(Bloomberg) -- The European private credit market is gaining ground on the US, according to a report from Moody's Ratings.
Over the last several years, the depth of the market in Europe has lagged behind the US, mostly because of regulatory and legal issues that have constrained the market's growth, Moody's said in its report.
However, the region is poised for growth, given the untapped market potential and deglobalization, which will force greater autonomy from the US and drive increased spending. Some progress has already been made to implement reforms that would stimulate the sector, including changes designed to unlock insurer capital for private credit, make securitization more accessible and lower capital charges.
The concentration in the market to among a few large direct lenders is only growing, Moody's said in its report. Six of the largest firms accounted for 59% of all fundraising in the private markets in Europe, tripling their share from 2019.
As the European market grows, it's likely to face scrutiny over opacity, rising leverage and concentration risk via the dominance of a few alternative asset managers, Moody's said.
Private credit lenders have also been expanding their menu of offerings, in order to meet the bespoke needs of borrowers and investors. This has led to a rise in payment-in-kind, net asset value loans and other financial maneuvers.
There will be an increased need for investments in defense and infrastructure as pressures mount, including new tariff policies and the war in Ukraine. There are also significant budget gaps and private credit could be well-suited for infrastructure investments, the report said.
Historically, private credit funds have never paid much attention to the defense sector, given environmental, social and governance considerations. However, rules and regulations have been changing, opening up opportunity for more deals.
Apollo Global Management Inc., for example, is looking to invest in artificial intelligence, defense and infrastructure in Europe, where trillions in spending is needed, its co-head of European credit, Tristram Leach, said last month.
"There is an enormous amount of spending that needs to happen in Europe," Leach said in an interview with Bloomberg TV. The firm has pegged that Europe requires $18 trillion of investment in these areas.
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