Growing Footprint of Private Credit in Europe

In this commentary we look at private lending through the lens of European Structured Credit and the various drivers of private credit expansion in Europe, the opportunities and risks for investors, and explore the similarities between private credit funds and the typical structured finance-like set up observed in Collateralised Loan Obligations (CLOs). We further explore how some private credit funds use leverage in a way that is akin to the securitisation format of credit tranching, which warrants a further assessment from the credit ratings angle. Finally, we seek to provide an analysis of the main features related to loan origination by credit funds introduced by Directive (EU) 2024/927.

Summary highlights:
-- The rise of private credit;
-- Opportunities and risks of private credit;
-- Unveiling AIFMD II: Transforming financial landscapes through loan origination;
-- Private credit funds: Tranching, structural considerations, and similarities with CLOs;
-- Morningstar DBRS Outlook on the European Private Credit Market.

“The unprecedented growth of private credit lending witnessed in recent years will likely lead to the expansion of Middle-Market (MM) CLOs in Europe, something that has become a norm in the U.S. However, the path for MM CLOs in Europe is still uncertain,” said Carlos Silva, Senior Vice President at Morningstar DBRS. “While the current environment presents challenges, the private credit sector in Europe remains poised for growth, with opportunities for innovation on the horizon.”