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Private Credit 

Alessia Pirolo

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.

At the start of a new season, it’s a good point in time to look ahead and forecast what will come next. This year, we have heard over and over again that we will have to wait for 2025 for M&A and private credit deal flow to pick up. Indeed, lower interest rates and competitive pricing suggest that things are moving in the right direction.

But how fast? With autumn now here and the last quarter of 2024 looming, a serious gap remains between actual deals in the pipeline and the huge dry powder in the pockets of GPs.

So what will be next? Preqin sat behind the crystal ball with its Future of Alternatives 2029 report. The numbers seem strong. In the next five years, global private debt AUM is expected to reach $2.6tn from $1.5tn at 2023-end growing at an annual growth rate of 9.88%. Direct lending is forecasted to remain the largest part of private debt, and the strategy with the strongest AUM growth at 10.18%, reaching $1.33tn in 2029.

With demand from borrowers still resilient, direct lending returns are forecast to increase to 11.51% IRR within the next five years, from 8.24% IRR in 2020–2023.

According to Preqin, 70% of investors who took part in a recent survey said that direct lending presented the best investment opportunities in the private credit sector. This is in line with the prediction that direct lending’s share of fundraising will reach 66% in 2029 from 55% by the end of 2023.

But overall, after an exceptionally strong 2021 fundraising for private debt with $234bn raised, the last two years have seen a decline which Preqin forecast will go on in 2025 with about $181bn raised, before recovering to a new record high of $240bn in 2027.

In a major move to expand its lending business, Apollo has obtained $5bn of funding from BNP Paribas for investment grade, asset-backed deals it will originate as well as the Atlas SP arm it acquired from Credit Suisse, Bloomberg reported today.

The private credit opportunity is still here for firms such as Apollo, but it has also been increasingly clear that not everyone will be able to share in it.

And yet, another week and another big name is pushing to sit at the table. BlackRock has launched a new division, global direct lending, which will be led by Stephan Caron, previously head of the European middle-market private debt business, and at the firm for over 10 years. At the same time, Jim Keenan, global head of BlackRock’s private debt business, and Raj Vig, co-head of US private capital, are leaving.

So far, BlackRock has been active in the space but has not challenged the leading direct lenders, as the deal rankings of 9fin’s European Private Credit Review H1 24 shows. The firm has about $35bn of direct lending assets, which is just a fraction of its $10.6trn total AUM. Its goal is to change this and to compete more directly against largest players such Ares and Arcmont for a leadership position in the space, according to 9fin sources confirming a Bloomberg report.

The expectation, though, is that there is room for just a few players in the game. “In the European market, capital and investment opportunities accrue to the top 25 largest private credit funds, with the direct lending market in which we operate having 10 or fewer direct competitors,” Marc Chowrimootoo, co-head of direct lending at Hayfin, recently wrote.

“Last year, many investors and managers were suggesting that the market was about to be shaken up by a flurry of new managers,” Chowrimootoo added. “That sentiment has now been turned on its head. A number of the newer entrants to the asset class are reportedly either re-evaluating their private credit strategies or scaling back their operations entirely.”

Several players share the same expectations, and have even more dire predictions for the future of ambitious new comers. “Especially smaller funds are having a very, very hard time at the moment,” a fund manager told 9fin. “There was a gold rush in the last few years and a lot of new funds entered the market, which now have problems raising the next generation of funds. So our expectation is that we will see quite a few fund managers going out of business.”

Competition is heating up. This is noticeable with HPS’s refinancing of web hosting firm Miss Group’s existing debt to fund an acquisition. The fund dislodged Ares as incumbent lender undercutting its bid by around 100bps.

Across Europe, we keep seeing a flow of software-related sale processes. Dutch tech investment firm Main Capital Partners is looking to sell its German HR software business Perbility and has mandated Rothschild to advise on the auction.

Listed Swiss software group Temenos has launched a process to carve out its fund management arm, Multifonds, off around €25m of EBITDA. And offers were due at the beginning of this week for software firm Ringler Informatik, marketed off an EBITDA of around €10m.

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