Bank retrenchment, an underpenetrated market, and concerns around high software sector concentration have created a “compelling” relative value opportunity for European private credit, according to Pemberton Asset Management.
In its latest investment note, the manager observed that the “ongoing retreat” of European banks from corporate lending to mid-market companies is the single biggest structural driver of the growth in European private credit.
Regulatory reforms Basel III, and subsequently Basel IV, have “materially raised capital requirements for corporate loans”, in turn triggering a steady withdrawal from mid-market lending.
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Pemberton has identified the core mid-market, which is companies that are “too large for traditional business banking and too small to access public capital markets”, as the “most acute pressure point”.
In Europe, middle market bank lending accounts for approximately 50 per cent of European corporate credit compared to approximately 25 per cent in the US, reflecting “how much further the European transition has to run”.
“In the US, where the shift from bank to non-bank lending is significantly more advanced, private credit has already filled much of the gap. In Europe, that process is ongoing,” Pemberton stated.
Consolidation in the European bank market, leading to a reduction in the number of credit institutions, is also a contributing factor.
Europe is an “underpenetrated” market serving an economy of comparable scale to the US, according to Pemberton.
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The European private credit manager pointed out that global private credit assets under management stood at approximately $1.8tn (£1.3tn) in the first half of 2025, with North America accounting for approximately $1.1tn, or 61 per cent of the total, and Europe approximately $550bn, or 31 per cent. This is despite the EU and UK representing a combined GDP of $25tn in 2025, “not far short” of the US at $30.6tn.
“The economies are comparable in size, the credit markets that serve them are not,” Pemberton said.
It suggested that the current market environment, in which concerns around software sector exposure have dominated private credit headlines, has created further opportunity. The perceived threat to software revenue models from AI has led to “a sharp turn in sentiment”, triggering a surge in redemption requests at non-traded US business development companies.
“A number of market participants are impacted by the consequences of high software sector concentration, including bank markdowns of loan collateral that are particularly acute for levered funds, and by retail-driven redemption pressure, both of which are likely to reduce their ability to deploy capital,” Pemberton explained. “Banks, meanwhile, are tightening balance sheets in response to broader macroeconomic uncertainty.”
The private credit manager noted that, in combination, “these dynamics could potentially reduce competition in an already less competitive European mid-market further”, which in turn, may create better terms and stronger relative value for limited partners and “could favour managers with the necessary expertise, setup and dry powder to deploy”.
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