Trump takes centre stage

Opinions on how Trump's economic plans will affect European private credit were divided.

"The policies Trump might introduce could generate significant volatility, especially if he raises tariffs on certain countries," noted one lender.

The soon to be 47th president has proposed sweeping tariff reforms, including a 10% tariff on all goods imports, as well as considerable deregulation and tax reductions in the US.

If such plans go ahead, the ensuing trade war could lower expected UK growth from 1.2% to just 0.4% next year, stated British think tank NIESR.

“With Trump’s win, volatility is likely — but that tends to benefit private markets,” added another. "Direct lending serves as a hedge against volatility in portfolios, and it can also spell periods of significant opportunity in terms of investments.”

During periods of uncertainty from 2019 till today, liquidations have caused prices on leveraged loans to drop significantly more than direct lending senior loans, as highlighted by data collated from Lincoln and S&P and shown during a panel.

But other attendees were more reserved on how much US policy may sway European markets.

“Honestly, I don’t think Trump’s win will change a whole lot,” an investor said. "Market activity in Europe is strong and getting stronger, and what Trump may or may not do won't drastically affect world trade that much.”

“Given the success of the Federal Reserve in reducing inflation without a recession, I don’t expect Trump’s policies to result in any big changes,” another said.

Opportunities in the mid-market

With syndicated markets back to dominating large-cap LBOs and refinancings, investors in Monaco were primarily focused on how to capitalise on mid-market opportunities.

"The biggest opportunity in the mid-market is capturing the 40-50% share still controlled by banks,” said one panellist.

The share of European mid-market LBOs being financed by direct lenders over banks has gradually declined, down to 55% at the start of the year, since a peak of 67% in 2021, a graph using PitchBook LCD data showed.

Attendees had a variety of views on how best to turn the tide.

“We need to capture more of the mid-market: around two-thirds should be the goal,” one said. “We can't replace banks but there is room to take on more of their market share.”

Another saw collaboration as the right approach: “I think we should focus not on replacing banks, but working with them. Partnerships between banks and private credit funds can work incredibly well together, lowering risk and allowing for lenders to take on higher positions in companies' capital structures.”

Regardless of method, what is clear is that the return of syndicated markets has stoked fierce competition in the €10m-€70m EBITDA space, which is leaving some GPs feeling the pressure to deploy.

All eyes on M&A

“This concern that bigger is always better when it comes to GPs has led to an overcapitalisation of the high-risk, large-cap end of the private credit market,” a speaker said. “That is forcing lenders into the mid-market space, which is limited in size.”

Conferencegoers agreed that this squeeze is causing direct lenders to compete on two main factors, pricing and risk.

Just as large-cap funds are having to lower pricing to compete with BSL markets, so to are mid-market funds to remain competitive in an increasingly crowded space.

For one speaker, this spelt good news: “The significant pressure to deploy and realise returns should lead to an increase in deal flow.” But to what extent those deals will be optimally priced and have undergone proper due diligence in such a heated environment, remains to be seen.

Undoubtedly, sentiment amongst attendees was optimistic when it came to signs of recovery in M&A in recent months and looking forward.

“M&A recovery is now hitting its stride,” said one panellist.

“We are undoubtedly in a recovering M&A environment,” said another. “We’ve seen a big rebound in the second half of the year.”

In the first three quarters of 2024, deal value has shot up 28% and deal volume is up 13% compared to the same period last year, according to the latest data from PitchBook.

Reflecting on this uptick, one lender said: “I view M&A activity as a confidence barometer. If you can underwrite the interest rate forward curve, transactions become more digestible for both buyers and sellers.”

European private credit pipeline

This week, 9fin reported on several large-cap market processes moving forward.

In the UK, EQT and Cinven are in talks with direct lenders to back their bids for the accountancy firm Grant Thornton UK, while a third contender, New Mountain Capital, is working on an all-equity deal.

With accountancy deals the talk of the town at the moment, another deal is seeing Arcmont prepare a debt package to remain on as incumbent lender for any potential buyout of Waterland’s Cooper Parry.

Meanwhile, in Germany, the sale of family-owned supplements firm Orthomol has moved into the second round of bidding, with EQT in the running.

You can read our weekly updated pipeline of new and in-market deals here. And if you’re a fan of this newsletter but aren’t yet a subscriber, email subscriptions@9fin.com for a trial.

Join us for breakfast

What are your plans on Thursday, 14 November, between 08:00-11:00am? You still have time to sign up for a morning of networking, learning, and continental breakfast at our in-person London event.

The 9fin private credit team looks forward to discussing the latest trends in private credit and commenting on exclusive data from our European Private Credit Review Q3 24 alongside expert speakers from Blackstone Credit, Corinthia Global Management, Eurazeo, and Goldman Sachs. To join us, you can sign up at the link here.