Key Takeaways
- • Gabriella Sahlman, co-founder and Managing Partner of Fuels Capital, argues that private credit growth in Europe is not reaching the continent's mid-market companies, which are the least likely to obtain financing.
- • The European Commission puts Europe's debt financing gap at €39bn per year, while Mario Draghi's competitiveness report calls for at least €750–800bn in additional annual investment.
- • Per media reports cited in the piece, private equity-backed companies make up just 5–10% of investable companies in Europe yet absorb 89% of private credit.
- • Fuels Capital estimates that 25–30% of European mid-market companies do not qualify for bank lending, direct lending or bond markets.
- • The author argues that expanding credit access must not repeat the loose underwriting that drew scrutiny after the First Brands and Tricolour bankruptcies, and recommends asset-backed, niche specialist lending.
Summary
Private credit is under scrutiny after a series of high-profile bankruptcies, including auto parts manufacturer First Brands and subprime auto lender Tricolour, which exposed weak lending standards. The European Central Bank examined Europe's exposure to similar failures and flagged weak underwriting and opacity in parts of the market as serious concerns.
According to the article, Europe nonetheless depends on private credit because of years of chronic underinvestment. Mario Draghi's report on European competitiveness suggests the continent needs at least €750–800bn in additional investment each year for infrastructure, defence, startups and energy security, a gap that bank financing alone cannot close. The European Commission estimates the debt financing gap at €39bn per year.
The author contends that growth in private credit does not translate directly into financing for mid-market businesses. Private credit is concentrated in one borrower type: per media reports, PE-backed companies make up just 5–10% of investable European companies but absorb 89% of private credit. Fuels Capital estimates that 25–30% of European mid-market companies, typically those undergoing acquisitions, ownership transitions, expansion or refinancing, do not qualify for bank lending, direct lending or bond markets.
The piece argues that expanding credit to these complex but fundamentally sound businesses must not mean repeating loose underwriting. It emphasises structuring loans around underlying asset value, enforceable security, clear repayment sources and downside protection, since underwriting quality is revealed when businesses underperform. The author notes that some businesses are too risky to finance and that the opportunity lies in identifying those where value and security support a loan.
The article concludes that Europe needs a more diverse private credit market, with specialist lenders and niche credit funds financing sound businesses outside conventional models, rather than a larger market of the same type of lending.
According to the article, Europe nonetheless depends on private credit because of years of chronic underinvestment. Mario Draghi's report on European competitiveness suggests the continent needs at least €750–800bn in additional investment each year for infrastructure, defence, startups and energy security, a gap that bank financing alone cannot close. The European Commission estimates the debt financing gap at €39bn per year.
The author contends that growth in private credit does not translate directly into financing for mid-market businesses. Private credit is concentrated in one borrower type: per media reports, PE-backed companies make up just 5–10% of investable European companies but absorb 89% of private credit. Fuels Capital estimates that 25–30% of European mid-market companies, typically those undergoing acquisitions, ownership transitions, expansion or refinancing, do not qualify for bank lending, direct lending or bond markets.
The piece argues that expanding credit to these complex but fundamentally sound businesses must not mean repeating loose underwriting. It emphasises structuring loans around underlying asset value, enforceable security, clear repayment sources and downside protection, since underwriting quality is revealed when businesses underperform. The author notes that some businesses are too risky to finance and that the opportunity lies in identifying those where value and security support a loan.
The article concludes that Europe needs a more diverse private credit market, with specialist lenders and niche credit funds financing sound businesses outside conventional models, rather than a larger market of the same type of lending.
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