Credit Review H1 24. 

Deal volume in Italy as a percentage of Europe rose to 9% in the second quarter, from 7% in Q1 and from 3% in Q2 23. Meanwhile, Spain accounted for 4% of European deals in Q2 24, following a quieter first quarter.

Source: 9fin

Momentum has been building with about €600m of loan issuance being tracked by 9fin so far in the third quarter. 

Even in August when these countries are traditionally closed for business, there have been some notable transactions. In Spain, Pemberton and JP Morgan have put together a €300m financing package to support Carlyle’s stake acquisition in Seidor, a Catalonia-based technology consultancy firm, which is being sold at an enterprise value of around €1bn, 9fin reported. 

And in Portugal, Partners Group is looking to secure a debt financing package from private credit lenders to back its majority stake acquisition of biotechnology company FairJourney Biologics, which is being valued at €900m, 9fin reported. 

Flexibility fuels private credit growth 

In Spain and Italy the prevalence of SMEs means there is a significant non-sponsored lower mid-market deal opportunity. Despite the general slow down in M&A across Europe, in the non-sponsored space, private credit lenders been involved more frequently in auctions, sources said. 

In Italy, the economy is driven by over 4 million SMEs — the highest number among all EU Member States, according to the European Union's Annual Report on European SMEs 2022/2023. In Spain, SMEs numbered 2.8 million in 2022  and grew by 4.9% in 2023, the second-highest growth among EU countries, as reported in the same document.

Most sectors in Italy remain fragmented, which makes it a complex market for investment but at the same time this presents an opportunity to scale up businesses. When Italian vet clinic network Gruppo Animalia hit the market in a primary LBO earlier this year, for instance, it attracted interest from private equity firms and direct lenders. 

"In the UK, the regulator is looking at this [veterinary] sector because you have five chains owning 60% of the market. In Italy the top five chains own 2.3%, so there’s a lot of hype around potential buy-and-build strategies here,” a source said at the time. 

The same is true for many other sectors in the country, a direct lender pointed out. “Italy has excellent low-mid sized firms,” they said. “There is a huge opportunity for aggregations and consolidations in most sectors. But banks are not financing such investments. Private credit is the ideal tool.”

While the opportunity is clear for direct lenders, private equity sponsors and family-owned businesses in the region are increasingly attracted to the flexibility that private credit offers. This includes the ability to commit substantial capital to support business plans and M&A strategies, with multi-currency tranches, or tailored solutions such as partial payment options during cash-constrained periods.

In August, Pemberton provided €109m of debt financing to support Tikehau’s acquisition of Italian cable installation company CEBAT from Oaktree. The deal included an €84m privately placed bond and an additional €25m committed acquisition facility which will allow new investment. This would not have been easy to obtain from banks. 

“People are aware that it's a lot more flexible than bank lending. I'm not saying every time, but sometimes it's worth paying a premium for the flexibility,” said Raffael Torres, co-head of private debt pan-Europe at Muzinich. “Many people were quite bruised in Spain through the great financial crisis because the banks had always said, we're here and suddenly they disappeared,” he added.

Additionally, working with banks can be a relatively slow process. "We see clubs of banks even in mid-cap deals, and when a deal has to be approved by six banks' boards, it slows down," noted a direct lender. "When you deal with multiple players, the pace of the deal is often dictated by the slowest one,” they added.

Much of the activity was centred in the industrials and consumer staples markets, according to 9fin data.

Source: 9fin

Opportunity for partnerships

Banks had been the dominant force in financing across southern European countries before the global financial crisis, but regulation implemented since then has caused a retreat, which in the past years has left space for private credit funds to move in. 

Since the global financial crisis, the number of banks in Spain has shrunk from 55 to just 10. The latest move is BBVA’s hostile takeover bid for Banco Sabadell, which has received approval from the ECB.

"With banks consolidating in Spain, companies have fewer financing options," said Nicolas Escribano, director at MV Credit. "Increasingly, we’re seeing private credit take opportunities away from the banking market.”

In June, private creditors and local banks vied for the debt financing of IK Partners' ongoing carve-out of ILERNA, the Spanish arm of its vocational e-learning provider, Skill & You. The sponsor ultimately opted for private credit, with CVC Credit leading the race to finance the acquisition.

Another route is finding ways of co-existing. 

“As banks continue to retrench, we see opportunities to complement bank lending while not over-leveraging businesses. This provides market opportunity for alternative lenders and banks collaboration,” said Barbara Ellero, partner and head of private capital at Anthilia Capital Partners. 

Sponsor efforts to secure senior debt in public markets and junior debt in private markets are becoming increasingly visible across Europe with a notable example in Spain. Here, Cinven secured a junior PIK tranche on top of €415m senior bank debt to finance its acquisition of Idealista, Spain’s largest online real estate platform, valued at €3bn. 

The syndicated loan market is more affordable, but doesn't offer the same level of flexibility as private credit. PIK financing is one way private credit gains an edge in certain deals, despite the higher cost, as 9fin explored in this analysis earlier in the year. 

“In markets like Spain, the unitranche space remains relatively small due to the unique size and characteristics of the market. This creates an opportunity in the TLB space, where private credit can fill the gap,” said Miguel González Moyano, partner and co-head of senior debt strategy at Oquendo Capital. “While banks have long been the primary lenders, our business model is designed to complement their lending activities, both through our senior and our subordinated debt strategies.” 

In Italy, an example of this type of partnership is the hybrid pari passu financing involving Pemberton and several banks to support the sale of civil engineering group Officine Maccaferri to Ambienta. Pemberton contributed around €200m to the package, while the remaining portion was provided by banks such as UniCredit, IMI-Intesa Sanpaolo, JP Morgan, Banco BPM, Illimity, and BPER.

Looking ahead

As private credit continues to mature across southern Europe, generational change is expected to play a significant role in the coming decade. With many business owners nearing retirement, we are likely to see a surge in private equity activity. 

In Italy, about 60% of SMEs are run by people over 60, according to a report from Bocconi University. Yet, only 30% of these companies make it past the first generation, and just 12% reach the third generation.

Looking ahead, sponsors are likely to seek exits from investments that have been held for extended periods, which should increase transaction activity across the region. 

“Despite the liquidity challenges associated with higher interest rates,” Anthilia’s Ellero said, “we continue to see resiliency in the lower middle market, in part because — even before entering into this period of elevated rates — loan structures have generally been more conservative.”

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