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GP-led credit secondaries long way off
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Why are insurers crazy for private credit?
17Capital’s Stephen Quinn on the rapid growth of NAV finance >> 8
ISSUE 96 | AUGUST 2024
Private credit poised to fill defence sector funding gap as geo-political risk intensifies PRIVATE credit funds could be well placed to fill the funding gap in the European defence sector, as alarm bells are raised around the availability of defence financing on the continent. Global geo-political tensions have fuelled the need for more defence spending, particularly in Europe, where the sector has been underfunded for decades. Amid a shortage of bank funding, private credit has been touted as a viable alternative. An executive director focused on credit at an investment bank said that it was “very plausible” that private credit would capitalise on the opportunity. “Private credit is good in filling the gaps and providing funding to the under-funded sectors or companies that would otherwise struggle to get bank funding,” he said, speaking on the condition of anonymity. “This would of course come at a price (and would be more expensive
than corporate debt or syndicated lending), but this is the exact unique selling point for private credit. It can pick up good quality credit that for whatever reason does not neatly fit into the bank lending investment criteria.” According to a study from the European Commission, there is an equity financing gap of approximately €2bn (£1.68bn) and a debt financing gap of between €1bn and €2bn for small- and mediumsized enterprises (SMEs) in the defence sector. The same study found
that SMEs operating within the defence sector find it much more difficult to access finance than others. “For private credit firms, there is an opportunity there,” said Arnaud Journois, vice president at Morningstar DBRS. “There is a financing gap for European SMEs in the defence sector. They have difficulties not only accessing funding, but also having bank accounts.” A recent report from Morningstar DBRS said that banks are expected to play a pivotal role in financing the defence
sector, as public spending is not sufficient to fund the growing needs. However, banks appear to be reluctant to lend to the defence sector due to the sector’s incompatibility with environmental, social and governance (ESG) guidelines. This has created an opportunity for both private equity and private debt firms to step in and support the 2,500-odd defence SMEs which play a central role in the complex defence supply chains in Europe. “I think the real opportunity is in the SME sector,” said Journois. “The lack of funding will have to be filled by external funding.” The need for more SME defence financing has led the European Investment Bank (EIB) to implement a rule change which allows it to invest more easily in defence firms; as well as creating a fund to buy into defence SMEs, as well as non-defence SMEs. Earlier this year, >> 4