Normal service resumes: The outlook for French private debt

October 22, 2024

If you have any feedback on this article or are interested in subscribing to our content, please contact us at opinions@muzinich.com or fill out the form on the right hand side of this page.

--------

After a challenging period, activity in the French private debt market is beginning to rebound, as Alexandre Millarini explains.

Along with other European countries, the French private debt market experienced a slowdown in origination in 2022 and 2023 as the higher interest-rate environment put the breaks on sponsor-driven deal activity.

Although that trend continued in the early part of this year, it was business as usual in Q2. According to Deloitte figures, France saw 85 new deals in the first half (23% of the European total), but 60 of these came in Q2.¹ Activity was largely driven by deals for lower and middle-market companies, with annual revenues of less than €75 million.²

Meanwhile, investor appetite for the asset class in France shows no sign of abating, including in the retail channel, which has seen the announcement of high-profile fund launches this year.³  

The political impasse that followed President Macron’s surprise decision to call a snap legislative election in June⁴ led to gloomy forecasts on the impact on the country’s financial markets.⁵ But perhaps of more significance will be what the government does to get its budget deficit – which is forecast to reach 6.1% of GDP by the end of the year⁶ - back within the European 3% target.⁷

While the government has announced several austerity measures in an effort to reduce the deficit,⁸ it may need to look at alternative routes, including opening up parts of the public sector to private investors.

To understand what that might mean for private debt and assess the broader outlook for the asset class, we put the questions to Alexandre Millarini, head of direct lending, France, at Muzinich & Co.

How would you assess the current state of the French private debt market?

Like other major markets, French private debt has traditionally been driven by private equity sponsors, particularly to finance M&A transactions. For much of the past couple of years, M&A activity has been down, largely due to higher interest rates.⁹ While this trend has impacted M&A for companies of all sizes, the large cap sector has been least active; the mid-cap segment has been more resilient, so there have continued to be financing opportunities for lenders such as ourselves.

One of the specific characteristics of the French private debt market versus other markets is that local banks are still active in lending to mid-cap companies.¹⁰ We have also seen some lenders that have typically focused on large and upper-mid cap companies seeking to enter the lower and core middle market, and there is also the syndicated loan market.¹¹

The funding market is dynamic and competitive, which is healthy, but for us the key is to stay focused on underwriting discipline and on being a flexible and agile partner to sponsors we have built relationships with over many years.

Discipline is critical; we do not see any benefit to our investors in us being aggressive in terms of leverage or pricing in an environment where interest rates remain elevated and there is a level of economic uncertainty. That can only increase risk at a portfolio level, and we have seen in other markets, including the US, the consequences of being too aggressive on the origination side.¹²

Of course, our goal is to deliver good returns for our clients, but we want to achieve that in a way where risk is managed appropriately. We believe one of our key advantages is having a local platform, which has allowed us to develop strong relationships with sponsors, provided access to a large pipeline of potential transactions, but be selective in who we lend to.

What are the key strengths of the French market?

French capital markets are deep, mature and resilient relative to many other countries, largely because it has a good mix of public, private and bank financing available to borrowers. In our view, private credit has a critical role to play, including being a valuable option for borrowers when access to public markets and bank loans is more challenging. For investors, it has also consistently offered what we believe are attractive returns for the risk profile.

“Our goal is to deliver good returns for our clients, but we want to achieve that in a way where risk is managed appropriately.” Alexandre Millarini

What impact do you see the shift in monetary policy having on the market?

It was inevitable that the rapid rate-hiking cycle we saw in 2022 and 2023 would lead to a slowdown in private equity M&A, because of the negative impact it would have on valuations and returns. In our view, lower rates could help unblock many deals that have been on hold, and private credit activity should benefit as a result. There will be competition from the syndicated loan market and banks, but private credit can fill the gap when it comes to bringing flexibility to borrowers.

Is the current political impasse having much impact on deal activity?

Unsurprisingly, this is a question I have been asked many times in recent months. And what I always say is that the private credit market is used to complexity, from a variety of sources, and finds a way to adapt. You only have to look at the last five years, where we have had a global pandemic, conflict in Ukraine, a spike in inflation and high interest rates.

As with any market event, the initial noise can put things on hold for a short period, but people quickly adapt to the new reality. I don’t believe what France experienced with the European and legislative elections was no more disruptive than recent elections in other jurisdictions, including the UK, Spain or Italy.

Business goes on, finance goes on, and we do not anticipate any major changes to result from the political situation.

In terms of origination, where do you see the main opportunities by sector?

We continue to see opportunities in a broad range of sectors, but one area we believe could become very interesting is healthcare and pharmaceuticals. Government spending needs to be cut to meet EU fiscal rules; areas like healthcare that have been heavily subsidised by the state are under scrutiny and could be opened up to private investment. With people living longer, this situation will become even more acute over time.

We believe healthcare could follow a similar path to the dental industry, which has gradually opened up to private competition and is projected to grow to around US$1.5 billion by 2030. 

Other areas that are relatively dynamic include technology and IT services, while we also like defensive parts of the business services sector, including diagnostics, which are largely domestic and defensive businesses. Agrifood is another resilient sector that has provided a consistent flow of deal opportunities. 

Do you see opportunities in non-sponsor transactions?

This part of the market is relatively small, but it is an area we will look at because we have the knowledge and capability to do it. At the same time, it will be on a highly selective basis as we are not seeking to be in competition with our sponsor partners.

“Government spending needs to be cut to meet EU fiscal rules; areas like healthcare that have been heavily subsidised by the state could be opened up to private investment. .” Alexandre Millarini

 

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co are as of October 2024 and may change without notice.

References

1.Deloitte, ‘Private debt deal tracker Autumn 2024,’ September 2024
2.Bloomberg, ‘Private Credit’s Record Quarter Masks Worry of Smaller Deals,’ October 10, 2024
3.Reuters, ‘Blackstone, Generali team up for private debt fund for French retail investors,’ September 26, 2024
4.Le Monde, ‘Macron calls snap elections after historic far-right gains in European vote,’ June 9, 2024
5.Bloomberg, ‘Investors bet French assets face months of volatility after election,’ July 5, 2024
6.France 24, ‘Is France the sick man of Europe?’ October 11, 2024
7.European Council, ‘Economic governance review: Council adopts reform of fiscal rules,’ April 29, 2024
8.Associated Press, ‘France's budget battle: Why the government's plan to plug the deficit is sparking an outcry,’ October 15, 2024
9.PWC, ‘Global M&A industry trends – 2024 mid-year outlook,’ June 25, 2024
10.Banque de France, ‘Access to bank financing for companies – Q2 2024,’ August 2, 2024
11.Private Debt Investor, ‘France sets the pace for its neighbours,’ May 1, 2024
12.Bloomberg, ‘Flawed Valuations Threaten $1.7 Trillion Private Credit Boom,’ February 28, 2024
13. Insights 10, ‘France Dental Care Market Analysis,’ May 31, 2023

--------

Important information

Muzinich and/or Muzinich & Co. referenced herein is defined as Muzinich & Co., Inc. and its affiliates. Muzinich views and opinions.  This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall.

Any research in this document has been obtained and may have been acted on by Muzinich for its own purpose. The results of such research are being made available for information purposes and no assurances are made as to their accuracy. Opinions and statements of financial market trends that are based on market conditions constitute our judgment and this judgment may prove to be wrong. The views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity, they are for information purposes only.

This discussion material contains forward-looking statements, which give current expectations of future activities and future performance. Any or all forward-looking statements in this material may turn out to be incorrect. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Although the assumptions underlying the forward-looking statements contained herein are believed to be reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurances that the forward-looking statements included in this discussion material will   prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation that the objectives and plans discussed herein will be achieved. Further, no person undertakes any obligation to revise such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

United States: This material is for Institutional Investor use only – not for retail distribution. Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission (SEC). Muzinich & Co., Inc.’s being a Registered Investment Adviser with the SEC in no way shall imply a certain level of skill or training or any authorization or approval by the SEC.

Issued in the European Union by Muzinich & Co. (Ireland) Limited, which is authorized and regulated by the Central Bank of Ireland. Registered in Ireland, Company Registration No. 307511. Registered address: 32 Molesworth Street, Dublin 2, D02 Y512, Ireland. Issued in Switzerland by Muzinich & Co. (Switzerland) AG. Registered in Switzerland No. CHE-389.422.108. Registered address: Tödistrasse 5, 8002 Zurich, Switzerland. Issued in Singapore and Hong Kong by Muzinich & Co. (Singapore) Pte. Limited, which is licensed and regulated by the Monetary Authority of Singapore. Registered in Singapore No. 201624477K. Registered address: 6 Battery Road, #26-05, Singapore, 049909. Issued in all other jurisdictions (excluding the U.S.) by Muzinich & Co. Limited. which is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ, United Kingdom.