In comparison to the US, Europe represents a far less cohesive environment for private debt investors. While the UK has benefited from the English legal tradition and been a hub for activity, other countries have varying taxes and regulations which can affect the ability of private credit funds to invest. We take a look at the key markets.
France is by far the most developed private debt market on the continent with a healthy number of deals that mean it is beginning to challenge the UK’s dominance. However, regulatory issues in France mean that debt investors do need to be careful when doing deals in the country.
Lending in France is subject to a banking monopoly which only authorises certain entities to directly grant loans in France. Credit funds therefore have to using one of several exemptions to get around the law, such as using instruments not covered by the monopoly, acquiring loans from a fronting bank as a secondary transaction, or originating the loan directly through one of several acceptable vehicles domiciled in France.
There are some recurrent issues in withholding tax on foreign receivables in France and an ongoing debate on the application of double tax treaties as to whether an intermediary holding company is needed to mitigate issues around foreign withholding tax.
However, once these obstacles have been dealt with, the French market has reacted very positively towards private debt. Thierry Vallière, global head of private debt at Amundi, says: “France has less mid-sized companies than Germany, but the French market is much more aware of private debt and disintermediation is far more developed.”
As with other markets, being able to originate good deals is the main barrier to entry, and in France a local presence and tie-ups with the major banks can be the best way to access opportunities.
It’s Europe’s biggest economy, the manufacturing heartland of the continent, and yet private debt hasn’t really taken off in the country as it has in France and the UK. Both regulatory factors and business culture issues have combined to cause fairly sluggish growth in private debt deal numbers.
Like France, Germany has restrictive rules on which firms can lend money and a banking licence has been required for many types of firm. However, the law is beginning to be relaxed with a new framework for lending by alternative investment funds established in 2016.
But unlike France, business culture in Germany has been more resistant to changing its debt finance model, making it a more difficult market to crack, despite the wealth of mid-market companies in the country which offer attractive prospects for alternative lenders.
“German banks are very competitive but it’s also a really fragmented market and relationships can only get you so far. This makes it an inherently tough market for debt funds to get into,” says Jaime Prieto, managing partner at Kartesia.
In particular, Germany has many small regional banks that have strong relationships and brand recognition in the areas where they operate. These banks have long served the German mid-market and have the kind of local knowledge needed to bring them origination opportunities that outsiders may struggle to access. These banks are also able to offer much lower rates than most private debt investors which is often crucial in the banks’ decision making process.
While still quite small, Southern Europe is attracting a relatively health number of private debt deals. The Italian market tends to suffer from having many countries with high levels of leverage and complicated capital structures. Having a solid understanding of the local market and target companies is vital to operate in Italy. Messy finances can lead to taking a more conservative approach to terms in Italy, usually with shorter tenors and charging a premium rate of interest.
Spain has many opportunities, though usually smaller companies than would be seen in either France or Germany, but has typically been dominated by local banks. “It’s more difficult to find deals than in Italy, because of a lower level of disintermediation in Spain,” adds Amundi’s Vallière.
Spain is also benefitting from a solid economic recovery following several difficult years after the financial crisis and with the upset of the Catalonia crisis now quietening down, 2018 could see further growth in the country.
The low countries are in many ways polar opposites. While Belgium has seen very little private debt deal activity, the Netherlands has seen much more and considering its size is doing relatively far better than Germany.
A relatively open and developed market, close ties to the established market in the UK and a range of mid-market companies make the Netherlands an attractive place to lend. Solid rule of law and protection for creditors are also likely to help the Netherlands continue to punch well above its weight in attracting private debt.
Belgium however suffers from issues with its withholding tax which was increased to 30% in 2017, making it unattractive for debt funds.
Lastly, it is worth noting that Luxembourg is likely to remain the predominant fund domicile for the industry, though it is facing increasing competition from Dublin that is likely to intensify as the UK leaves Europe.
A popular destination for private equity activity, but still in the early stages of private debt growth. Norway has proven popular as a location for infrastructure debt owing to its significant energy industry and the country is reportedly well disintermediated with companies that have sensible financial structures, all important for private debt investors.
Sweden has attracted a fair bit of capital to its real estate sector but private credit provision to Swedish companies has remained sluggish. However, the Nordic region is one to watch with the high level of disintermediation expected to result in more deals in the future as firms look to alternatives to bank finance.
Expected benefits from problems with Denmark’s banking system several years ago have, thus far, failed to produce any significant increase in activity. Yet despite all this, the Nordic region is viewed positively by fund managers who believe growing awareness of private debt and good levels of disintermediation will enable many more deals to be sourced in the north of Europe.