Hayfin hails private credit opportunity in Europe
European asset manager Hayfin has argued that Europe offers a more compelling opportunity than the US for alternative lenders and institutional investors.
In a 40-page report, titled ‘Why Europe?’, Hayfin makes the argument that Europe’s commercial bank-centric market means it is ripe for further disruption by alternative lenders.
According to the report, total assets held by European banks are more than two times larger than their US counterparts, $57tn (£44.5tn) versus $24tn respectively, despite US gross domestic product being 1.8 times that of Europe’s, or $27tn versus $17tn respectively.
“Altogether, it’s clear that as and when banks do pull back from more of their traditional lending activities, European public markets are less equipped to reliably pick up the slack, particularly for smaller borrowers, leaving the door open for private credit funds to take advantage of this opportunity,” the Hayfin report said.
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The firm said European private credit is more than a decade behind the US in its growth trajectory, with fewer private credit funds seeking to seize market share from banks in Europe compared to the US.
Hayfin estimates that there are between 250 and 300 funds in Europe, compared to more than 500 in the US. Consequently, “the competitive dynamics are tilted in favour of the most scaled players,” the firm said.
Hayfin said the European private debt market is supplied by a smaller number of large funds than the US. The five largest managers headquartered in Europe account for 37 per cent of all private debt capital raised since 2007, compared with 23 per cent in the US, while the next 20 managers account for approximately that much again.
“That means the top 25 funds have effectively raised approximately 75 per cent of all capital allocated to European private credit since the asset class’s inception, compared to approximately 50 per cent in the US,” the report said.
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As such, Hayfin believes there is more scope for European private credit funds to benefit from ongoing bank retrenchment. “Theoretically, [resulting] in better terms with lower leverage and more attractive risk-adjusted returns for private credit funds in Europe than in the US,” the firm said.
Finally, despite the US being perceived as a more creditor-friendly environment, Europe’s credit recovery rates have historically been higher, according to the report.
“US credit markets have historically seen higher default rates than those in Europe, with five-year average defaults in the US for leveraged loans and high-yield bonds more than 2x those observed in Europe. This pattern is also seen in private credit, with the European private credit default rate at around two per cent versus more than four per cent in the US.”
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