In conversation – navigating through the changing landscape of private debt

Against a background of wider macro -economic uncertainty, investments in private credit continue to grow in Europe, supported by a wide range of asset classes and welcome developments. Here our infrastructure investment experts discuss their views on the road for the road for infrastructure investing.

The global market for private credit has been expanded rapidly in the last 15 years. A reduced appetite for loans between banks, caused by the global financial crisis and the subsequent restrictions, has seen that non-bank financial institutions and private lenders offer increasing amounts of debt financing.

Figures published earlier this year by creditworthiness agency Moody indicate that the value of global private credit assets that is in management is on the way to less than USD 0.5 trillion in 2014 to almost USD 3 trillion by 2028.

Private credit has usually been extended to companies that want to attract capital outside of traditional bank channels and that may not be eligible for standard bank loans. “In the business atmosphere, private debt plays a very specific role for companies that want to grow quickly,” explains Christopher Carrasco, head of SME loans.

“They want to consolidate their market, and they want to keep their first mover benefit. From the point of view of a lender, these are companies that have the potential to generate a strong cash flow in the long term, so that they are able to repay loans and cover interest payments.”

Carrasco points out that the European market is a far behind its American counterpart, where about 80% of the business loans are financed by private debts.

“Because Europe consists of many different countries, it is not that easy to apply the same pool of private debts. At the same time, the American pension fund industry has a much longer history of involvement in private debt. However, we see much greater appetite for private debts in Europe, with the development of new asset classes and potentially larger levels of retailbeleg.”

Private credit – Opportunities and risks

For investors there are a number of reasons to consider private credit:

• The yield premium on such investments means that they can yield a higher return than listed high-yield bonds with the same creditworthiness
• Private credit investments can offer greater adverse protection than traditional uncovered bonds through the use of covenants
• Price volatility in private credit can be lower than in other parts of the fixed -income universe
• The lack of correlation between public shares and bonds means that private credit can add a valuable layer of diversification to portfolios.

However, these benefits must be weighed against potential risks, such as the relative lack of liquidity and market information with regard to private investments, as well as greater sensitivity to changes in market and macro-economic conditions.

Recent macro-economic uncertainty caused by President Donald Trump’s plans to impose broad rates on many of the most important trading partners of the US has underlined the importance of careful risk management.

Stéphane Blanchoz, head of alternative solutions, says: “The market volatility that the ‘Liberation Day’ rate announcements of President Trump followed in April is a good test for private credit, in the sense that it must be emphasized with the construction of private credit portfolios.”

For example, Blanchoz explains, maintaining high insurance technical standards is of vital importance, while diversification – in terms of geography, sector and activa class – can also help reduce credit risk. “Finally, managers must be very careful in their use of leverage to expand their exposures.”

The importance of sourcing options

An important feature of leading managers in private debt is their ability to find high-quality, off-market deals. “Investors are looking for their own deals that minimize overlaps within their portfolios,” says Vincent Guillaume, co-head of infrastructure debt. “They also want managers with the capacity to quickly use capital and offer attractive returns. This means that sourcing is an important distinctive factor.”

A solid track record and experience in the market are the cornerstones of the sourcing options of the best managers. “We have developed strong relationships with important market players, including private equity sponsors, banks, financial advisers, developers and companies that give us access to their opportunities.”

“These relationships are of vital importance. But although we perform our own purchasing within the private debt team, we are also very happy to be part of the wider BNP Paribas Group. We benefit from privileged access to the company investment bank and the retail networks that can generate a large number of opportunities that are less visible to other market participants.”

Private debt, the energy transition and digitization

Although private business credit has dominated the market so far, the availability of private debt has been linked to real assets, such as infrastructure and real estate, consistently grown in recent years.

“In Europe we see a series of new opportunities coming further than traditional senior secure debts,” says Stéphanie Passet, co-head of infrastructure debt. There are more and more opportunities in riskier debt profiles, including more developmental risk or technological risk. “For investment managers, this brings new challenges in terms of risk analysis and deal selection.”

In the meantime, the infrastructure debt segment is quickly evolving, with the deal pipeline powered by two mega trends: the energy transition and digitization.

In terms of energy, there are not only deals in the production of clean energy – for example wind, solar energy or hydro power – but also in battery storage and charging of electric vehicles.

Europe also needs more digital infrastructure and to expand its data center capacities. Looking at how the market changes, we switched from the financing of individual projects or vehicles with special purposes to providing capital for large portfolios of projects for developers.

The future of private debt in Europe

Regulatory developments have been set to broaden the investor’s base for private assets.

The regulations of the European long -term investment funds of 2024 have reservations of the long -term investment funds (ELTIF 2.0) reserved those investors of retail investors to participate in certain open private equity and private fault funds.

“ELTIF 2.0 is an important step forward to the democratization of private asset investing for both professional and non-professional investors,” says Blanchoz.

“By adding private credit strategies to their portfolios instead of traditional stock or credit strategies, investors may improve the risk-corrected efficiency.”

As economic uncertainty persists, private credit can reliably, less volatile return. As the activa class matures, entering new markets and finding new sources of capital, the profession and use of it will probably only increase.