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Increasing investor demand and a borrowers’ market are pushing French private debt funds to diversify their product range, but some warn that the disintermediation process is moving too slowly.

You sell cheese, but your customers are demanding bread. However, you enjoy selling cheese: it’s a product you know how to make and generates handsome margins. You may want a few more years of experience making cheese before you consider expanding into breadmaking. Especially as others are opening their own cheese shops.

This is about where the French private debt market is. Senior debt is the most popular investment strategy, but some firms are looking to diversify their product range as borrowers demand more customised solutions. It’s natural: a borrower’s market means companies use their negotiating positions to get better terms and tailor-made facilities. The funds respond accordingly.

Asset-based lending, for instance, is in the sights of many managers, while others are exploring aircraft leasing and trade finance. For those which prefer to stay in the senior space, there is a focus on improving origination capabilities. To be a success in France, many say, means more than just tagging your fund with a pan-European label.

It’s not surprising the asset class is taking off. The same trends pushing the development of the private debt market in the US and UK are present in France: low interest rates, bank retrenchment and the constant appetite of small- and medium-sized enterprises to acquire debt financing quickly.

Indeed, France is the second biggest market in Europe accounting for 26 percent of total transactions (238) in the last four years – behind the UK at 40 percent (368), but more than double Germany at 11 percent (101), Deloitte’s latest Alternative Lender Tracker report shows. Furthermore, the same report shows that 2016 was a good year for deals with 70 completed – a 3 percent increase compared with the 2014 high of 68 and up significantly from the previous year (59).

An evolution is taking place and an investment ecosystem being fostered. Regulatory changes started the process of opening the French private debt market to insurance companies. Asset managers have been free to provide unlisted loans to French corporates since 2012 and future developments are expected to make direct lending even easier.

But it is also a time to be patient. Speaking to a fund manager at one of the largest asset managers in France, the disintermediation process has been too slow. The anticipated boom of activity a couple of years ago has not materialised to the level expected, he says. French banks remain active lenders in the country.

This year is expected to see another strong 12 months for the country’s private debt market. Some of the larger players are expected to close sizeable funds in 2017, which likely means more records broken on the fundraising front. It’s a reflection of the expected increase in opportunities as corporates become more comfortable with alternative providers of credit. Many fund managers see their role as educators as well as financiers is starting to pay off.

While global asset managers may see the possibility of seizing increasing opportunities, locally based firms are quietly confident their deep knowledge of the idiosyncrasies of the French SME market will ensure they win the best deals. After all, who are better at making cheese than the French?