Regional Guide: United Kingdom slips back

The UK has dropped behind France for the first time in terms of deals.

Some of the shine came off the UK private credit markets during 2022. Deloitte figures show more deals were done in France than the UK in the second half of the year – the first time the UK market has been pushed into second place – and activity dropped by almost 20 percent.

Credit fund managers say their LPs are less keen on the UK and are shifting their appetite towards Continental Europe. Nicolas Nedelec, managing director in private debt at Eurazeo, says: “There is this overall perception that the UK is difficult right now and for sure our investors are not keen on us doing a lot of UK deals.

“But there are good companies everywhere, and in the UK in particular you have this culture of innovation and entrepreneurialism so there are some great opportunities.”

Nedelec says the lower mid-market is still quite underserved, because a lot of funds have moved up to target larger transactions.

Chris Bone, head of private debt in Europe at Partners Group, says his team has taken the strategic decision to shift focus elsewhere: “Our portfolio is currently underweight UK. We do think that the UK compared to other regions in Europe is experiencing more stress as a result of Brexit, availability of workforce, high inflation rates and so on.

“We will still invest in high conviction transactions there. But while we have always invested across the European market, we are now doing less in the UK and prefer what we are seeing in the DACH region, France and the Netherlands.”

Andreas Klein, head of private debt at Pictet Asset Management, says there are a number of reasons why the UK is struggling: “Following Brexit, China and now Ukraine, supply chains are still suffering in the UK, labour shortages are still an issue and productivity growth is very low, so we are therefore seeing very little in terms of true underlying growth in the UK economy.”

Klein also cites the peculiarities of the UK’s housing market being heavily weighted towards short-term fixed-rate mortgages, which makes the general demographic much more sensitive to rate changes. “The UK is more sensitive to volatility and will therefore likely suffer a bit more relative to some other stronger European peers and the US,” he says. “Having said that, from a debt perspective it is not necessarily a terrible situation provided the wheels don’t fall off completely.”

One positive is the relative strength of private debt in the current environment. “Whilst the last decade has played very well to the hand of equities, this lower, or negative, growth environment with higher inflation and higher rates is much more favourable to credit,” says Klein. “We are putting less risk into businesses that we are lending to and we are getting increased yield, which is not a bad position for us to be in.”

Scrutiny required

The more resilient industry sectors that have been in vogue with private credit in recent years do continue to present opportunities in the UK market. They simply call for more scrutiny in the current climate, according to Natalia Tsitoura, partner and head of European origination at Apollo Capital Solutions.

“Business services deals are still very busy in the UK. But inflation is definitely an issue in the UK that we struggle to see going away, so we are very focused on that in our underwriting,” she says. “With sluggish top-line growth, very high interest costs and high inflation, it is difficult today to stretch to the kinds of structures that private debt historically put together, even for the best businesses.”

John Empson, managing partner and co-head of CVC Credit, agrees about the need for a sector-based approach. “In the UK, we have continued to see some larger cap transactions and the focus has been on continuing buy-and-build opportunities in the mid-market in certain key sectors,” he says. “There has been a growing general migration towards healthcare, business services and segments within telecommunications, software and related services by a number of private credit providers.”

Empson adds that CVC Credit is assessing deals in segments where they feel either resilience has been proven or there are structural tailwinds supporting a business. “We are seeing more breadth in what we do and the opportunities are perhaps more asset specific,” he says.

Number of UK-based funds closed 2018-22

Total amount targeted by funds in market

November 2022
London-headquartered credit specialist Beechbrook Capital held a second close of its third UK SME Credit fund with £170 million ($199 million; €193 million).

UK manager LendInvest said it already has £200 million in commitments as it prepares to launch its latest open-ended flagship fund, which has a target of £300 million.

January 2023
White Oak UK, a UK non-bank lender, has pledged to provide £500 million to UK SMEs and mid-sized corporates in 2023.