European direct lending market forecast to outperform US
Lower base rates in Europe will support an uptick in M&A activity this year, according to Pemberton research, that will boost the continent’s direct lending market.
A report by the alternative asset manager said there are greater opportunities for direct lending in Europe compared to the US, highlighting that European returns continue to exceed those seen across the Atlantic.
“In our view, credit investors will continue to earn higher spreads in Europe versus the US given the more developed and commoditised nature of the US market,” the report said.
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“We believe the pro-growth Trump government will underpin an ongoing divergence between European and US base rates, with lower growth in Europe but also lower all-in borrowing costs for European borrowers.”
Pemberton said that the economic outlook is improving this year in mainland Europe and the UK, with GDP growth projections ranging between one and two per cent.
While growth projections are higher in the US, particularly after the inauguration of the Trump government, some borrowers may struggle with the higher cost of borrowing caused by higher base rates, Pemberton noted.
“2025 is projected to see continuing good news around inflation, where it remains below the 2023 spike on both sides of the Atlantic,” the report said. “However, whilst the US seems poised for higher growth, the tighter US labour market and potential impact from tariffs increase uncertainty and the potential for both inflation and base rates to increase in the US.”
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Additionally, Pemberton predicted that US dollar investors will continue to benefit from higher returns this year when they invest in European direct lending due to currency movements.
“Current FX forwards are showing a two per cent uplift over one to three years, taking an illustrative 10 per cent net return in euros to a 12 per cent net return in US dollars if hedging strategies are executed smoothly,” it said.
“This is in-line with the two per cent uplift that we have seen in recent years.”
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