DWS Insights: Private credit approaches a $2 trillion market. DWS’ Dan Robinson, Head of Alternative Credit EMEA, discusses the asset class’s evolution, its opportunities and challenges, and its growing appeal to institutional and retail investors, as well as corporates.
Private lending as an alternative to bank loans can provide small and medium-sized enterprises (SMEs) with the capital needed for their transformation. SMEs are the backbone of Europe’s economy and have a key role to play in the transformation of Europe.
The European mid-market is at the forefront of transforming Europe’s economies, with decarbonization and broader sustainability goals a focus point as Europe strives to ensure it does not fall further behind in innovation and competitiveness. The role of private capital will be key to financing transition within Europe’s economies and complementing public sector funding.
Dan Robinson, Head of Alternative Credit EMEA at DWS, explains, “Private lending is rapidly developing, and this shift has created a $2 trillion market today from just $200 billion post global financial crisis.”
Key Drivers of Growth
Robinson identifies three pivotal factors driving the rise of private lending:
- Regulatory Shifts: Regulatory developments like Dodd-Frank, Basel III and upcoming Basel IV have shifted banks’ ability to generate sufficient returns on corporate lending, leaving a void filled by private credit.
- Origination Opportunities: Asset managers initially accessed opportunities through leveraged buyouts (LBOs) sponsored by private equity, a natural starting point given their connections and the risk appetite of private equity-backed firms.
- Mismatch in Bank Lending: “Banks’ short-tenor deposit models do not align with the long-term illiquid nature of corporate loans, creating space for private lenders.”
These factors have positioned private credit as a key alternative in global finance. Robinson predicts continued growth, particularly in Europe, which lags the US in terms of the penetration of asset managers into lending. “As regulation tightens, we expect room for Europe to grow rapidly still in terms of direct lending penetration.”
Why Private Lending Appeals to Investors and Corporations
Private lending is increasingly attractive to institutional and retail investors alike due to its yield, income-focused returns and low volatility. Robinson elaborates:
“For institutional investors private credit offers a high, income-based return, typically paid in cash on a quarterly basis, with yields more comparable to equities. During the zero-interest rate era, this was highly attractive in the search for yield. But even now, with higher rates, the absolute returns remain appealing. Even under high default scenarios, the margins provide a cushion, ensuring returns remain competitive.”
Retail investors are drawn to its stability and income potential, particularly in semi-liquid products. Robinson emphasizes, “The democratization of private credit is significant. Retail investors can now access an asset class with stable, high cash flows and reduced volatility compared to equities.”
Private lending also offers significant advantages for corporates compared to public issuance. It allows companies to avoid the scrutiny and ongoing expenses tied to public markets. Additionally, private lending provides flexibility, enabling bespoke financing solutions tailored to the unique needs of a business. Robinson adds:
“The relationship aspect is another key benefit. Unlike faceless public market lenders, private lenders can engage directly with borrowers in bilateral discussions, whether during periods of growth or financial strain.”
DWS sources investment opportunities through its own regional origination teams and close collaboration within the broader Deutsche Bank group. This includes its corporate bank, investment bank, and leveraged finance businesses. DWS additionally has established a capital solutions team that builds long-term relationships by addressing client needs.
Challenges and Considerations
Despite its advantages, private lending is not without risks. Liquidity remains a primary concern. Robinson notes, “In developing semi-liquid credit products, close attention must be paid to the components of the liquids bucket and adverse liquidity scenario analysis.”
Robinson also cautions about maintaining selectivity to protect the downside first, where the first discipline is the avoidance of vulnerabilities by focusing on defensive sectors which represent the highest credit quality.
Regional Opportunities
Europe stands out as a region of interest for private lending due to inefficiencies that favor lenders. Robinson highlights the German-speaking regions, the Netherlands, and the Nordics:
“Germany’s disciplined corporate landscape offers attractive opportunities, especially in sectors like manufacturing, healthcare, and technology. We also have a relatively positive outlook on the Nordic economies. Generally speaking, the insolvency regimes in the Nordics and Germany are supportive to our type of lending.”
The Road Ahead
The future of private lending looks bright as it continues to diversify across regions and products. Robinson concludes, “The market is still in its infancy. The next phase will see private credit expand beyond LBOs into asset-backed finance and direct access to the borrower. It’s an exciting time ahead of us.”
Find out more about “The transformation of Europe”
Further reading from DWS at Hedge Nordic: “Bridging the €2.5 Trillion Gap: Private Sector Key in Europe’s Transformation”
DWS Group (DWS) with EUR 963bn of assets under management (as of 30 September 2024) aspires to be one of the world’s leading asset managers. Building on more than 60 years of experience, it has a reputation for excellence in Germany, Europe, the Americas and Asia. DWS is recognized by clients globally as a trusted source for integrated investment solutions, stability and innovation across a full spectrum of investment disciplines.
*Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect. No representation or warranty is made by DWS as to the reasonableness or completeness of forward looking statements. No liability for any error or omission is accepted by DWS. Opinions and estimates may be changed without notice and involve a number of assumptions which may not prove valid.
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