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Analysis Direct lending
How direct lending took off in Europe
by Lisa Lee
In the second of our two-part history, we look at the evolution of direct lending in the UK, the sector’s expansion to other parts of Europe, and its growth into a dominant asset class
One of the hottest plays in finance is lighting up Europe. Private credit is having a year for the record books: the biggest single European deal ever, the largest fundraising in the region’s history, and its busiest quarter, have all come in 2025. As the European market has risen to become a significant lender, it makes sense to look back at its history to understand its path forward.
“I joined the business over 25 years ago when it was very small,” said James Reynolds, global co-head of private credit at Goldman Sachs’ asset management arm. “This year, we saw a six-billion-euro deal — a milestone I joked about a decade ago. Ten billion in Europe is only a matter of time.
Largest direct lending deals on record
Source: Debtwire
“Private credit in Europe will keep growing and pushing further into the larger cap end of the spectrum.”
These impressive feats are fanning envy from investment bankers, and also fears that, in pursuit of rapid growth, the asset class has lowered lending standards to the point of putting in peril the stability of the financial system.
Grabbing market share from banks
In the spotlight is direct lending, thus far the largest segment of private credit, where asset managers primarily provide debt to private equity firms’ leveraged buyout deals or to their portfolio companies. Direct lenders have been raising more sub-investment grade debt from investors — effectively stealing market share away from global banks. That trend is expected to continue.
“While private markets in general have grown significantly in the last decade in particular, we believe there’s still significant runway for this momentum,” said Michael Dennis, co-head of European credit at Ares Management.
This year, we saw a six-billion euro deal — a milestone I joked about a decade ago
James Reynolds
Global co-head of private credit
Goldman Sachs
European direct lending can trace its heritage back to financial innovations that sprung out of California in the 1980s, and the pioneering work of Michael Milken and the investment bankers at Drexel Burnham Lambert, who created the modern high-yield bond market (see box below). But it was from the wreckage of the Great Financial Crisis that today’s direct lending landscape took form. And the main centre for that growth was rooted in the UK — specifically, the City of London.
The US subprime mortgage crisis that began in 2007 quickly became the rest of the world’s problem. European governments ended up bailing out more than 30 banks across the continent over the next two years.
I can trace the beginning of the direct lending market to the UK government
Natalia Tsitoura
Head of origination, European private debt team
Apollo Global Management
In the aftermath, the overwhelming response was to increase regulations and capital buffers on banks. Particularly in the UK — which had nationalised Northern Rock, pumped tens of billions into the likes of RBS and Lloyds, and provided additional billions in liquidity — the regulatory impulse to curtail banking activity deemed risky resulted in an opening for private credit firms to lend to small- and medium-sized businesses.
The private credit move was done with the government’s seal of approval. In 2012, the UK established the British Business Bank, wholly owned by the government, with initial funding of GBP 1bn. It paved the way for private credit firms to morph from providing only riskier junior debt (called mezzanine in Europe) to also handing out senior secured loans.
We know where the risk sits because we hold it
Michael Dennis
Co-head of European credit
Ares Management
“I can trace the beginning of the direct lending market to the UK government. HM Treasury provided a billion to a billion-and-a-half for capital. The mandate was that you will be invested in UK middle market capital. Five funds received the capital, and I worked at one of them,” said Natalia Tsitoura, head of origination in the European private debt team at Apollo Global Management.
“For me personally, that was the beginning of a dedicated UK senior secured middle market — and it helped that one of your LPs was the UK government,” added Tsitoura.
The Financial Services Act, which fundamentally changed the way the banks are regulated in the UK, came into force in 2013. More rules were layered over banks in the following years, to the benefit of private credit firms.
The companies were high quality, the spreads were very attractive, but there was not a ton of M&A
Mike Carruthers
European head of private credit
Blackstone
Direct lending in the early period was dominated by British firms or US ones that set up shop in London and took on British characteristics. Increasingly, however, their eyes turned to the European continent.
“2015 was an inflection point in that we started seeing more direct lending activity across a broader set of markets as European commercial banks continued their retrenchment, giving us an opportunity to accelerate our expansion,” said Ares’ Dennis.
Growing into the mainstream
Expansion of the European private credit market was underpinned by new investors from around the globe, which were allocating significant capital with major players. They were turning private credit from a niche corner of credit into a mainstream asset class.
“From a fundraising perspective, the closing of our fourth commingled fund in 2018 was a watershed moment — given the step-change in capital raised — as it underlined a shift in investors’ appreciation of, and appetite for, direct lending in Europe,” said Matt Theodorakis, co-head of European direct lending at Ares. “There was a palpable sense of excitement from many of the first-time LPs in this asset class.”
Largest direct lending fundraises YTD
Source: Debtwire
Mattis Poetter, chief investment officer at Arcmont, concurs that 2018 was a wake-up moment when looking at the blue-chip investors the firm and its peers were attracting. “Although the sums invested at the time were substantial, for them it was still a small allocation in their overall pension or insurance portfolios. It was evident that allocations would grow meaningfully from here,” he said.
From 2015 to 2020, private credit firms raised bigger funds and deployed more capital. That growth was turbo-charged by a trio of events that roiled European financial markets: COVID, the Ukraine war and inflation.
“I knew the private credit markets would grow, but the pace of it was accelerated by the wider market turbulence. Investors appreciated the stability and resilience of private credit returns, while private equity firms really benefited from our scale and reliability,” said Arcmont’s Poetter.
Increasing the firepower of the European private market was its buttressing with cash from across the pond. US-based private credit titans that had raised a veritable war chest of cash were opening offices in London, hiring talent from the UK firms, and even looking to acquire European private credit outfits.
I knew the private credit markets would grow, but the pace of it was accelerated by the wider market turbulence
Mattis Poetter
Chief investment officer
Arcmont
While US transplants Ares and Goldman Sachs had long roamed in Europe, others came later. One of the now-dominant players in the region, Blackstone, got into European direct lending in 2015 and only really started on its current strategy in 2018 after evolving into a performing credit lender.
“Private credit has become a global business, and you’re seeing many European sponsors go to the US, and many US sponsors go to Europe. Having scale and flexible capital has helped us grow our business here,” said Mike Carruthers, European head of private credit at Blackstone.
The increase in funding suddenly made possible deals such as Adevinta, a then-record EUR 4.5bn debt package for the European classified company’s buyout by private equity firms led by Permira and Blackstone in 2023. Included among the lenders were US titans Blackstone’s credit arm, Sixth Street and Blue Owl.
In Europe, it’s really important to be local
François Lacoste
Managing partner, private debt team
Eurazeo
The invasion of Ukraine ushered in a period of nearly two years of that some have dubbed ‘the golden age of private credit’.Spiking inflation and interest rates made investment banks skittish to underwrite deals for the capital markets. In Adevinta’s case, investment bankers weren’t willing to back an all-euro facility, due to the weakness of the European leveraged loan market.
“The nice thing for our business was the deals that got done were excellent quality,” said Blackstone’s Carruthers, speaking of the post-Ukraine era. “There was very little bank competition, but there was still real competition from other private credit funds, so it remained a competitive field where we had to continue making our case. The companies were high quality, the spreads were very attractive, but there was not a ton of M&A.”
But for all the success of some US firms, the majority have struggled to gain a real foothold in Europe. Some of the biggest names in US private credit barely have a presence in London, let alone the rest of Europe. A few years ago, Blue Owl engaged in discussions to acquire UK-based stalwart Hayfin — but ultimately Hayfin opted to remain independent.
“I don’t think anybody likes tourists,” said Apollo’s Tsitoura. “What sponsors do like is global firms with a European HQ. We’ve got European decision-making. We have European dedicated funds. We have European leadership, with our regional headquarters in London and offices in Frankfurt, Zurich and, very soon, Paris. We look no different than other European firms.”
Part of the challenge with entering the European space is that while much of Europe bonded into one common market, lending is done on a country-by-country basis.
Market-specific expertise
“Across Europe, you need people on the ground who can address issues directly. For example, if you do a transaction in Spain or Italy, you need to understand who the key players are, how the market is structured, what types of companies operate there, and the overall maturity of the market,” said François Lacoste, managing partner in the private debt team at French investment firm Eurazeo. “In Europe, it’s really important to be local, as each market has its own specificities.”
Moreover, being based in Europe isn’t enough. Fidelity International disbanded its direct lending unit in 2024, having barely gotten started.
Alcentra once numbered among the home-grown heroes of European private credit, but a poorly-implemented succession plan prompted a string of defections and eroded its European direct lending business. Franklin Templeton was able to purchase Alcentra in 2022 for just USD 350m in upfront cash, a small fraction of what former peer Oak Hill Advisors commanded, and a price tag the CLO assets alone would have justified. While the CLO and infrastructure operations have performed well, Franklin Templeton has since acquired Apera Asset Management to drive its private credit efforts.
New entrants can be counterproductive for the market
Cécile Mayer-Lévi
Head of private debt
Tikehau Capital
For the most part, the European private credit market is hot, hot, hot. Perhaps no instance better showcased the war for talent and desire to enter the space than the team lift at Barings in 2024, which its own lawyers described as “one of the largest corporate raids at an asset manager in years”. In the space of a weekend, 22 Barings employees in the private credit team in Europe and the US quit en masse, sending shock waves across the market. They joined Paul Weightman’s Corinthia Asset Management, which began deploying this year. Barings, with the strong support of parent MassMutual, responded swiftly to stabilise the ship and holds 10th spot in Debtwire’s European direct lending rankings for this year.
“Every year, there are many new entrants. At the same time, it has become more and more consolidated. Hopefully, the market won’t have that many new players starting from scratch. New entrants can be counterproductive for the market, because when you have a new player trying to capture market share, then they’re ready to consent, not only on terms, but on legal documentation,” said Cécile Mayer-Lévi, head of private debt at Tikehau Capital.
In 2025, the banks are back and fiercely competing to provide financings. That’s driven down the fat returns private credit shops delivered during the golden era. In addition, there are now worries about the asset class. Jaime Dimon, the CEO of JPMorgan Chase, stirred a firestorm when he referred to two bankruptcies — First Brands and Tricolor — as ‘cockroaches’ and warned: “When you see one cockroach, there are probably more.”
The International Monetary Fund (IMF) now lists private credit among potential systemic issues and the Bank of England is stress-testing private credit firms. Kristalina Georgieva, managing director of the IMF, admitted that private credit “keeps me awake every so often at night”.
But according to Ares’ Dennis, systemic risk concerns often overlook the fact there is no mismatch in the duration of fund assets and liabilities. “We raise long-term capital from sophisticated investors for deployment in long-term, illiquid investments that we actively manage,” he said. “Importantly, we know where the risk sits because we hold it.”
Excerpt from our history of European direct lending Part 1
Both the US and European direct lending markets trace their origins to the ‘junk’ bond revolution started by Michael Milken in the 1980s. Milken’s seminal research showed weak companies were sounder than the conventional wisdom held at the time — so their debt could make for a good investment as long as yields were high enough. Milken and his bankers at Drexel Burnham Lambert began to create and sell high-yield bonds. Those high-yield bonds were then used to back leveraged buyouts, transforming the private equity industry.
Soon, Jimmy Lee and his group at Chemical Bank ushered in the leveraged loan market. In 1989, Peter Gleysteen— who was then Lee’s second in command and is now the founder and CEO of AGL Credit Management — pioneered the structure that turned LBO loans held by banks into non-amortising, bullet-payment loans attractive to insurance firms. In the meantime, a proto-private credit market was forming. This strategy, which was then called merchant banking or sponsored finance, saw financial firms such as GE Capital (where your correspondent once worked) and Heller Financial provide financing for modest-sized LBOs and lending to small- and medium-sized sponsor-backed companies. Already the ‘middle market’ was swinging along — and in competition with commercial banks.
It wasn’t long before the junk bond innovation crossed the Atlantic. For private credit, the entry into Europe came in the form of mezzanine debt, a layer of capital between fixed income and equity. Among the new entrants was one of the most storied names in finance: US-based investment bank Goldman Sachs, which had gambled on a foray into the US and Europe. Goldman Sachs was hardly alone. ICG, then Intermediate Capital Group, was founded in 1989 in the UK to enter the emergent mezzanine debt market. GE Capital had also journeyed to Europe to set up shop. Others littered the landscape, mostly under the radar. But while mezzanine debt counts as private credit, it’s not direct lending.
Direct lending in its modern iteration began in the aftermath of the GFC. For almost two years there was no leveraged buyout in the US and Europe. The industry was frozen. When the deal spigot turned back on, the landscape had radically shifted. Regulators were now on the prowl, determined to keep banks safe. They commenced a decades-long endeavour, which is still ongoing, to de-risk the banking system and maintain financial stability. As banks pulled back from lending to companies that would earn a sub-investment grade credit score were they rated, direct lenders stepped in.
Direct lenders began hawking a new financing structure, another import from the US: the unitranche, a blend of senior and subordinated debt.
US credit focused shop Ares saw its opportunity. The firm opened an office in London in September 2007 and hired a team from Barclays Leveraged Finance Group to start a European direct lending business. Home-grown firms were being founded too, many of which lead the market today. Alcentra was formed in 2002. Hayfin was created in 2009. Arcmont was established in 2011. In 2012, ICG launched its inaugural direct lending strategy in response to the lack of capital provision by traditional lenders.