As the size of the German sponsored market has increased by leaps and bounds in recent years, so the proportion of deals financed by debt funds rather than banks has also shot up.

The number of leveraged buyout deals in the country climbed from 28 in 2012 to 103 in 2017, before falling back slightly to 89 last year, according to investment bank GCA Altium. Over this period, the slice of the deal pie accounted for by debt funds has gone up from precisely zero seven years ago to very nearly half (48 percent) in 2018.

For those who doubted that Germany would ever become fertile soil for debt funds given its traditional and apparently resilient banking culture – and there were many – the data is likely to be a source of great surprise or even shock. And for pan-European debt funds, which have thought of Germany as a potential pot of gold that may nonetheless be tantalisingly out of reach, it may well feel like a barricade has been successfully breached.

Dive a little deeper into the data, however, and the story becomes more nuanced. For one thing, how are debt funds able to be competitive on price in a market where the banks have driven down margins? The answer is that they’re doing it by teaming up with the banks. Last year, almost a quarter of unitranche deals, for example, featured first out/second out structures that used cheap bank debt to lower the weighted average margin.

In light of partnerships such as these, the old “bank versus fund” narrative seems increasingly outdated. But if it’s true that the banks are stepping back from centre stage – happy to play a role in deals without leading them – is this necessarily a bad move? Taking a more cautious stance may be entirely appropriate at a time when the cycle is late-inning and risks appear to be growing. The GCA Altium report noted that covenant-lite unitranches had recently been offered and executed, albeit for what it described as “very strong credits”.

It may be that, even in the face of more adventurous deal structuring plus political and economic headwinds, German private debt deals end up staying the course. The likes of covenant-lite deals may be creeping in around the edges, but it still seems far-fetched to imagine Germany becoming one of Europe’s riskiest markets overnight. That said, it may only take a handful of bad deals to taint the reputation of the non-banks and hobble their hitherto strong advance. Are the banks playing a clever long game?

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