European direct lending is $400bn, a third of private credit

European direct lending accounts for about $400 billion of an estimated $1.3 trillion global private credit market, close to a third and the second-largest regional market after the US. The estimates are from Bill Sacher, partner and head of private credit, and James Charalambides, partner and head of European private credit, in an Oct. 29 column for the Insurance AUM Journal.

The authors argue a strategic European allocation rests on scale and diversification in a $400 billion market, wider spreads than US loans, and currency hedging back to dollars. European transactions frequently offer wider credit spreads than US ones, reflecting market structure, competition, borrower characteristics and the complexity of lending across several jurisdictions.

For dollar-based investors, the relevant return is the hedged-to-USD yield rather than the euro spread. Currency hedging can substantially reduce direct euro/dollar exposure, and the economics of the hedge set the home-currency yield. The authors argue a European book keeps the US dollar base rate while adding European credit spreads, potentially producing a meaningful premium over US private credit yields after hedging costs.

The authors put European direct lending's growth rate above the US portion and describe the region as established but less mature and less saturated than its US counterpart. The wider spreads are tied partly to cross-border complexity, which a manager must underwrite deal by deal rather than treat as a structural discount available to any buyer.