The European banking sector faces a tide of new regulation in the form of the Payments Services Directive, MiFID II, IFRS 9, Basel III and the overarching EU Banking Union, which could have a positive impact on the wider banking sector and private debt investors. The moves could also help Europe catch up with post-financial crisis improvements and innovation made in the US banking and loans sector.
The European Central Bank has introduced new rules detailing how banks will be treated going forward. The good news is that this should lead to Europe being a financially safer place with more resilient banks in future. The bad news in the short term is that the European banking sector is actually quite badly equipped for the changes ahead.
We believe a number of European banks were slower to react to the full impact of the global financial crisis compared with the US.
In Europe, lending in particular is still dominated by banks, which is not the case in the US. Within the European and US markets there are significant differences in the way businesses can approach lenders to raise the capital for their companies and non-bank lending is far less common in Europe.
We run a growing European direct lending strategy, and new regulations such as the IFRS9 accounting rules could soon make it harder for banks to lend to companies but could in turn open up wider markets for non-bank institutions such as ours, which already provides loans to many European businesses.
When comparing the maturity of the US lending market to Europe, we think in the US, because of historical financial events such as the Savings and Loans crisis in the 1980s and 1990s, systems have developed which give far more lending options and sources of capital to companies that need them. That said, the global financial crisis has led to the advent of private debt funds in Europe specifically targeting the direct lending/mid-market area.
Additionally, when looking at the potential attractiveness of loans as an asset class to investors, borrowers see the real benefit and there are several reasons why they like to use direct lending funds. The advantages are not all about price. Instead direct lending can offer flexibility, speed of response and the partnership approach asset managers take when they are lending.
While we acknowledge global markets have been showing some signs of recent stress, we predict the European loans market will continue to offer attractive prospects in the year ahead. Europe is attractive for a number of reasons. In terms of the recovery cycle it is in a good place and within the European market we have been able to achieve consistency and stability.
Returns remain strong and attractive to many investors because the market is less mature than the US and there is less competition between funds at this stage in the development of the marketplace. We believe it continues to hold some strong potential.
Graeme Delaney-Smith is head of European direct lending and mezzanine investments at Alcentra, an asset manager focused on sub-investment grade corporate credit