Why Private Markets Matter - European Opportunity
Prior to the 2008 financial crisis, lending was dominated by banks in Europe. Many banks retrenched postcrisis, leaving a lending gap that catalyzed the establishment of numerous private credit funds. A once niche area, private credit and private markets in general, have subsequently become a cornerstone of European finance.
Private markets are an attractive part of a diversified portfolio for several reasons. Greater returns from private investments compared to public markets, historically only available to institutional investors, can significantly bolster portfolios when compounded over time. As private equity managers often have a controlling interest in the companies they are investing in, they have a vested interest in improving those companies and are directly active in management. Further, investors can potentially balance volatility by adding private investments alongside their public market holdings.
Private investment managers are incentivized to attract retail investors to meet the growing demand for capital in the market. Europe now accounts for 25% of global private credit fundraising since 2008 and is poised to grow with increased U.S. interest around the European middle market. By 2031, private credit assets under management in Europe are projected to reach over $615 billion, nearly doubling from 2024 AUM. While the appetite is there among fund managers and potential investors, there are two key challenges to navigate: rollout and credibility.
Risks and Valuation Considerations
In Europe, ELTIFs and LTAFs -types of semi-liquid investment funds designed to unlock retail access - offer some liquidity flexibility to combat the otherwise illiquid nature of these assets. While these vehicles work well in theory, they face challenges for widespread adoption. Each fund type features a slew of regulations that may be difficult for the average investor to understand, such as liquidity provisions and minimum required investments. ELTIF 2.0, launched in 2024, aims to address some of these complexities by loosening the restrictions for investors and fund managers alike, such as widening the base of eligible assets and introducing the allowance of liquidity events.
The other major challenge in expanding private assets to retail investors relates to credibility and timeliness around valuations, as a lack of available private market data limits the transparency afforded to investors. Retail investors demand more frequent and accurate valuations of their investments that have not been widely available in the market. Questions are leaking into the private credit market as regulators observe failures, the size of private credit and the use of fund-level leverage. In order to combat risks in the event of a market downturn, fund managers must improve their processes, procedures and governance of the valuation of the underlying assets. These long-standing practices are particularly crucial during periods of volatility.
Private equity firms know how to value their own assets but doing so in-house can obscure the objectivity that investors need to feel confident about the stated value of these assets. And, whereas public market investors can evaluate a wide range of data beyond the share price, this information is much less available in private markets. In order to enhance credibility, independent and defensible valuations are crucial.
Kroll’s recently released Kroll StepStone Private Credit Benchmarks serve as a breakthrough in equipping investment managers with vital market information to sustain this market need. The Benchmarks provide the most comprehensive and timely dataset available for the private credit market. Built using loan-level data and information from more than 16,000 deals, the Benchmarks are updated weekly with new primary market data and are segmented by region, industry and asset characteristics.
Since launch, the demand for access to this data by the largest private investment managers has been overwhelming. As private markets continue to expand with retail investment, such timely and accurate data will be essential to support sound decision making and sustainable growth.
