European Private Credit Poised for Expansion, Lewy Says

In Brief:

In a recent podcast, Arrow Global CEO Zach Lewy discusses how private credit firms are capitalizing on European banks' retreat from traditional lending. Lewy, who founded his asset-backed lending firm operating across Western Europe, explains that while current high interest rates create a "golden moment" for lenders, success requires strategic discipline rather than indiscriminate lending. He particularly highlights residential real estate as an attractive sector due to persistent housing shortages across Europe, while cautioning against office real estate exposure given post-pandemic work pattern shifts.

Big Picture Drivers:

• Bank retreat: European banks are withdrawing from specialized lending activities due to high cost-income ratios and increased regulatory capital requirements.

• Interest rates: Current higher rates create favorable conditions for lenders after 17 years of low-rate environments.

• Supply-demand imbalance: Structural housing shortages across multiple European countries create lending opportunities.

• Remote work: Changing work patterns are boosting hospitality assets and driving population shifts toward Southern Europe.

Key Topics Covered:

• Asset-backed lending: Offers stronger protection through physical collateral versus corporate credit.

• Real estate sectors: Residential and hospitality show strength while office properties face headwinds.

• Market inefficiencies: Deals under €200 million offer less competition and higher returns due to operational complexity.

• Local expertise: Success in Europe's fragmented market requires deep local knowledge and platforms.

Key Insights:

• Disciplined strategy: Lenders must be selective about sectors rather than pursuing all opportunities indiscriminately.

• Size matters: Lending costs become more efficient above €200 million, but competition increases at that scale.

• Institutional evolution: Over time, institutional investors will likely shift more toward asset-backed lending, following banks' and insurers' models.

• Southern shift: Remote work is driving a gradual migration from Northern to Southern Europe, benefiting hospitality and residential assets there.

By The Numbers:

• €95 billion: Assets serviced by Arrow Global across its 26 platforms in Europe.

• 35 million: Loans and real estate assets in Arrow's system of record, providing extensive market data.

• 60% LTV: The loan-to-value ratio Lewy considers safe for residential lending, even in significant downturns.

Memorable Quotes:

• "If you're a lender against high quality collateral that has good liquidity and exits are possible... there're clearly categories where the supply demand is in your favor." - Zach Lewy

• "The fundamental discipline in all asset backed investing is what's this asset worth, how liquid is it, how much advance rate should I put against it?" - Zach Lewy

• "The banks retreating from that last mile of lending... I think that is a change that we will see accelerate and become the norm as opposed to being some sort of peculiarity of the moment." - Zach Lewy

• "Like most disciplines in investing, if you're approaching this in a thoughtful way and you're building your portfolio in a very deliberate manner, you can achieve the highest common denominator." - Zach Lewy

The Wrap: While private debt's "golden age" may be overstated, clear opportunities exist for disciplined lenders with sector expertise. As economic uncertainty persists, asset-backed lending is positioned to gain prominence, particularly for firms that can navigate Europe's fragmented market through local expertise and platform-based approaches. The continued retreat of traditional banks from specialized lending creates a sustainable opportunity for private credit to fill this gap.