Breaking down borders

European private debt is fast-growing but confined to a few key markets. A deal announced this week is the kind of initiative that should boost the late developers.

The European private debt market has grown to reach a comparable size to the longer-established US market in recent years, but geographically the opportunity set is unevenly distributed with some markets barely off the ground. A new partnership between a Polish debt fund and a European Union investment scheme suggests innovative ways can be found to stimulate activity in the sleepier backwaters.

Despite the fog generated by Brexit, the UK continues to be the region’s private debt stronghold – and by a notable margin, according to data from Deloitte’s Alternative Lender Deal Tracker. The spring 2018 edition of the tracker reveals that the UK accounted for 503 of the 1,301 transactions recorded over the prior 21 quarters, or 39 percent of the total.

France, where President Emmanuel Macron’s economic reforms are expected to generate increased interest in a range of investment activities, was home to 25 percent of deal activity and in Germany, the traditional banking stronghold where debt funds are beginning to make their mark, the figure was 10 percent. Europe’s remaining 47 countries accounted for just 26 percent of deals between them.

There is no one-size-fits-all solution to bridging this gap. However, the deal struck in Poland highlights the potential for innovation to bring financing solutions to companies that would otherwise be out of reach. The agreement sees the EU – through its Investment Plan for Europe (colloquially known as the Juncker Plan) – provide a guarantee scheme to Polish debt fund manager CVI.

The scheme is effectively a public-private partnership of the kind seen regularly in the infrastructure asset class, but rarely in the private debt space. It insures against credit losses incurred by the fund manager of up to 50 percent from investments in SME and small mid-cap companies with a higher risk profile than CVI would normally underwrite.

The guarantee means CVI can pass on cheaper financing to these companies and a potentially higher return (commensurate with the higher risk) to its investors, as well as greater investment diversification. A spokesman for CVI told PDI the scheme has been well publicised, bringing with it the additional benefit of raising private debt’s profile in Poland and making it easier to engage with potential investee companies and originate new deals.

For LPs, schemes such as this may add an extra layer of complexity on top of country risk in places they are less familiar with. But Rome – or even Warsaw – was not built in a day. An accumulation of baby steps should allow Europe’s nascent private debt markets to emerge from the shadow of the “big three” and offer investors a broader geographic mix in their portfolios.

Write to the author at andy.t@peimedia.com.