The European lower mid-market offers significant opportunities for senior lenders, driven by untapped M&A potential and flexible financing solutions.
Higher interest rates and reduced bank competition fuel growth in private credit.
The private credit market has witnessed remarkable growth over the past decade and continues its rapid expansion. According to McKinsey, this segment was valued at $2 trillion in 2023 and is projected to reach $3 trillion by the end of the 2020s. Within this market, the European lower midcap segment is expanding swiftly, driven by the ongoing retrenchment of banks, a lower level of maturity compared to the US, and a vast universe of investable assets underserved by the broader market.
Direct lenders are increasingly vital in supporting lower mid-market companies in their rapid development.
On the demand side, lower mid-market private debt is particularly appealing to investors due to its regular, contracted cash flows and income. This stability is especially valuable when other asset classes lack distributions. The returns on private debt are linked to reference rates, which helps reduce volatility and protects returns. Historical loss rates in this segment are also favourable, further enhancing its appeal.
The lower mid- market is characterized by less competition, allowing for higher deal selectivity, stronger downside protection and improved risk-adjusted returns
Kartesia, a partner with Candriam since 2020 and a prominent player in this market segment, emphasizes the importance of a local presence to identify the most attractive opportunities and to create partner relationships with management teams with strong alignment of interest
Borrowers are increasingly drawn to sponsorless private credit due to the certainty of execution, speed, and the flexibility of financing solutions. Lenders like Kartesia can start with smaller investments, around €15 million, and scale up to €100 million per investment, providing the necessary support for growth over a significant period of time. Additionally, Kartesia offers tailored debt and capital solutions to non-sponsored companies, acting as a true business partner that can substantially invest in the firm while limiting dilution. Private debt funds can also incentivise companies to perform impact transformation by reducing debt margins based on achieving specific metrics. These collaborations benefit the private credit market by increasing the availability of customised financing options, reducing uncertainties, and supporting the growth and development of companies in the lower mid-market.
Higher interest rates have created favourable conditions for the private credit market. However, this environment also emphasizes the importance of discipline and selectivity. At Kartesia, managers are focusing on non-cyclical, cashflow-generative businesses and setting reasonable deal structures. Strong downside protection is essential, which has contributed to better default rates compared to other asset classes.
In conclusion, the European lower mid-market presents a significant opportunity for private lenders. The combination of deep market with strong untapped M&A potential and the retrenchment of banks has created a favourable environment. The appeal of private credit to sponsorless borrowers, the rise of collaboration between banks and funds, and appealing interest rates all contribute to the robust growth of the private credit market in this segment. As the market continues to evolve, Candriam in cooperation with Kartesia is well-positioned to capitalize on these opportunities and support the growth and development of companies in the European lower mid-market.