Q2 2021
Editor’s letter
Even in the face of crisis, direct lending has blossomed
Dan Alderson
Deputy Editor Creditflux
Welcome to the 11th edition of the Creditflux and Debtwire European Direct Lending Perspectives (EDLP). In this issue, we explore the dynamics behind a market that is coming to the boil with jumbo deals and increasing leverage, but in which investors face the valuation challenges of ever-greater competition
As we move towards Q4, there is now insurmountable evidence that direct lending has come of age. Fundraising in the first six months of this year matched the €22 billion raised across all of 2020, showing that investors believe they are onto something big, irrespective of the issues that dented inflows during last year’s COVID-19 lockdowns.
It is far from an even distribution of riches, however. One manager, Ares, accounted for half of that fundraising total, while Hayfin logged €5 billion. Even so, the underlying base is surging, with one-third of the investors who contributed to Ares Capital Europe V’s record-breaking tally being new to the firm.
Having all this money awash in the system has fired up borrowers to push boundaries wherever they can. What’s more, private equity (PE) firms have amassed €150 billion in dry powder, which suggests these conditions will endure through the rest of 2021. The deals they are doing have ballooned in size, with eye-wateringly tight pricing and leverage shooting up, as much as six times debt to equity in some cases.
The big test of investor resolve thus becomes whether pricing will keep its head above leverage in the coming months. The big temptation for borrowers will be to refinance at better rates any deals that are recent enough or whose protections allow.
Direct lending issuance totalled €10.8 billion by the end of H1, compared to €15.8 billion for the whole of 2020 and 2019’s €18.2 billion, according to Debtwire Par. Q2 brought €3.3 billion across 157 deals, delivering well on the promise with which this year began, after Q4 2020 generated €4.1 billion.
Investors believe they are onto something big, irrespective of the issues that dented inflows during last year’s COVID-19 lockdowns.
A surge in cases connected to the COVID-19 Delta variant undoubtedly hampered European activity in Q2, and such mutations remain a cause for concern in financial markets. But direct lenders will hope most jurisdictions’ experience of this wave — and the positive impact of vaccination programmes — mean the worst of the pandemic is behind us.
M&A in 2021 so far has spurred this bullish feeling. This adds to inflated asset prices and encourages PE firms to be more pre-emptive and presents more opportunities for discrete and nimble direct lenders.
In this edition, we look back over Q2 2021, while casting an eye towards the challenges of H2. You will find the usual deal information, league tables, fundraising data and news, as well as features on investors flooding into the asset class and key metrics driving sentiment.
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European Direct Lending Perspectives
Q2 2021
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