Direct lenders are eyeing opportunities in Southern Europe, amid increasing competition in the historically more popular Northern European markets.

Italy’s and Spain’s middle markets in particular are recording strong growth rates, according to industry experts.

While sponsor-backed deals are more common in Northern Europe, lenders need to navigate a world of individually-owned businesses in Southern Europe, which can bring its own challenges but also opportunities.

Read more: Monroe Capital closes $730m private credit CLO 

“With over 200,000 founder- or family-owned businesses across Europe, this segment is less cyclical and far less competitive than the private equity-backed space,” said Josh Shipley, European head of PGIM’s private credit business.

While the UK, French and German markets have a stronger foothold, sourcing the best deals in newer markets requires a thorough understanding of regional nuances, he explained.

Looking at the European market more broadly, M&A activity has picked up significantly, according to Sophia Alison, EMEA direct lending portfolio manager at Macquarie Asset Management.

Read more: Arrow Global raises  €4.2bn for European private credit and real estate 

This is particularly visible in high-quality companies that have EBITDA of €20m (£17.4m) to €50m, she said.

Still the investment selection process remains more critical than ever.

“The increased competition is driving convergence in pricing and terms across companies of varying quality, with the market now offering up to an extra turn of leverage to weaker companies and less pricing differentiation from stronger ones,” she added.

Read more: Fitch warns of “transmission risks” as European private credit market scales