European Private Debt Industry Boosted by Strong Prudential Framework
While American private debt funds are facing an unprecedented crisis of confidence, Europe boasts a stronger prudential framework to protect its savers and banks. With the Basel regulation, lower exposure of individuals, and central role of banks, the European private credit market seems better equipped to face the contagion risk from the United States, although not entirely immune.
The European financial industry often criticizes European finance regulations as too conservative, restrictive, and risk-averse. However, it is rare to see them celebrate this framework, as they have done in recent weeks, pointing out that thanks to it, the European saver would be better protected today than their American counterpart in case of a financial crisis. This shift comes as private debt – an asset class of private equity that funds European SMEs away from the scrutiny of public markets, often with leverage effects – is increasingly losing confidence among investors across the Atlantic.
The United States is indeed facing a crisis of confidence in this industry worth over $2 trillion. For weeks, a crowd of panicked individual clients are withdrawing their stakes, and supposedly healthy businesses are starting to falter. Should the same be feared in Europe?
A More Protective Prudential Framework
“We must be wary of this alarmist rhetoric,” warns Antoine Maspétiol of Eiffel Investment Group and co-chair of the French Invest’s private debt committee, an association that brings together French investment funds. “The European regulatory framework is solid,” agrees Édouard Veber of Rothschild & Co, the other co-chair. According to him, “funds intended for individuals are protected by a more conservative regulation [than in the United States], which requires funds to have a liquidity cushion to repay retail investors.”
