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Private Credit 

Fin Strathern

Michelle D'Souza

Welcome to Taking the Credit, 9fin’s weekly observations on the issues affecting the European private credit market. Find out more about what we do for private credit.

I hope everyone is holding space and feeling power in private credit this week, much like the fans of new box office hit Wicked?

If not, don’t fret, the cast of the Wizard of Oz spin-off didn’t know it was happening (or what it means) either!

But away from the Land of Oz, it seems the Wicked Witch has cast a sluggish spell on direct lenders, as fresh insights this week show unitranche activity fell in Q3 across the UK, France, and Germany.

The data comes from Houlihan Lokey’s MidCapMonitor, and highlights that activity fell by 26%, 21%, and 10% across each respective geography following an impressive Q2 (much in line with 9fin’s Q3 review released last month).

The Benelux region is singled out as the only geography that charted an increase in activity, up by a stellar 29% from the previous quarter — someone remembered their ruby slippers!

Digging in to the findings, market chatter and 9fin reporting suggests a similar outlook for the end of the year.

“The macro environment is quite bleak across Europe, but particularly in Germany right now,” one direct lender said. “We have a fair few portfolio companies under pressure, and the quality of businesses coming to market has been poor this quarter.”

“Given the macro, you would expect terms should be moving in favour of and back towards lenders, but everything seems to be getting more competitive,” another said.

Benelux appears to be sticking to the yellow brick road however, with 9fin coverage in Q4 highlighting four deals financed in the Netherlands, and another nine mid-market sale processes launching across the region. Such a flow of deals would suggest another strong performance awaits in 9fin’s upcoming January report.

“The Benelux market is more active now than I have ever seen it,” said one Dutch lender. “There feels to be a maturation of the market at the local level, with private equity firms that may have never used private credit now more willing to consider it.”

For the rest of Europe though, all eyes are fixated on 2025.

Goldman Sachs Asset Management published its outlook for the upcoming year last week and, perhaps most importantly for anyone with a stake in private markets, included a comforting graph to make us all feel better about the dreaded valuation gap.

Source: Goldman Sachs Asset Management Outlook 2025: Reasons to Recalibrate

They even included some stirring words: “A stabilising macro backdrop and a recalibration of investor expectations should act as a catalyst for a more normalised environment for private equity buyouts in 2025. We see signs that this process is already underway, positioning the industry better for exits and new capital deployment, albeit with some parts of the market looking more compelling than others.”

I’m holding space and feeling power in that. For sure.

Barings made history last week as the manager paired with BNP Paribas on Europe’s first private credit CLO, Barings Euro Middle Market CLO 2024-1. Dechert and Cadwalader served as legal counsel to the manager and arranger, respectively.

Major stumbling blocks have stood in the way of launching European private credit CLOs, something which the market has been working to overcome in the background for several years.

But, looking behind the curtain, US private credit CLOs have been around for two decades and are thriving with $133bn of assets across 265 deals at the end of September, per 9fin’s Q3 CLO rankings.

The US, however, has syndicated mid-market loans that will often carry ratings. Some smaller US banks and other funds also have sales forces and put quotes out on them, so they are quasi-traded, giving some semblance of liquidity.

That doesn’t exist over in Europe. Thus, the CLO market has been exploring how it can create an efficient structure and get the right capital structure to match up with that. The European middle-market is much smaller than its US counterpart, with bank financing also far more prevalent in the region.

One of the biggest hurdles the market has had to overcome is the upfront costs of securing ratings on an underlying portfolio of private assets, in addition to the CLO tranche ratings, and ensuring rating agencies are comfortable around the pool of assets.

Diversification has been another big factor. Having a sufficient number of loans to ramp up a portfolio that is big and diverse enough to keep investors happy is no small feat. The average number of loans in a BSL CLO is around 200-250.

Barings purchased the portfolio from its parent company MassMutual through a sale agreement, according to an S&P ratings report.

The €380m CLO portfolio has 61 obligors, which include 45 private credit names, and around 60% of those feature some variation of PIK toggle features. To enhance the diversification, Barings also included 16 broadly syndicated loans, making up 13% of the portfolio.

French issuers form the majority of the portfolio at 39.1%, followed by the Netherlands at 21.6%.

Will we see more private credit European CLOs? Absolutely. 9fin sources indicate that at least 12 deals are in some stage of development, though it is unclear which will go down the public or private route.

The Barings deal offers a proof of concept and a catalyst if the investor demand is there.

“The logic around managing a CLO is you have a reinvestment period and then a tail to that,” said one CLO manager, “if it’s done in a static fashion it’s just efficient leverage that self-liquidates.”

“I’m not really sure how people will be utilising private credit CLOs other than to say we’ve done it,” said another manager. “Such deals can only be done by firms with both an established CLO and private credit platform. To the extent it allows managers to take assets off balance sheet, a private credit CLO may be more beneficial than other leverage facilities.”

I’ll get you — and your private credit business too

Mega news landed mid-week as BlackRock has agreed to formative terms for a $12bn deal to acquire HPS Investment Partners, the Financial Times first reported.

The asset manager has been eyeing an acquisition-based move into private credit in recent years, as it looks to capitalise on the high fees of the alternative assets industry.

HPS, which has financed recent private credit deals for firms such as Miss Group and Ocorian, had been working on an IPO for much of 2024 prior to BlackRock’s offer. The firm has $145bn of assets under management globally, of which $123bn is in the form of private credit, according to its website.

With December rearing its head, many processes are starting to wind down for the year, or are getting pushed back to 2025.

Drawing an end to Fidelity International’s U-turn out of direct lending, Morgan Stanley and BlackRock have bought the firm’s only two private credit loans.

In Denmark, funds including Arcmont and GIC are eager to dislodge incumbent lenders Park Square and SMBC from the heated sale process for Hg’s Trackunit.

And in Germany, Rothschild has been appointed to sell EOS Partners-backed dermatology firm Medermis off €40m of EBITDA.

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