The European lower mid-market offers stability and resilience, according to research from Candriam and Kartesia, while the firms dismissed concerns about wider systemic risk in private credit markets.
In an investment note, Thomas Joret, deputy head of high yield and credit arbitrage at Candriam, and Charles-Henri Clappier, partner, head of KSO France and business development at private debt manager Kartesia, wrote that, while the European private credit market is expected to double in size to €1tn (£0.87tn) by 2030, bank retrenchment is no longer the main growth driver.
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Instead, demand is shifting toward bespoke capital solutions in the deep lower mid-market, “from both private equity sponsors and non-sponsored, as family-owned businesses seek customised, non-dilutive financing”, according to Joret and Clappier.
They see large-cap sponsored leveraged buyouts as facing significant pricing and term pressure as a result of “intense competition” driven by “abundant private debt capital, steady bank participation, and subdued M&A activity”.
By contrast, small- to mid-sized transactions face lower competitive pressure, particularly the sponsorless ones, Joret and Clappier said, thereby providing “satisfactory” deal flow and quality, with terms that support premium returns and strong risk control.
They suggested that the most attractive deals tend to be in companies that are too large for local banks or regional funds, but that remain below the threshold of major mid-market players.
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“Lower mid-market portfolios and deal flow across Europe remain highly diversified by sector and profile, and granularity provides resilience through cycles,” Joret and Clappier said.
They also addressed the recent high-profile collapse of both First Brands and Tricolor in the US, which had “renewed scrutiny of valuations, transparency, and systemic exposure across the riskier parts of the credit spectrum”.
However, they concluded that these “pockets of stress” do not point to evidence of wider systemic risk, and that the two failures are “tied to specific fraud or isolated business practices”.
“Moreover, they are not linked to debt but primarily to bank-arranged structures, with private credit exposure limited to small secondary positions,” Joret and Clappier said.
Read more: “Lender control” not product complexity behind First Brands failure
In December 2020, Candriam acquired a 33 per cent stake in Kartesia, allowing it to expand its alternatives platform to include European private credit.
