Private debt used in 52% of buyouts in Europe in Q1 2024 – Houlihan Lokey

May 31, 2024 (Preqin News) – Unitranche finance activity in Europe decreased by 21% to 85 transactions in Q1 2024 from the preceding quarter. Investment bank Houlihan Lokey said that, given that the first quarter is usually a relatively low-volume period, activity was resilient and is likely to pick up over the coming quarters.

While the interest rate environment has been higher for longer than anticipated, the prospects of rate cuts from the European Central Bank (ECB) and Bank of England (BoE) are raising hopes of an increase in sponsor-backed M&A.

‘Despite a cautious approach to leverage multiples, both banks and debt funds demonstrate openness to quality assets, painting a positive outlook for the remainder of the year,’ Patrick Schoennagel, Managing Director and Head of Sponsor Finance, Europe in Houlihan Lokey’s Capital Markets Group, said at the report's launch.

Regulations introduced after the Global Financial Crisis (GFC) have impacted European banks' ability to provide corporate loans. Private debt managers have since stepped up to meet this demand, offering incentives such as grace periods, flexible terms, and faster loan approvals for companies seeking capital.

Europe-focused private debt AUM has grown more than tenfold since the GFC, from $34.1bn in December 2009 to $471.9bn in September 2023, according to Preqin data.

Houlihan Lokey’s MidCapMonitor finds that private debt fund managers were able to defend and increase their market share of buyout financings against banks in key European geographies, including the UK, where 77% of transactions involved private debt funds in Q1 2024, up from 67% in 2023, and 72% in 2022. Similarly, private debt funds were used in 80% of deals in the Benelux (at a similar rate to the 82% in 2023) and Germany (55% in Q1 2024).

In countries where banks have maintained a strong presence in the corporate lending market, such as France, Spain, and Austria/Switzerland, debt funds accounted for only a minority of transactions (27%, 19%, and 25%, respectively). Across the whole of Europe, private debt funds financed 52% of buyouts, with the remaining 48% financed by banks.

European corporates used debt capital from banks and private debt fund managers to execute buy-and-build strategies, with add-on acquisitions comprising 44% of private debt transactions in the first quarter. This was second only to new financing deals, which comprised 45% of European private debt deals.

The growth of private debt and its increasingly important role in financing mid-sized corporations means the asset class is attracting increasing scrutiny. In April, the International Monetary Fund (IMF) called for regulators to ‘consider a more intrusive supervisory and regulatory approach to private credit funds, their institutional investors, and leverage providers’.

In the UK, the BoE announced in January that it intended to keep a closer eye on private debt. Lee Foulger, Director of Financial Stability, Strategy, and Risk at the bank, said: ‘Going forward, the Financial Policy Committee will continue to closely monitor risks from private credit and interconnected markets, drawing on market intelligence and the data sources available.’

The EU echoed this sentiment in February as it announced the adoption of new private debt regulations, including amendments to the Alternative Investment Fund Managers Directive (AIMFD). These new rules require EU-based fund managers to ‘improve the availability of liquidity management tools’ and ‘alleviate risks to financial stability and ensure an appropriate level of investor protection.’

_{The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.}