Private debt expertise at Pictet

Regional focus

The UK, for instance, is the biggest and most mature of Europe’s private debt markets, where direct lending has become an established alternative to traditional bank financing. Indeed, the UK was responsible for roughly a third of all the European deals since mid-2012.Deloitte Private Debt Deal Tracker, Spring 2024  Compared to other European geographies it is a relatively creditor-friendly jurisdiction, offering lenders more flexibility in the structuring of transactions and certainty via a wide body of established restructuring and insolvency case laws. It also has a relatively high share of the asset-light, low beta sectors favoured by our European Direct Lending strategy. High value-add service sectors, including tech, healthcare and life sciences, have accounted for 81 per cent of UK private debt deals over the past two decades, compared with just 60 per cent for the rest of Europe.

In contrast, France has historically been dominated by a network of regional banks, with less need for alternative sources of financing. That has changed in recent years, with borrowers becoming more interested in the flexibility offered by direct lenders, whilst the legal framework has also improved by rebalancing stakeholder dynamics, becoming more creditor-friendly. The process for corporate defaults has been streamlined, which not only makes it easier for lenders to recover assets and ultimately preserve capital, but also enables companies to turn around more quickly (such as via the recently introduced accelerated safeguard proceedings, or “sauvegarde accélérée”).

To find the best opportunities in France, you still need to have a dense network of local contacts. Deals sourced directly from business owners tend to offer more attractive returns compared to ones that rely on an intermediated process – a structure more common in the core upper mid-market and large cap segments. One of our recent transactions taps into the specificities of the French market, providing specialist software to help assess the energy efficiency of buildings in order to meet national sustainability and net zero targets.

Germany and the wider ‘DACH’ area is another market where direct lending has become the “go-to” for borrowers. Back in 2012, banks still dominated the German market. However, by 2024, their share had fallen to 43 per cent, with debt funds responsible for the rest.Houlihan Lokey MidCapMonitor This retrenchment by traditional bank lenders reflects the increase in regulation and their reluctance to take on too much balance sheet risk after the global financial crisis. But it is also testament to the increased flexibility offered by private debt funds. We can offer more bespoke, transformational, and flexible forms of capital, notably committed lines for future acquisitions, revolving credit facilities, and back-end repayment profiles to preserve cash. Additionally, Germany has a vast number of local champions spread across its regions; there are also opportunities beyond its borders in Austria and Switzerland.

As an example of the close links across this region, one of our portfolio companies is based in Graz – an old medieval town in Southern Austria – but has a strong client base across the border in Germany. Its cloud-based time-tracking software solutions are optimised to meet new German regulation that requires businesses to digitally track employee working hours. The company has a strong and established recurring revenue stream, as well as the potential to expand its software-as-a-service offering to new clients and markets.

Small is beautiful

Across all European jurisdictions, our focus is on the EUR3-12 million EBITDA lower-mid-market segment, where we see the greatest number of potential investment opportunities and where direct lenders have historically been under-represented. We see the best potential in low beta sectors (those which tend to be less volatile than the overall market, like software or healthcare) and in smaller companies with strong market shares in ‘micro-niches’ across Europe. These firms tend to be highly resilient to shifts in the business cycle and to be leaders in their markets.

Last but not least, we pay close attention to deal structures to protect our investments. This includes robust loan documentation tailored to nuanced, often complex local legal jurisdictions, for example the strict German restrictions around loan collateral. By lending through senior secured loans across the lower mid-market, we preserve investor capital by ensuring we are getting the first euro in case of any credit event and subsequent security enforcement. That provides valuable downside protection. As one of our private debt experts summed it up, “small is beautiful and credit first”.