Slow Bank Disintermediation Makes European Private Credit a Real Diversifier

What's New

European private credit earns a place in US insurer portfolios as a diversifier because bank disintermediation there runs 4 or 5 years behind the US. Mark Jochims, Head of European Private Credit at Morgan Stanley Investment Management, argues this in an interview on the InsuranceAUM.com Podcast. Europe's market is fragmented. Many Europeans stay attached to their banks, so the shift to private lenders moves slower. That gap leaves different borrowers, sectors, jurisdictions and deal flow. Jochims does not expect Europe to end up identical to the US. Insurers that have filled their US allocations should judge Europe on what it adds to the mix.

Why It Matters

Many US insurers already hold meaningful US direct lending books and are looking abroad as those allocations saturate. Jochims pushes back on reading Europe's recent press attention as proof it is the better market. He says it stays correlated to global output, so the gain comes from different underlying loans. Currency is no obstacle, since investors can buy European private credit in US dollars. Jochims runs a European direct lending business, so a larger European allocation serves his firm.

By The Numbers

• 2 times: the pace at which Jochims says Europe is growing compared with the US.

• Two-thirds: the share of the private credit market he puts in direct lending.

• 50% plus: the share of the European market that commonly cited data still assigns to banks.

• 2023: the year his Morgan Stanley team started investing, with AI built into underwriting from the start.

Memorable Quotes

• "Europe is not inherently better than the US on the private credit side." Jochims sets aside ranking the 2 markets and frames Europe as a source of different exposure.

• "Europe is a fragmented market, and from a cultural perspective, many Europeans are fairly attached to their banking system." He ties this attachment to the slower pace of disintermediation.

• "It's probably still correlated to global economic output, so it's not completely uncorrelated." Jochims concedes that European loans will still feel a global downturn.

• "Europe adds potentially different borrowers, different sectors, different jurisdictions, different source of deal flow, different supply demand dynamics, and some form of diversification." The list sets out his case for adding Europe to a US-heavy book.

The Wrap

The case stays intact while banks keep a large share of European lending and the market keeps growing faster than the US. It also depends on European portfolios keeping their own borrowers, sectors and deal flow. It weakens if Europe converges on the US model and loses those differences. It also weakens if European loans track US losses closely through a downturn. The next credit cycle will settle it.