Ares reaffirms commitment to core mid-market
ARES Management has outlined its commitment to the core mid-market, despite raising €30bn (£25.4bn) for its latest European direct lending fund.
The amount raised –announced last month – makes it the largest institutional direct lending fund to date based on LP equity commitments.
Despite the record fundraising activity, the private credit behemoth is sticking to the same strategy, and crucially, the same size of deals it began nearly 18 years ago.
Ares’ direct lending franchise in Europe was set up in 2007, with the asset manager lending to companies with EBITDA over €10m. Fast forward to today and the alternatives giant is still investing in companies with over €10m EBITDA, while many competitors have sought to increase their deal sizes.
According to PitchBook data, in the fourth quarter of 2020 the median deal size for direct lenders was €89.7m, and the median EBITDA was €18m. In the
second quarter of 2024 the median deal size was up to €300m, while the median EBITDA was €40m.
“Our main focus has been on backing midmarket companies right across Europe,” Michael Dennis (pictured left) partner and co-head of European credit, told Alternative Credit Investor. “Nothing changes with this fundraise.
“This is for a number of reasons, not least because the commercial banks are continuing to cede market share. With a big fund, opportunistically you can back larger companies
as and when they arise, but if you look at the current market dynamics, the liquid markets have come back pretty strongly. There is currently more liquidity for those larger companies, so it doesn’t make a lot of sense as the relative value sits better in our core middle market franchise.”
Although he did add that if those markets close again, the fund has the scale and the capability to back those larger companies.
For Dennis and his cohead Matt Theodorakis (pictured right), one big
advantage Ares has is the sheer size of the team. When the US-based group first set up its European direct lending strategy there were 30 investment professionals across four offices. Now, there are over 90 people as part of the team across seven offices, with the firm reportedly exploring adding two more branches in Europe. With the new fund now locked and loaded, the team will continue to hire.
“We have continued to invest significantly in our business – every vintage, every year, we add resources to what we do,” Dennis said. “We have 90 investment professionals, which we believe is a factor of two-to-three times larger than any other direct lending team in Europe. We continue to invest so we can take advantage of the growing market opportunity and also make sure we’re on top of monitoring the existing portfolio.”
He added that talent, however, is always difficult to come by and “the size of our team is >> 4
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Acertain amount of cynicism is a prerequisite for a journalist. Any sources, particularly those speaking on the record, will understandably be keen to present their most favourable version of events.
Within alternative credit, I always find this particularly apparent when it comes to fundraising conditions. Panellists at events consistently give a glowing view of current activity. One-on-one conversations may reveal a little more caution but still typically stick to the party line that everything is going well and picking up at a steady pace.
Recently I happened to speak to a young analyst at a very wellknown asset manager, who was far more candid than usual. He revealed that the asset manager was struggling with fundraising across the board, and that the whole of his team, including the portfolio manager of their newly-launched private debt fund, did not believe they could achieve their fundraising target.
The growing dominance of the private credit behemoths – Ares, Permira, Blackstone and the like – was cited as a challenge for other asset managers in attracting investment.
This is highlighted in our front-page story, an exclusive interview with Ares’ co-heads of European credit following their record direct lending fundraise.
How do smaller asset managers, or those less known for their alternative credit offering, compete? The usual response to this question is that they need to have a specific niche but surely there must be more to it than that.
This is a topic we’ll be exploring further in Alternative Credit Investor this year. If you have any views on the matter, you’re welcome to email me directly at suzie@alternativecreditinvestor.com
SUZIE NEUWIRTH EDITOR-IN-CHIEF
cont. from page 1
one of our best assets”.
The team has already deployed €6.4bn across over 50 investments from the fund and Theodorakis says they are excited to continue investing with more certainty in the market.
“Going forward, we’re excited as we think recent historical macro concerns have calmed down a bit,” he said. “From an inflation
perspective, we are back to near historical levels in our core markets.
“We do feel that alongside some of the interest rate guidance we’re seeing, there is more certainty in the market today than in prior years.”
But with an existing portfolio of over 200 companies already, and some potential challenges on the horizon – such as
how US President Donald Trump’s policies might impact the market – the team is also focused on making sure existing investments do not turn sour. For this, the firm has a dedicated portfolio team to monitor existing investments.
“Our portfolio is a core competitive advantage for us both from a deployment perspective
Private credit fundraising accelerates into target-smashing territory
A SERIES of multi-billiondollar fund launches by the world’s biggest private credit fund managers helped private credit reach new heights in 2024, while the early signs suggest that 2025 will be another record-breaking year for the sector.
In January this year, Ares Management launched the largest institutionally funded direct lending fund on the market, with €30bn (£25.4bn) committed. Meanwhile, Allianz Global Investors announced the final close of the global Allianz Private Debt Secondaries Fund (APDS) at €1.5bn – outstripping its initial target of €500m. This followed the success of a multitude of billiondollar-plus launches in the back half of 2024.
In September 2024,
global alternative asset manager Intermediate Capital Group (ICG) raised $17bn (£13.8bn) for the latest fund in its flagship direct lending strategy, exceeding its $11bn target. Around the same time, Park Square Capital reported that it had raised €3.4bn for the final close of its latest European direct lending fund, a 50 per cent increase from the previous vintage.
The following month, Blackstone announced the close of the first series of its evergreen institutional US direct lending fund with $22bn raised, comfortably beating its $10bn target.
Silver Point Capital raised more than $8.5bn (£6.7bn) for its third direct lending fund which was launched in November, taking the amount of investable capital the group has available for
and knowledge of sectors,” Theodorakis added. “We have sector specialty expertise that has helped us generate strong risk adjusted returns. Ares has been a strong believer in having a dedicated portfolio function, that’s now a sizeable team inside of that 90, and we’ve continued to scale that as our portfolio has grown.”
the strategy up to $15bn.
And in December, Triton announced the closing of its third private debt fund, having exceeded its €1bn fundraising target.
The popularity of these raises suggests that private credit funds may have surpassed their own stellar performance in the first half of 2024.
According to PitchBook data, private debt funds closed $90.8bn in the first half of 2024, although this total was expected to top $200bn, once all late closings had been reported.
However, there are fears that the space is becoming dominated by a handful of larger players who are fundraising in the billions rather than millions. This could leave smaller players out in the cold and struggling to compete for institutional funds in the year ahead.
British Business Investments director sees private credit growth as “structural force”
PRIVATE credit can “significantly” boost the UK’s funding capabilities, as banks continue to limit their lending, Richard Coldwell (pictured), investment director at British Business Investments (BBI) has said.
Despite ongoing risks for credit investors, including geopolitical challenges, the high cost of living in the UK, and the recent national insurance increases; Coldwell said that growth in private credit is "a structural force".
“It's driven by regulatory matters and the fact that the banks are not able to lend as expansively as they once did, and so private markets are filling that gap,” Coldwell told Alternative Credit Investor.
“I think that private credit continues to offer an attractive risk profile in a relatively uncertain world.”
BBI is a dedicated credit investor which allocates approximately £300m per year into credit strategies. Coldwell said that the institution is “very consistent” with its deployment, and will continue to allocate
to private credit funds and smaller alternative lenders in the year ahead.
“Direct lending continues to represent the significant majority of what we all understand as private credit,” Coldwell said. “And so that will always be the core part of any portfolio. But we're increasingly seeing an interest in diversifying away from that where there are attractive riskreturn opportunities.”
He added that BBI has a remit to finance lenders of all sizes, including peer-to-peer lenders. BBI was one of the first investors in former P2P lender Funding Circle, and has also provided funding lines for Folk2Folk and property lender CrowdProperty.
“We have a structured capital portfolio where we are effectively lending to smaller lenders through structures such as block discounting agreements, revolving credit facilities, and forward flow agreements,” Coldwell explained.
“Those are structures in which we are attaching directly to security. We are open to supporting alternative lenders of all sizes, as long as they are UK-focused. We're trying to support the broader market.”
BBI is a governmentowned entity, part of the UK government's Department for Business and Trade (DBT). Its remit is to support UK businesses, particularly in areas like venture
capital, debt finance and growth funding. Coldwell emphasised that BBI stands above politics and views its role as being there to support the market, regardless of the government of the day.
“The reason we exist is there is less institutional awareness of the opportunities that exist at the smaller end of the market,” he noted. “We're there to try and support those smaller managers.”
When onboarding a new lending partner, Coldwell said that primarily BBI is looking at the track record of the fund or platform. In particular, the institution is looking for lenders who can demonstrate that they can manage risk, and have the depth of resources to manage their portfolios in the event that something goes wrong.
“We expect the fund managers to have the recognition of that risk and the capability to address those situations when they occur,” he said.
“There continues to be strong demand. Investors and credit providers have to navigate that world of opportunity and take into account the risks that are apparent.”
Private credit investor predicts more regulatory scrutiny of systemic risk
THE CHIEF credit
officer of the UK’s largest retirement fund expects to see more regulatory scrutiny of the possibility of systemic risk in private credit, although she does not expect it to impact the industry’s growth.
Michela Bariletti, chief credit officer and head of global investment research at UK pension giant Phoenix Group, noted the shift of credit from highly regulated banks to less regulated managers, which she said was piquing the regulators’ attention.
She suggested that GPs could soon hear more from regulators seeking to understand whether or not certain types of investment instruments are suitable for all types of investors.
She said that some regulators are already looking at issues such as how to ensure that a new systemic risk is not created in the system due to the potential lack of liquidity.
“I think we will hear more from regulatory bodies on their views in terms of a potential build-out of the systemic risk,” she said.
“And that is going to be interesting to see how it's going to play out.
But at this stage I don’t see it as a risk to the volume or to the outlook of the development of private credit.”
Phoenix Group classifies itself as a ‘buy and maintain’ investor with an investment horizon of up to 60 years. Approximately £10bn of the pension fund’s assets are held within illiquid strategies.
Bariletti added that the credit market has been “fairly benign” over the past few years, particularly post-Covid, but she is mindful of the possibility of stressors to come.
“Going forward, the expectation is that there might be some stress happening, particularly on the private side,” she said. “So it's extremely important that when you play in the space, you know what you're doing.”
She added that a knowledge gap persists among pension investors when it comes to private credit investing, and pension investing in general.
“There is a lack of advice that is currently in the UK market,” Bariletti noted. “There is a very small portion of the population that gets advised, and that
Earn
Invest from just £1,000 9.13%
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advice is quite expensive.”
While Phoenix Group cannot provide financial advice, Bariletti said that the company is doing a lot of work to understand
how it can better support its investors and close that knowledge gap.
Go to page 12 to read the full interview with Bariletti.
Private credit CLOs in the US could overtake BSL CLOs
America, by the end of December 2024 the US private credit CLO market had grown by 16 per cent since the previous year with $36bn (£29.37bn) of new issuances.
By the end of last year, private credit CLOs represented 19 per cent of the total new issue CLO volume in the US market.
Amid central bank rate cuts, some industry experts have suggested that yield-seeking investors could show a preference for private credit CLOs over BSL issuances in the year ahead.
†
PRIVATE credit
collateralised loan obligations (CLOs) could surpass broadly syndicated loan (BSL) CLOs in the US market as investors
prioritise yields, industry insiders have predicted.
According to recent data from the Loan Syndications and Trading Association and Bank of
However, Brian Bejile, co-founder and chief executive of syndicated loan analytics platform Octaura, has warned that as private credit CLOs become more popular and take share away from the BSL market, managers may face calls for enhanced transparency.
“The level of disclosure is definitely something that the investors in these deals focus on as a potential risk,” says Bejjile.
“In the BSL CLO market, there's great disclosure. Oftentimes in middle market and private credit CLOs, the access to the underlying data may not be as good. So that does limit the
investors who can buy because they want to know what they are buying.
“The more investors feel like they can understand the risk of what they're investing in, the more comfortable they are, and the easier it's going to be to sell a transaction and do the next one and the next one.”
The main difference between a BSL CLO and a private credit CLO is the composition of the portfolio of loans. BSL CLOs are purchased from the market and can be traded on the secondary market. By contrast, private credit CLOs consist of middle market or private credit debt, with loans originated by the manager.
This makes BSL CLOs more liquid than private credit CLOs, but they might also be more vulnerable to market volatility.
Recent macro-economic uncertainty has driven demand for private credit CLOs on both sides of the Atlantic. While the US private credit CLO market had a banner year in 2024, the European market also saw the launch of its first ever private credit CLO, which was issued by Barings in November.
Banks and private credit managers move from competition to collaboration
PRIVATE credit funds
and banks have been in a continuous battle over who gets more market share. But now many are looking to move beyond the constant tug-of-war and focus on what they do best.
That means many banks are looking to set up partnerships with asset managers, to benefit from their dealmaking expertise, while using their own vast network for sourcing.
“People started to realise that there could be something mutually beneficial to be done,” said Stephen Boyko, co-chair of the corporate department and a member of the private credit group at Proskauer Rose. “If the banks would source those relationships, the credit funds could execute on them and raise the money.
“There's been much more of a push, particularly over the last two years on the bank side to find a partner. Because the banks really want to stay relevant to their customers.”
The partnerships are not always easy to set up and can take up to a year in the most complicated cases. Boyko has worked on three such deals last year and has two more in the pipeline.
Groups that have set up
such partnerships include Apollo and Citigroup or Centerbridge Partners and Wells Fargo.
Now, the focus is moving beyond direct lending into other areas of private credit. While the majority of these have been USfocused, Boyko also sees the model opening up in other geographies.
“The banks are feeling the pressure on the regulatory side in all aspects of lending, including leveraged lending, equipment finance, royalty finance, asset-based lending, and infrastructure lending, and they are teaming up now with private credit managers to source, underwrite, and fund those loans through joint ventures,” Boyko explained. “So you can have a bank that has multiple joint ventures with multiple parties for different strategies. I think the competition part's been working out pretty well because
they're partnering where it makes sense to partner and where it doesn’t, they're competitive.”
In most cases, banks are realising that a partnership is a better use of their capital and it is easier from a regulatory perspective, Boyko said. But some are continuing to set up their own outfits, in a bid to win back business from the private credit market.
Goldman Sachs recently announced the creation of the Capital Solutions Group, which will work with institutional investors to fund loans. If it is successful, other banks may want to follow its example. But for now, it is among the minority.
According to Deloitte’s Center for Financial Services, this approach is more common among large banks that have the capacity on their balance sheet. It also works for those that have their own wealth management or asset management businesses.
According to the consultancy’s own research, four out of eight global systemically important banks are building their own funds, in addition to pursuing partnerships. But this figure falls to four out of 26 for regional banks, which are mostly developing cooperative relationships. It is not just the banks that see the value in partnering up.
Jennifer Crystal, a member of the private funds group at Proskauer Rose, added: “We have some credit fund clients who see a real potential for strategic synergies. They want to take advantage of the bank's vast sourcing network while leveraging their experience and understanding of how to raise capital from institutional investors and how to operate and run a complex fund.
“Some credit fund managers view these partnerships as a way to add scale quickly. If you're not one of the top 10, but you're trying to differentiate yourself in respect of fundraising, if you can talk about having this kind of partnership or joint venture with a bank, I think it helps in terms of scaling the business.”
Continuation funds mark next stage of growth in private credit
THE EMERGENCE of large-scale continuation funds in the private credit space looks set to catalyse further growth in the market, as well as advance the expansion of the retail sector.
Reflecting on the recent news that BlackRock is to launch a $1.3bn (£1bn) private credit continuation fund, Milko Pavlov (pictured), managing director of Houlihan Lokey’s financial and valuation advisory group, said the move by the mega manager will open opportunities for similar transactions in future.
“In private equity 12 to 15 years ago, continuation vehicles were only used for the so-called ‘zombie funds’, but once the established players started to adopt them in order to provide liquidity, it became the norm for funds to do it,” he said.
“A transaction such as the BlackRock one implies that those holding private credit will no longer be afraid to explore these avenues. It will come down to pricing and terms. We are aware that there are secondary
transactions within the funds that take place, typically depending on the performance of the manager and the quality of the team. People will be trying to understand what the pricing will be to assess if that would be something to utilise for themselves.”
Ultimately, Pavlov expects the extra liquidity, and the emergence of a strong secondary market, will create a greater dependency on private credit for exit potential and to innovate new financing structures for a variety of uses.
This is likely to attract more retail investment, as well as highlight private credit as an ever more flexible financing option, where access to bank finance is not an option.
“Particularly in Europe, we're going to see far more retail going into private credit,” Pavlov said. “It’s an asset class that, once people are educated, understand the risk profile, and are able to conduct diligence on the GPs, I believe will trigger significant growth.
“Keep in mind, that
in a lot of European countries, you still have deposits at zero per cent whereas here we're looking at probably six to seven per cent yield, taking into consideration distribution and default provisions. We are seeing structures that provide certain elements of liquidity, which is more important for the retail segment.”
Commenting on the rising concern among politicians and regulators that private credit may present structural risks to the economy, Pavlov said: “I do sympathise with the concern of the regulators because as they see the data
coming through, they are starting to realise that private credit is playing a systematic role in the funding of the economy.”
However, he pointed out that while private credit does generally carry more risk than bank financing, the largest and most sophisticated players in the market undertake rigorous due diligence.
“From a reporting, monitoring and underwriting standpoint, the process is fairly robust, especially with the clients we work with,” he said. “However, there could be players that are not using a reputable valuation agent, where the appetite for risk might be higher and that could trigger a lot more issues further down the line.”
The rise of these ambitious and innovative private credit funding structures is set to cement the asset class’s place in the financial system going forward. Pavlov expects growth across the board, as well as more joint ventures between banks and private credit managers, and, ultimately, more consolidation.
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Buy and maintain
WITH £10BN INVESTED
in illiquid strategies, Phoenix Group is already bullish on private credit, and Michela Bariletti (pictured), chief credit officer and head of global investment research, expects to see even more growth in the market. She tells Alternative Credit Investor what she looks for in a private credit fund manager, and how the UK’s largest retirement fund approaches credit risk.
Alternative Credit Investor (ACI): Could you tell us a bit about the work that Phoenix Group does?
Michela Bariletti (MB): Phoenix Group is the UK’s largest retirement business. We manage around £280bn on behalf of about 12 million customers. Approximately £240bn is managed on behalf of our customers, so these are workflow pension schemes and defined contribution (DC) pension schemes, mainly. And then we have £40bn that we manage on the balance sheet, and they are assets that back our defined benefit (DB) pension scheme. We are very, very active in private markets on that side of the business.
ACI: What percentage of Phoenix's portfolio is invested in private credit currently?
MB: We have about £10bn of illiquid assets. We consider private credit to be an illiquid asset, so when we talk about that £10bn share of the assets, those are private credit but at an investment grade. On the shareholder asset side, by the nature
of us being a Solvency II investor, all our private credit investments are investment-grade.
In relation to the DC pension scheme, then it could be a variety of private credit in terms of credit risk profile and a mix of investment grade and non-investment grade. We are a buy and maintain type of investor. When we do an investment, we need to be absolutely comfortable that it's something that we can maintain, and particularly when it's illiquid in case there are situations where the investment is not performing.
ACI: What is your typical investment horizon?
MB: We will be looking at any maturity depending on our liabilities, but we can go out all the way to 50 or 60 years depending on the type of asset that we are looking at. Of course, it has to be
not only the credit risk, but also the sustainability of the assets and the investments that we are looking at.
Predicting 50 years is very challenging. I'm not saying that we will always get it right, but you look at the essentiality of the asset, the economics, and the nature of the cash flow that will be generated. At the same time, you look at the sustainability from an ESG perspective, and also which type of service the asset is providing and which are the counterparties that are involved in the business. All of that will then inform our decision about the longevity of the investment.
ACI: Which private credit managers do you currently work with?
MB: The way we originate assets on the shareholder side is both directly and with external asset
“ We are very, very active in private markets”
an asset with a long term profile. So you are potentially looking at real estate infrastructure projects or social housing, an asset that can be sustainable over a long period of time.
ACI: How can you ensure that sustainability?
MB: Over the past three years we have built a very strong internal desk in terms of credit risk management capabilities, with the ability to assess
managers. We work with Abrdn, MetLife and BlackRock, among others. We tend to choose the asset manager depending on their skills and capabilities in a specific asset or sector or geography. We have relationships with USbased asset managers as well to ensure that we have access to additional opportunities in the US. And we have a specialised real estate manager in the UK. So it's really a variety.
ACI: You recently entered into a joint venture with Schroders to create Future Growth Capital –how did this come about?
MB: Schroders had the capability and the positioning in terms of size and scope to give us confidence that we had the capability to originate the assets that would be suitable for our policyholders. I think also the size of the two companies fits very well in terms of creating the right balance of decision and influence. When you are in a joint venture, you need to ensure that you're comfortable with your partner, but also that the power is balanced and that you are aligned in what you want to deliver.
ACI: Are you currently looking to onboard any other managers?
MB: When we look to award a new manager, we're looking at their capacity and capability to originate certain assets. We will look at their experience and track record in terms of performance and ability to originate those assets. And of course, the ability to manage the credit side of things is extremely important. We spend a lot of time with our managers understanding their credit risk management
process, and particularly if there are any checks and balances internally from a line one versus line two perspective, and also ultimately into their workout capabilities. The workout capabilities are extremely
conversation with the borrower if things go wrong. So we like covenants that give us the ability to take the borrower to the table and to have a discussion when things might not go as planned. You want to be there as early as possible to understand the strategy, how they're going to manage it, and how they plan to recover so that you can be a partner in the journey rather than being caught by surprise. To me, underwriting and covenants are extremely important.
The other thing that we look at when we are lending or co-lending with other investors is the position of our co-lenders in terms of liquidity, particularly. Because when you lend, you don't want to be in a situation where your partner or someone that is co-lending with you is in a force-selling situation because
“ Underwriting and covenants are extremely important”
important when you're playing the private credit side because we are trying to create some liquidity. We are buying and maintaining, and we expect our private credit managers to have the ability to see through the life of the investment from its inception till the end, whether it is a good end or a workout situation.
ACI: Do you have any concerns about private credit at the moment?
MB: The most important thing when you're playing private is your underwriting standards. And that is something that we take quite seriously. We want to ensure that the transaction is structured in a way that enables us to have a
of liquidity constraints.
ACI: What is your outlook on private credit for 2025 and beyond?
MB: In terms of origination, I think it's positive. I think the outlook for 2025 is still fairly benign. Of course, there's a lot of uncertainty around what the Trump administration will mean for the global economy. Therefore, we would take a cautious stance when we look at new opportunities to understand how they might fit within the global headwinds that we can see.
We talk a lot about the golden era of private credit. Everyone is expecting it to continue to grow and I totally agree. I think private credit will continue to grow.
UK property presents great opportunities for fixed-income investors in 2025
IN 2025, FIXED-INCOME
property-backed investments are expected to gain attention from investors seeking stability and strong returns in a shifting economic landscape.
While the UK property market is expected to remain stable, the real opportunity lies in platforms like Folk2Folk that offer access to predictable income through property-secured lending.
“The UK economy is not in very good shape at the moment,” says Roy Warren (pictured), managing director of Folk2Folk.
“The equity market is volatile, but the demand factor of property in the UK means that there is more stability in property investing.
“Valuers are being very cautious at the moment, and we are seeing property valuations being reduced slightly, but we don’t foresee any significant decreases in the year ahead.”
Folk2Folk allows investors to tap into the inherent value of property without exposing them to the complications of property ownership or the volatility of real estate equity investing, while still gaining the benefits of property-backed stability for their capital investment and a fixed monthly income.
With a minimum investment of £20,000, the platform’s investors can earn fixed returns starting at 8.75 per cent per annum, with no fees to invest.
All of Folk2Folk’s loans are secured against UK property with a conservative loan-to-value (LTV) ratio of approximately 60 per cent
of open market value, ensuring a comfortable level of security.
Investors earn predictable monthly interest payments, providing a fixed-income solution for those prioritising consistent monthly returns. Additionally, Folk2Folk focuses on regional UK businesses, adding the benefit of supporting local and regional economies while earning competitive returns.
“Property-backed lending allows investors to benefit from the value of property without the burdens of ownership, such as maintenance, new tax legislation, or tenant management,” explains Warren.
“It also offers enhanced liquidity compared to physical property, especially through platforms like Folk2Folk, where loans are structured for a fixed term, with defined interest payments.”
As with any investment, property loans carry risks such as borrower defaults or changes in property value. However, these risks are mitigated via intensive due diligence and by securing loans against property assets, with relatively low LTVs. In Folk2Folk’s case, the 60 per cent LTV means that UK properties would have to decline in value by more than 40 per cent before the security no longer provides protection.
Folk2Folk manages the risk of borrower defaults by taking a hands-on approach towards due diligence, with all decisions made by experienced professionals rather than automated systems. This includes assessing the borrower’s financial position, business viability, and appointing external valuers who carry out the property valuations.
Warren is passionate about delivering great fixed returns to his investors, and offering an alternative to the volatility of equities and the challenges of property ownership.
He notes that the weaker UK economy has led to rising interest rates and persistent inflation concerns, which have made traditional fixed-income products less attractive, as their real returns erode.
“In contrast, property-backed investments with fixed income provide a hedge against these challenges, offering aboveaverage returns while benefiting from the security of underlying property assets,” says Warren.
Property-backed fixed income combines the best of both worlds: a tangible asset that holds intrinsic value; and a steady stream of income. In 2025, as investors look for stability amid economic shifts, these investments present an opportunity to pursue consistent returns without the complexities of direct property ownership.
This combination of tangible security and monthly income provides an attractive option for those prioritising financial stability during uncertain times.
Continental shift
The first European private credit collateralised loan obligation (CLO) has finally been launched. Could this be the start of a new era? Kathryn Gaw reports
FOR THE PAST FEW years, talk of the first private credit European collateralised loan obligation (CLO) has dominated the sidelines of private credit and broadly syndicated loan (BSL) events. But while the American private credit CLO market has gone from strength to strength, the European market continued to lag behind.
Industry insiders were beginning to lose hope that a private credit CLO would ever be launched in the European market. In fact, in the middle of 2024 one private
credit expert told Alternative Credit Investor that they did not ever expect to see a private credit CLO launch in Europe. But in November 2024, Barings announced the successful pricing of its debut private credit European CLO – the Barings Euro Middle Market CLO 20241 DAC – at €380m (£321m).
The first European private credit CLO had finally arrived.
“The launch of Barings' private credit CLO marked a significant milestone in the region's financial landscape,” says Iyran Clunis, EMEA head of sales at Allvue.
“The European market has traditionally faced challenges in creating diversified portfolios necessary for middle-market CLOs. It really comes down to how complex this product is as to why we haven’t seen the execution of true middle-market CLOs in Europe.”
Aaron Scott, a partner in the finance real estate team in the London office at Dechert, worked with Barings on its private credit CLO. He believes that the Barings issuance will usher in a new era for the European market, with more private credit CLOs to come.
“Since we launched this I've had another couple of managers who have reached out, who are at least thinking about trying to structure a European private credit CLO,” Scott told Alternative Credit Investor. “I know there are at least a couple of managers out there who are considering an issuance.”
Scott’s prediction has been echoed by a number of other private credit insiders. The general consensus seems to be that at least two more European private credit CLOs will launch this year. If they are received well, this could mark the
beginning of a lucrative new market.
In the US, private credit CLOs have been around since the early 00s, although back then they were referred to as ‘middle market CLOs’. Initially intended to offer a way to securitise corporate loans, they gained popularity for their high yields and ability to offer diversification to investors.
According to Bank of America data, at the end of 2023, private credit CLOs made up roughly 11 per cent of the $1.3tn (£1.07tn) CLO market in the US. That same year, $27bn of private credit CLOs
were issued by 28 managers. The potential of this market is enormous, yet to date it has been concentrated in the US.
The slower pace of progress in the European market has been attributed to several factors. Historically, there has been a lack of sizable asset managers and an insufficient volume of underlying loans. The complexity of European regulations has also made it harder for CLO managers to operate. And the variety of currencies in the European market makes it more
“ I know there are at least a couple of managers out there who are considering an issuance”
difficult to accurately price and access certain bundles of loans.
Barings has reduced the administrative and regulatory burden of its private credit CLO by opting for a static issuance.
“This means that on day one, all of the assets that were going to be in the portfolio were known, and those assets were disclosed to investors, and there's very limited ability to reinvest or buy assets after the closing day,” explains Scott. “In some ways that simplifies the deal.”
Static CLOs offer several benefits, including reduced management fees due to the absence of active portfolio management, increased transparency and predictability of cash flows, and potentially lower regulatory and compliance burdens. These factors can make static CLOs appealing to the types of investors who
prioritise stable and straightforward investment vehicles. They are also much faster to put together. Barings approached Dechert with its private credit CLO in mid-September, and the deal was priced and made public just six weeks later.
“Static structures may become more common in Europe due to investor preferences for simplicity and better risk management, as well as regulatory considerations,” predicts Clunis.
“For instance, differences in national insolvency laws and securities regulations can affect the enforcement of creditor rights and the transferability of loan assets across borders.
“These disparities can introduce additional legal and operational risks for actively managed CLOs that engage in frequent trading or substitution of assets.”
Static structures can also help to streamline the CLO approach by maintaining a fixed pool of
“ Static structures may become more common in Europe”
assets, thereby reducing the need to navigate the complexities associated with cross-border asset management. For instance, cross-border interest payments within the EU are subject to varying withholding tax rates, which can impact the cash flows and overall returns of CLOs holding assets from multiple jurisdictions. Managing these tax implications requires careful structuring and compliance, adding more layers to active management strategies.
“It's important to note that the European CLO market is still
evolving, and the choice between static and actively managed structures will ultimately depend on investor preferences, regulatory developments, and performance outcomes,” says Allvue’s Clunis.
“It'll be interesting when we see another one of these European private credit deals as to whether it will be an actively managed deal or whether they will continue down the static path,” adds Scott. “In the US, we see both.”
There is certainly enough investor demand to fuel a European private credit CLO boom, whether the issuances are static or managed. CLOs offer diversification, competitive returns, and access to private markets. They also pave the way for retail access, via CLO
“
of structure, so investors can choose to reduce their risk by remaining at the top of the capital structure, in the AAA tranche.
“It's definitely a hot space,” says Bejile. “There's a lot of investment chasing and I think it's a great opportunity for participants to come in and issue into the market.”
These participants are likely to be large global fund managers, who have previous experience issuing private credit CLOs in the US market. Barings fits this description, as do a handful of other managers. They will also need to work with experienced teams who can help manage the structuring of the loans. For example, Dechert was able to tap its US office for assistance with the Barings issuance, as they
Multiple CLO launches per year is still some way off”
exchange-traded funds (ETFs).
Brian Bejile, co-founder and chief executive of Octaura, spent 20 years working in the CLO space before founding Octaura, an electronic trading, data and analytics solution for syndicated loans. He has witnessed first-hand the enormous growth of the CLO market over the past two decades.
“The main advantage of CLOs is diversification,” says Bejile. “That’s because a CLO has a portfolio of loans behind it – typically there are least 100 different loans issued by many different companies. So you have exposure across all those positions and each position is typically less than one per cent of the portfolio. If an issuer defaults, its impact on the whole portfolio is somewhat marginal.”
CLOs also have the benefit
naturally had more experience arranging private credit CLOs in the much more mature US market.
And of course, dealmaking activity will need to pick up in order to create the volume of private credit opportunities required to justify a CLO issuance. Last year, the main driver for new issuance in the BSL market came from refinancings, not M&A activity. The BSL CLO market is viewed by many as a sibling to the private credit CLO market, sharing the same investors, issuers, service providers and sometimes even sharing the same underlying loans. However, the relative maturity of the BSL space better lends itself to refinancing, at least in Europe. For private credit CLOs to flourish on the continent, dealmaking will have to rebound.
According to S&P Global, outside of the private credit space, European CLO issuance is expected to remain high, reaching €135bn in 2025, driven by a broadening base of originators, better lending conditions, and increased market participation from banks seeking funding and risk transfer solutions.
“The same technical factors that drove European CLO new issuance to record levels in 2024 are expected to continue through 2025,” says Clunis. “This should result in similar or higher gross new issuance figures, with a potential increase in refinancings and resets.”
Investor demand is a great motivator, and private credit managers appear to be well aware of the potential of the European CLO market. One prominent private credit player who requested anonymity told Alternative Credit Investor that they are aware of multiple managers that are actively working on or at the early stages of private credit CLO development and issuance.
“Multiple CLO launches per year is still some way off and it’s difficult to say how the evolution of the market will progress given the different dynamics at play versus the US model,” they added. “Most of the managers we are speaking to are considering all options but the hope is for reinvestment to be part of the European model.”
These managers are likely to be watching the Barings issuance closely before committing to their own CLOs. Despite the challenges and complications of a European issuance, strong investor demand and evolving market conditions indicate a promising future for European private credit CLOs. It only takes one trailblazer to lay the groundwork for others.
Private Credit Connect: London
26 March 2025
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