Regional Guide to Europe: UK

The UK remains the most mature of Europe’s direct lending markets but share fell back slightly in H1.

Figures from Deloitte’s latest Alternative Lender Deal Tracker show the UK debt market is still the most active lending space in Europe but held a slightly smaller share of dealflow in the first half of 2021 compared to the first quarter.

In the first three months of the year, the UK accounted for 41 percent of European direct lending deals, but that fell to 38 percent for the first half.

The market saw a rush of activity at the start of the year as entrepreneurs rushed to close deals before the potential capital gains tax rate hike in March 2021, but still the highly competitive sponsor market drove valuations in the second quarter.

Number of UK-based funds in market

Total amount targeted by funds in market

Robert Connold, head of alternative lending in debt advisory at Deloitte, says: “The UK saw a slightly smaller share of the dealflow in Q2 compared to Q1, in part because the UK has been driving the recovery across Europe and France and Germany as the other two major markets saw an increase in transactions in the second quarter as those markets came back.”

As the most mature European direct lending market, funds have taken significant market share from banks and now dominate senior and unitranche deals, accounting for 71 percent of transaction volume so far in 2021, according to GCA Altium’s MidCapMonitor. Banks remain cautious, although bank finance remains relevant in lower mid-market deals.

At Kartesia, founding partner Jaime Prieto says the UK market presents strong opportunities: “We’ve seen a good number of opportunities in the UK for companies looking to develop buy and build platforms, and there’s also an increasing awareness and comfort with institutional direct lenders in the mid-market, versus the banks.

“That’s something the UK has been experiencing for a long time, but the combination of Brexit and covid meant some of the banks lowered their growth rates in the UK, while some of the largest direct lenders were focusing on growth in Continental Europe. For us, that’s presented good opportunities in the mid-market,” he says.