Private credit and banks redraw the lending map

Victoria Judd and Max Griffin at Pillsbury explore an era of convergence in the banking sector

 

The European finance market is undergoing a fundamental transformation.  Not so long ago, banks dominated leveraged and structured finance, but tighter regulations and shifting internal risk appetites have led many banks to focus on diversifying their portfolios, leaving an opportunity for non-bank lenders to increase their participation in traditional and alternative financing structures.

 

 

The rise of private credit

In 2024, non-bank lending activity in Western and Southern Europe increased by 51% compared to the previous year, and Europe’s €290 billion pipeline of syndicated loans due to mature by 2030 offers opportunities for private credit providers to expand their footprint, especially where bank appetite faces regulatory constraints.

 

Direct lending is a significant part of investor portfolios and borrower toolkits.  Private credit funds offer borrowers an efficient means of accessing capital, and they often have more flexibility than banks to negotiate deal terms and alternative financing structures. 

 

 

Market consolidation

Macroeconomic conditions including elevated interest rates, persistent inflation and geopolitical uncertainty have made capital deployment more challenging.  In turn, this has prompted consolidation across the financial markets.  Larger banks are forming strategic alliances with private credit providers to underwrite complex, large-scale leveraged transactions.  

 

Such partnerships provide mutual advantages, with banks maintaining their roles as the relationship managers and providing access to efficient origination platforms, and private credit taking a greater share of risk by providing balance sheet depth.  This allows banks to maintain their depositors’ business, fees for ancillary services, and key relationships while reducing their credit exposure. 

 

 

Creative structuring 

Private credit’s ability to offer creative, flexible solutions is the core of its appeal.  With amendment and extension transactions continuing to be commonplace in 2025, the market is seeing evolving structural adjustments, new capital injections and tailored pricing arrangements. 

 

Similarly, dividend recapitalisations are returning capital to investors in the absence of exits, demonstrating how sponsors are adapting to prolonged hold periods and resulting in them actively seeking long-term debt partnerships.

 

Many private credit funds offer the option of ‘payment in kind’ (PIK), a portion of interest which helps borrowers ease their short-term cash burdens.  While full PIK interest is less common, paying margin by PIK is increasingly prevalent.  Though in part the result of higher interest rates, PIK is more common in non-bank lending structures than in transactions featuring only commercial banks.  

 

As a result of the longer-term focus of private credit investors, responsibility for restructurings and workouts tends to fall to them.  Where funds hold most of the debt or operate pari passu with banks, they can take the lead in covenant waivers and maturity extensions. 

 

In those circumstances, borrowers may not be able to fall back on their longstanding relationships with commercial banks, and they may find that private credit investors can have assertive restructuring strategies or gain management control via a combination of equity and debt structures. 

 

Despite these risks, as borrowers seek certainty and customisation, private credit’s agility gives it a competitive edge, which is often worth the increase in coupon price associated with private credit debt. 

 

 

Sector-specific exposures

Private credit is generally viewed as more willing to lend to riskier asset classes by filling a gap where banks are less able to lend.  As a result, infrastructure, healthcare and software, which offer stable cash flows, strong growth prospects and opportunities for structured finance solutions, account for around 60% of private credit portfolios.  Consequently, private credit funds are often overexposed in these areas, and banks are actively seeking out such debt to diversify their portfolios. 

 

This marks a notable shift: banks are cautiously returning to areas which were, until recently, held by private credit as funds rebalance sector exposure and capital deployment.

 

Private credit has also become a vital source of capital for small and medium enterprises (SMEs), since banks have tighter lending practices that impact this end of the market.  In 2024, 60% of SME lending originated from non-bank lenders.  However, ministers in the UK are engaging with banks to consider how to increase access to funding for SMEs, so there may be some renewed competition in this area. 

 

 

A new paradigm

The convergence of bank and non-bank lending is a continued structural evolution.  As regulatory and macroeconomic forces shape the landscape, banks and private credit providers are increasingly relying on each other’s strengths.  As private credit increases its lending exposure, it remains to be seen if, in response, regulators will tighten controls on private credit.

 

For borrowers, the greater number of players and increased competition mean that the future promises more funding options.  For lenders, strategic partnerships will remain key to maintaining relevance and managing risk.  Ultimately, the market is moving towards a model where speed of execution and collaboration are as valuable as pricing.

 

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Victoria Judd, Finance Partner, and Max Griffin, Senior Associate, at Pillsbury 

 

Main image courtesy of iStockPhoto.com and MicroStockHub