Does Europe need more private credit?
Maybe it does, maybe it doesn’t. We’re just happy to see the data.
Private credit is a weird category. While we nod our heads and even write long posts about the asset class, what even is it?
Taking the Fed’s definition, it’s all the assets in private credit funds and Business Development Companies. If you extend the count beyond the US, Preqin puts global private credit assets under management at $2.3tn. This number, we are told, will double over the next four years:
But excluded from the count are vast quantities of investment grade direct private debt sitting with insurers. And isn’t old fashioned relationship banking just another name for private credit, albeit with a tonne of regulation, and minus yachts and sports teams for star employees? If private credit includes all lending outside of public market channels, it’s far far larger than $2.3tn (Apollo’s Marc Rowan famously puts his firm’s total addressable market at $40tn).
We’ll leave a total global holistic reckoning for another day, but Alphaville’s heart was lifted by a recent paper from Oliver Wyman. Because fine, the report makes the case for why rapid growth in private credit is needed, as Huw van Steenis outlined in MainFT. But importantly for Alphaville, it also wraps its arms around the task of sizing up at least one large portion of private finance: asset-backed lending.
Sampling the largest managers’ self-declared assets, the management consultant reckons that asset-backed financing accounts for around a quarter of the total market. We assume that more traditional direct lending makes up almost all of the rest.
If we multiply this approximate ‘quarter’ estimate by Preqin’s $2.3tn private credit number we get $575bn of asset-backed lending. Sure, this number is pretty rough. But we can use the data provided to guess how much of the total asset-backed lending market it constitutes.
Across Europe and America, the report estimates the stock of asset-backed finance is around $10.3tn. So private credit is maybe 5 or 6 per cent right now. This gives plenty of market share for private credit funds to grab — not only from banks, but also non-banks like insurers and captive financing providers (think financing arms of big manufacturers).
Moreover, they kindly sent us their break down of asset-backed lending in Europe so we could poke around the granular detail. Anyone who has had a go at this knows how hard it is to get this data, so chapeau:
Hover your cursor over the chart to see what each sub-segment is, how it splits between bank lending, non-bank lending (private credit, insurance, captive finance companies etc), and public instruments (eg, asset-backed securities, covered bonds, etc).
The small but emerging “digital and data centre” bar has a greater than typical share of non-bank financing. And the report argues that Europe needs more private credit precisely to finance this kind of project if Europe’s AI ambitions are to be fulfilled — as well as to roll out the energy infrastructure required to deliver the green transition.
As such, it appears to channel private market asset manager Apollo’s Rowan, when he argued in an earnings call last year that:
The banking system everywhere in the world funds itself short and is really good and really strong at a group of activities, generally not long dated. The public bond markets around the world generally are also good in another group of activities, generally simple and standard.Anything that is long dated and complex, particularly highly rated, currently in Europe has no home, read the Draghi report. And in the US, the home is with people like us.
Alphaville isn’t yet convinced that the real constraint facing European AI infrastructure build-out is financing, rather than, say, planning, power, regulation, or general wherewithal. And if banks are hitting issuer concentration limits or don’t have the appetite for the duration there’s always the bond market.
In fact, US AI-build out in the US has prompted monster bond issuance, which has so far been absorbed surprisingly well. And if it works for Americans, we’re not sure why this sort of issuance wouldn’t work for Europeans (if the projects were there).
But if there really is a long-duration complex asset-backed financing gap that bond markets just can’t fill, we agree that private credit funds seem a natural source of continental capital. As long as fund investors don’t persist in asking for their money back.