European SMEs - A rich tapestry of sustainable private debt opportunities
In Short
The diversity of the SME segment in Europe offers investors access to a highly differentiated and steady flow of investment opportunities, explain the private debt team at Generali Asset Management. Moreover, falling interest rates are expected to benefit M&A corporate loans activity, while flexible unitranche structures from private debt funds should come back into focus.
The SME sector in Italy, France, Spain, and Germany encompasses over 12 million companies, generating more than half of Europe’s GDP.
As interest rates decline, a “soft landing” is expected in M&A transaction numbers, which could positively affect transaction volumes for corporate loans.
Lower rates means more expensive but flexible unitranche structures from private debt funds may come back into focus, particularly in the SME segment.
A key feature of our European private debt strategy is the ability to invest in both club loans with banks and unitranche loans, allowing for maximum investment flexibility.
SMEs are the backbone of European economies
Whether it’s industrial expertise in Germany, craftsmanship for luxury goods in Italy, or food and electrical engineering in France, Europe, with its diverse economic drivers and specialized industrial sectors, offers investors a uniquely heterogeneous market, opening up a wide range of investment opportunities in private debt funds for SMEs.
The SME sector in Italy, France, Spain, and Germany encompasses over 12 million companies, generating more than half of Europe’s GDP. In Germany, where SMEs are often referred to as the “German Mittelstand,” these companies represent 99% of all businesses, contribute 50% to economic output, and account for 60% of all jobs.1 This diversity offers investors access to a highly differentiated pool of companies when constructing portfolios, providing a steady flow of investment opportunities, highlighting the sector’s importance in portfolio construction.
For decades, the SME sector was heavily reliant on traditional bank financing. However, since the 2008 financial crisis and the resulting stricter banking regulations, lending to SMEs has become more restrictive. In this context, credit funds have emerged as private lenders and an alternative form of capital procurement. Companies have found reliable financial partners in this type of financing, while investors have benefited from an attractive risk-return profile compared to other asset classes in a low-interest-rate environment. By supporting SMEs, the backbone of many economies, private debt investors have also contributed to creating sustainable and competitive economies.
Soft landing expected with lower interest rates for M&A transactions
The high-interest environment of recent years, combined with geopolitical uncertainties, recession fears, and strong inflation, has led to significant uncertainty and a slowdown in M&A processes and corporate financing in the SME sector. The number of leveraged buyouts and refinancing transactions has particularly decreased compared to the boom years following the 2008 financial crisis and the start of the low-interest phase. Private lenders and banks have recently become more selective, and capital commitments from investors in private markets have also decreased. Some private equity funds even held individual assets longer than originally planned through so-called “continuation funds” to exit under better market conditions or benefit from continued value creation in their portfolio companies.
