The Rise of Private Credit in Europe
Over the past decade, private credit has transformed from a niche strategy into one of Europe’s most dynamic asset classes. Institutional investors, family offices, and pension funds have increasingly turned to private lending as an alternative to traditional fixed income, attracted by its yield premium and resilience in volatile markets.
In Europe, the private debt market exceeded EUR 400 billion in assets under management by 2024, with the DACH region (Germany, Austria, Switzerland) representing a growing share. This growth has been driven by the financing needs of Mittelstand and upper mid-market companies, which often face structural barriers to bank credit due to regulatory tightening and conservative lending practices.
The Financing Problem in the DACH Region
The DACH economies — while resilient — face structural imbalances that have widened the credit gap for medium-sized enterprises (SMEs and mid-caps).
a. Bank Retrenchment and Basel Regulations
Since the implementation of Basel III and IV, European banks have become significantly more risk-averse. Balance sheet constraints, higher capital adequacy ratios, and stricter risk-weighting rules have led banks to reduce lending to non-investment-grade borrowers and companies with limited collateral.
This has created a credit vacuum, particularly for companies seeking between EUR 10 million and EUR 75 million in flexible financing — too large for local banks, yet too small for capital markets.
b. Interest Rate Pressures and Refinancing Needs
The European Central Bank’s tightening cycle since 2022 has increased borrowing costs. Thousands of German mid-sized firms that financed expansion with cheap debt between 2018–2021 are now facing refinancing at double or triple the previous interest rates.
In addition, the maturity wall of 2025–2027, when large volumes of corporate loans will need to be rolled over, has intensified the demand for bridge and unitranche financing.
c. Energy Transition and Industrial Transformation
Germany’s accelerated transition toward decarbonization and energy efficiency has required billions in capital expenditure (CAPEX) — particularly in automotive, chemicals, and industrial manufacturing. Traditional banks have been reluctant to finance these transitions due to uncertainty in regulatory frameworks and project risk, further fueling the need for private credit solutions.
Sectors in Need of Private Credit Support
Private credit funds and direct lenders are finding sector-specific opportunities throughout the DACH region. These include industries undergoing transformation, consolidation, or temporary distress.
- Industrial and Manufacturing: Germany’s industrial backbone is under significant strain due to higher energy costs, global competition, and ESG-driven production changes. Mid-sized firms in precision engineering, automotive components, and chemicals are seeking growth capital and refinancing solutions to modernize facilities and reduce carbon intensity.
- Renewable Energy and Infrastructure: As the EU accelerates the Green Deal, the DACH region faces heavy investment needs in solar, wind, biogas, and hydrogen infrastructure. Many project developers rely on bridge loans and construction financing while waiting for long-term institutional capital.
- Technology and Digitalization: DACH-based software, data center, and IT service companies often prefer unitranche or growth loans to finance acquisitions or international expansion without equity dilution.
- Healthcare and Life Sciences: Private clinics, medical equipment manufacturers, and biotech firms require working capital and expansion loans, often in the EUR 10–50 million range. These borrowers are typically non-rated, making private credit ideal due to its emphasis on cash flow and fundamentals rather than formal ratings.
- Real Estate and Hospitality: Hotels, logistics centers, and mixed-use developers are turning to special situation and bridge lenders for refinancing and DIP loans, particularly where assets remain fundamentally sound but liquidity is constrained.
Types of Private Credit Solutions
a. Direct Lending
Direct lending refers to bilateral or club-style loans originated directly by non-bank lenders to companies.
- Loan size: EUR 10m – 75m
- Tenor: 3–7 years
- Structure: Senior secured, often with flexible covenants
- Use cases: Acquisitions, refinancing, working capital
b. Unitranche Financing
Unitranche combines senior and subordinated debt into a single blended loan, simplifying capital structures and reducing intercreditor complexity.
- Loan size: EUR 25m – 100m
- Interest rate: 8–12%
- Use cases: Leveraged buyouts, recapitalizations, expansion
c. Bridge Financing
Bridge loans offer short-term capital, typically 6–18 months, to cover temporary liquidity needs, pending refinancing or equity injections.
- Use cases: Pre-acquisition financing, project completion, delayed syndication
- Feature: Speed of execution — approvals within weeks
d. Credit Restructuring Loans
Restructuring or amend-and-extend financing helps companies manage existing debt burdens by refinancing or adjusting repayment terms.
- Use cases: Balance sheet optimization, refinancing maturing bank debt
e. Distressed Credit and DIP Financing
In distressed or insolvency scenarios, private lenders can provide Debtor-in-Possession (DIP) loans to companies undergoing restructuring under legal protection.
- Goal: Maintain operations and stabilize liquidity until recovery or sale
- Return profile: Double-digit yields due to elevated risk
Investment Criteria and Borrower Profile
Private lenders active in the DACH market typically target medium-sized companies that fall between traditional SME and large-cap segments.
- Headquarters: DACH region or neighboring countries
- Annual revenue: EUR 20m – 500m
- EBITDA: EUR 3m – 50m
- Loan size: EUR 10m – 75m
- Purpose: Growth, acquisition, refinancing, liquidity support
- Covenants: Flexible, cash flow-based
- Credit rating: Not required
Why Private Credit is Filling the Gap
Private credit offers three core advantages that banks increasingly cannot match:
- Speed and Flexibility: Transactions close in 4–8 weeks versus months for banks.
- Tailored Structures: Loans designed around borrower-specific needs — CAPEX, M&A, or restructuring.
- Partnership Approach: Long-term lenders providing follow-on capital and strategic input.
Investor Perspective: Why Family Offices and Institutions Enter Private Credit
Institutional investors — particularly family offices, pension funds, and insurance companies — increasingly allocate to private credit due to its:
- Attractive risk-adjusted returns (8–12% yield range)
- Low correlation to public markets
- Inflation protection via floating rates
- Exposure to real-economy value creation
Market Outlook: DACH Private Credit in 2025–2027
- Refinancing wave: Over EUR 200bn in mid-market loans maturing by 2027
- Private equity demand: Increased reliance on unitranche facilities
- Restructuring cycle: Rising insolvencies driving special situations lending
- Green transition: ESG-linked loans gaining traction
Case Scenarios of Financing Needs
Scenario 1: A German EV component manufacturer with EUR 120m turnover secures EUR 25m direct lending for CAPEX expansion.
Scenario 2: An Austrian healthcare group obtains EUR 40m unitranche financing for regional acquisitions.
Scenario 3: A Swiss solar developer uses EUR 15m bridge financing while awaiting institutional investment.
Scenario 4: A logistics firm receives DIP financing to maintain operations during restructuring.
Key Risk Considerations
- Illiquidity: 3–7 year lock-ins
- Concentration risk in cyclical sectors
- Regulatory complexity across jurisdictions
- Active monitoring needed to prevent default
Well-managed private credit portfolios historically show default rates below 2% and recovery rates above 70% in senior-secured strategies.
A Strategic Window for Investors and Borrowers
The DACH region stands at a pivotal moment. As banks retrench and industrial transformation accelerates, private credit emerges as a stabilizing force — supporting growth, restructuring, and innovation.
For investors, it offers yield and diversification. For borrowers, it delivers flexibility and execution certainty. Private credit is no longer an alternative — it is becoming the mainstream engine of mid-market finance in Europe.
Damalion supports entrepreneurs, investors, and family offices with compliant incorporation, financing coordination, and legal/tax alignment across the EU.
Glossary: Direct Lending & Special Situations (DACH)
- Basel III / IV
- Bank rules that raise capital and liquidity requirements, reducing lending to higher-risk borrowers.
- Bridge Financing
- Short-term funding (≈6–18 months) providing liquidity until refinancing or equity arrives.
- CAPEX
- Capital expenditures for assets like plants, machinery, or technology upgrades.
- Cash Flow–Based Lending
- Credit underwritten primarily on operating cash flows rather than collateral or ratings.
- Credit Restructuring Loan
- Financing to refinance, amend, or extend existing debt and optimize the balance sheet.
- DACH Region
- Germany (D), Austria (A), Switzerland (CH).
- DIP Financing
- Debtor-in-Possession credit for companies under court protection to fund operations during restructuring.
- Direct Lending
- Non-bank, bilateral or club loans (often senior secured) to corporates.
- Distressed Credit
- Loans or securities of financially stressed issuers; higher risk and potential return.
- EBITDA
- Earnings before interest, taxes, depreciation, and amortization; core profitability metric.
- ESG
- Environmental, Social, and Governance factors used in investment decisions.
- Family Office
- Private investment entity managing a family’s wealth and allocations (incl. private credit).
- Green Deal (EU)
- EU policy driving decarbonization; accelerates financing needs for clean energy/infrastructure.
- Illiquidity
- Limited ability to exit positions before maturity; typical lock-ups of 3–7 years.
- Institutional Investor
- Pension funds, insurers, endowments allocating at scale, often to private debt.
- Leverage / LBO
- Using debt to acquire companies; frequently financed via unitranche facilities.
- Maturity Wall
- Cluster of upcoming loan/bond maturities creating refinancing pressure.
- Mittelstand
- SMEs and mid-caps forming the industrial backbone of German-speaking economies.
- Private Credit / Private Debt
- Non-bank loans and credit instruments provided by private lenders.
- Refinancing
- Replacing existing debt with new facilities on revised terms.
- Senior Secured Loan
- Debt with first claim on collateral and priority in recoveries.
- SMEs
- Small and medium-sized enterprises; key borrowers in direct lending.
- Special Situations Financing
- Flexible capital for transitions such as restructurings, acquisitions, or temporary distress.
- Tenor
- Loan duration or term, usually expressed in years.
- Unitranche Loan
- Single facility blending senior and subordinated risk; simpler docs and faster execution.
- Yield Premium
- Extra return over traditional fixed income to compensate for risk and illiquidity.
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