Direct lending graduates to the main stage.
European direct lending is no longer about fringe players raising funds on the promise of yield, seeking to educate the market on what a unitranche actually is. The market has boomed in recent years, with as much as €32.5 billion raised in 2017 alone, according to a new report from Creditflux and Debtwire.
Last year was still a strong year for the sector, with around €25 billion raised, as managers focused on putting their cash to work. 39% of lenders deployed more than €750 million, according to our survey.
Chart: 22 European direct lending funds were closed in 2018, a dip versus the previous year.
The market is not without its challenges. With great yield comes great competition and the proliferation of direct lending funds has ultimately resulted in the deterioration of documentation,trickled down from the syndicated market, and tighter returns.
The use of leverage at fund level to boost returns is becoming a more common practice, and our exclusive survey reveals 37% of respondents saw 0.5 to 1 turn of leverage employed last year. Ares Management, which raised the largest fund of 2018 at €6.5 billion, is anticipated to use leverage to take the total size to €10 billion, our data shows.
Chart: Direct lenders are most optimistic about Germany, Austria and Switzerland (DACH) for growth in 2019.
Investors remain divided on the subject, with appetite for debt at the fund level very much a regional preference. But in general, investors are positive on the sector and remain focused on deploying their capital with direct lenders, even looking to increase allocations in some cases. LPs interviewed for this report told us they see the industry as a safe haven from macro uncertainties given the senior secured nature of the industry and the so far low default rates.
Download a copy of the report, European Direct Lending Perspectives, which offers a unique insight into the industry and the road ahead. The report contains the findings of our survey of nearly 100 market participants, show our exclusive mid market data and bring you interviews with investors and direct lenders.
