Upper middle market loans in Europe are offering good absolute returns and are becoming better value on a risk-adjusted basis than smaller deals because risk premiums are compressing, according to Invesco’s senior client portfolio manager Raman Rajagopal.
Speaking about the opportunities in the European private credit market, Rajagopal said that the difference in lending to bigger businesses compared to smaller ones, which pose a bigger credit risk, is “converging”, making upper mid market deals more attractive.
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“Upper middle market deals are becoming particularly attractive [in Europe] – from our perspective, you’re seeing a chance in that space to generate really attractive absolute levels of yields and also relative levels,” he said.
“A lot of allocators are looking to access European assets as they’re looking to diversify their exposure away from just dollar assets,” he added. That winds up as an opportunity as European loans currently offer a spread premium compared to dollar loans.”
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“Another consideration is in the European space, the difference in lending to larger businesses versus smaller is converging. The amount of spread or premium you’re being offered to take higher credit risk has been reducing.
“From our perspective, this is improving the relative value of investing in upper middle market deals as the spread for taking increased risk has reduced.”
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