Can European direct lenders capitalize on their earnings in 2021?

The ability of European non-bank lenders to capitalize on their earnings in 2021 will depend on how they handle the damage to their credit portfolios from the coronavirus pandemic.

With expectations of an economic recovery supported by advances in mass immunization programs, the outlook for private credit companies looks bright as long as they do their homework on risk control, said Robin Doumar, founder of Park Square Capital. in 2004.

“Some lenders have poorer portfolios,” said Doumar, also a managing partner at the London-based company with around $ 10 billion in assets under management. “But for people who have latched onto high quality companies – and most importantly, stable industries – we come out of them much stronger.”

Private credit in general, and direct loans in particular, have exploded since the last financial crisis.

In Europe, private credit reached $ 259 billion in March 2020, including $ 142.7 billion in direct loans. This is an increase from $ 44 billion in European private debt a decade earlier, according to data provider Preqin.

Business share

After a break to take stock after the pandemic began in March, direct lenders have increased their share of business relative to banks in key European markets from Germany and France to the UK, according to GCA Altium, a consulting firm. In the market for syndicated loans, typically organized by banks and used to fund large-cap companies, issuance in Europe fell 27% year-on-year as of Dec. 11, according to data compiled by Bloomberg.

In the UK mid-market – the largest in Europe for transactions between € 20 million and € 500 million – the market share of private debt funds increased from 48% in 2019 to 72% in the first nine months of this year. GCA Altium data shows.

No more apprehension

Legacy banks are probably a bit more cautious, said Aymen Mahmoud, partner at McDermott, Will & Emery UK LLP in London law firm. “I don’t think they know the extent of their exposure and so I think there is more apprehension.”

With private lenders backing mergers, consolidating balance sheets and executing their biggest deal this year, Ares arranged a £ 1.875 billion debt financing for UK insurance broker The Ardonagh Group.

However, a key test looms for the industry as governments begin to unwind the credit and tax relief programs they have put in place to help businesses weather the pandemic.

The European Central Bank predicts that the euro region’s gross domestic product will decline by 7.3 percent this year. He predicts that real GDP will reach the pre-crisis level of 2019 by mid-2022.

“It will be interesting to see how next year plays out in the real economy as you see government grants and programs start to leave the system,” said Taj Sidhu, managing director and head of the business opportunity fund. credit The Carlyle Group Incs. All of these things will create capital needs.

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