Against a backdrop of wider macroeconomic uncertainty, investment in private credit in Europe continues to grow, supported by a broadening range of asset classes as well as welcome regulatory developments. Here, our infrastructure investment experts discuss their views on the road ahead for infrastructure investing.
The global market for private credit has expanded rapidly over the past 15 years. A diminished appetite for lending among banks, caused by the global financial crisis and subsequent restrictions, has seen non-bank financial institutions and private lenders provide increasingly large volumes of debt financing.
Figures published by credit rating agency Moody’s earlier this year indicate that the value of global private credit assets under management is on course to rise from less than USD 0.5 trillion in 2014 to almost USD 3 trillion by 2028.
Private credit has typically been extended to companies that are looking to raise capital outside of traditional banking channels and which may not qualify for standard bank loans. “In the corporate sphere, private debt plays a very specific role for companies that want to grow rapidly,” explains Christopher Carrasco, Head of SME Lending.
“They want to consolidate their market, and they want to maintain their first-mover advantage. From a lender’s point of view, these are businesses that have the potential to generate strong cash flow over the long term, so they are capable of repaying loans and covering interest payments.”
Carrasco points out that the European market is some way behind its US counterpart, where around 80% of corporate lending is financed through private debt.
“Because Europe is made up of many different countries, it is not as easy to apply the same pool of private debt. At the same time, the US pension fund industry has a much longer history of involvement in private debt. However, we are seeing much greater appetite for private debt in Europe, with the development of new asset classes and potentially greater levels of retail investor participation.”
Private credit – Opportunities and risks
For investors, there are a number of reasons to consider private credit:
- The yield premium on such investments means they can deliver higher returns than publicly traded high-yield bonds with the same credit rating
- Private credit investments can offer more significant downside protection than traditional unsecured bonds through the use of covenants
- Price volatility in private credit can be lower than in other parts of the fixed-income universe
- The lack of correlation between public equities and bonds means that private credit can add a valuable layer of diversification to portfolios.
However, these advantages need to be weighed against potential risks such as the relative lack of liquidity and market information relating to private-credit investments, as well as greater sensitivity to changes in market and macroeconomic conditions.
Recent macroeconomic uncertainty caused by President Donald Trump’s plans to impose wide-ranging tariffs on many of the US’s major trading partners has underlined the importance of careful risk management.
Stéphane Blanchoz, Head of Alternative Solutions, says “The market volatility that followed President Trump’s ‘Liberation Day’ tariff announcements in April is a good test for private credit, in the sense that it highlights the key factors one should focus on when building private credit portfolios.”
For example, Blanchoz explains, maintaining high underwriting standards is vital, while diversification – in terms of geography, sector and asset class – can also help mitigate credit risk. “Finally, managers should be very careful in their use of leverage to extend their exposures.”
The importance of sourcing capabilities
One key attribute of leading managers in private debt is their ability to source high-quality, off-market deals. “Investors are looking for proprietary deals that minimise overlaps within their portfolios,” says Vincent Guillaume, Co-Head of Infrastructure Debt. “They also want managers with the capacity to quickly deploy capital and offering attractive returns. This means that sourcing is a key differentiating factor.”
A solid track record and experience in the market are the cornerstones of the best managers’ sourcing capabilities. “We have developed strong relationships with key market players, including private equity sponsors, banks, financial advisors, developers and corporates giving us access to their opportunities.”
“These relationships are vital. But while we carry out our own proprietary sourcing within the private debt team, we are also very fortunate to be part of the wider BNP Paribas group. We benefit from privileged access to the corporate investment bank and the retail networks that can generate a huge number of opportunities that are less visible to other market participants.”
Private debt, the energy transition and digitalisation
While private corporate credit has dominated the market to date, the availability of private debt linked to real assets, such as infrastructure and real estate, has grown consistently in recent years.
“In Europe, we are seeing a range of new opportunities emerge beyond traditional senior secured debt,” says Stéphanie Passet, Co-Head of Infrastructure Debt. There are increasing opportunities in riskier debt profiles including more development risk or technological risk. “For investment managers, this brings new challenges in terms of risk analysis and deal selection.”
Meanwhile, the infrastructure debt segment is evolving rapidly, with the deal pipeline driven by two megatrends: the energy transition and digitalisation.
In terms of energy, there are deals not just in clean energy production – wind, solar or hydro power, for example – but also in battery storage and electric vehicle charging.
Europe also needs more digital infrastructure, and to expand its datacentre capacities. Looking at how the market is changing, we have moved from financing individual projects or Special Purpose Vehicles to providing capital for large portfolios of projects for developers.
The future of private debt in Europe
Regulatory developments are set to broaden the investor base for private assets.
The 2024 European Long-Term Investment Funds Regulation (ELTIF 2.0) has removed barriers that kept retail investors from participating in certain open-ended private equity and private debt funds, easing the minimum investment requirements and relaxing the rules around investment advice.
“ELTIF 2.0 is a major step forward towards the democratisation of private asset investing for both professional and non-professional investors,” says Blanchoz.
“By adding private credit strategies to their portfolios in place of traditional equity or credit strategies, investors may be able to improve risk-adjusted returns.”
As economic uncertainty persists, private credit can deliver dependable, less volatile returns. As the asset class matures, entering new markets and finding new sources of capital, its appeal and usefulness are likely to only increase.
