Bank-originated, on average investment grade and structurally underallocated: why European Private Loans should not be overlooked
Investors often place European private loans (EPLs) within the broad spectrum of private debt strategies. But when we consider the issuers that make up the market, the asset class has far more in common with investment grade bank lending and sits closer to public investment grade and high yield credit than to sponsored private debt. We believe this misperception is one reason the asset class remains underallocated and overlooked by institutional investors.
The EPL market offers the yield premium available in Europe’s non-public corporate credit (+200bps over equivalently rated public debt), driven by an embedded illiquidity and complexity premium, with a duration of five to six years on average. It delivers that premium through a high-quality, defensive borrower base with conservative leverage, strong covenant protection and bank-led underwriting. We believe these structural characteristics are why these loans should be assessed on their own merits. Given the wider repricing across private markets, the conservative leverage of the underlying companies, their (on average) investment-grade quality and the defensive sector mix, we see an attractive entry point today.
A Market Built on Different Foundations
Banks dominate European corporate financing. More than 70% of European corporate lending is bank-originated, a structural feature with no real equivalent in the United States, where capital markets play a far larger role. That bank dominance has two consequences for investors.
First, it creates a vast, over €7.5 trillion non-public lending market that EPLs can access. Many of the companies within it are reluctant to tap public capital markets, deterred by minimum issue sizes and the associated regulatory and disclosure requirements.
Second, post-GFC regulation (in particular the Basel III and IV capital requirements) has made long-tenor lending progressively more expensive for banks to hold, and this has opened a structural gap. A large and growing population of high-quality European corporates needs private financing, and a banking system increasingly needs partners to help provide it.
The investable universe of EPLs is substantial. Around 35,000 European mid-market companies, with revenues broadly between €100 million and €5 billion, form the core of the market, though the typical borrower we finance has average revenues above €1 billion and earnings of above €100 million. These are established, often market-leading businesses that span every major industry and more than 15 European countries. Globally competitive, conservatively financed and domestically important, they are the financing backbone of the European economy.
High-Quality Asset Class
The defining feature of the EPL market is the quality of its borrowers. These are established, non-sponsored, mid-market companies with conservative financial profiles. Credit quality clusters around the investment grade boundary, with a portfolio average rating of BBB-, and issuer net leverage typically below 2.5x EBITDA. They tend to operate in sectors where cashflows are stable and predictable, such as food and beverage, utilities, logistics and healthcare. Exposure to software or similar AI-exposed sectors is very limited in the market as a whole.
Source: Neuberger, as of July 21, 2026.
Loans are bank-originated, credit-approved and subject to banking regulation, a process that supports disciplined underwriting, standardized documentation and robust covenant protection. More than 90% of EPL financings include financial covenants, binding and testable obligations that give lenders early visibility of any deterioration in a borrower’s position. This covenant protection is central to how the market operates, but much of the broader private credit market largely lacks it.
How EPL Is Differentiated and Complementary to Private Debt
Mainstream private debt, or direct lending, typically finances private-equity-sponsored, leveraged companies. Average credit quality sits around B-, while issuer leverage is commonly around 6x net debt to earnings. It is a fund-originated market and generates attractive yield relative to EPL by taking more credit and structural risk. That is a perfectly legitimate approach, and for investors seeking the highest private credit income we believe these strategies often make sense. EPLs sit at the other end of the quality spectrum. Borrowers are non-sponsored and investment grade on average, issuer leverage is below 2.5x, and more than 90% of financings carry financial covenants. Origination runs through regulated banks rather than a lending fund, and the sector mix is deliberately defensive, with minimal exposure to the software and AI-adjacent names that have driven some of the recent volatility in parts of the private credit universe. The two are complements rather than competitors. Private debt offers more yield for more risk; EPLs offer less yield in exchange for materially higher quality and stronger lender protection. An allocator does not have to decide which is better. The more useful question is which risk they are being paid to take, and how each fits within the wider portfolio. In particular, EPLs may be more suited to fixed income investors looking for some illiquidity premia without taking on a high level of credit risk (relatively).
Why Now
The EPL borrower base remains fundamentally sound: conservatively leveraged, investment grade on average and concentrated in defensive sectors with limited sensitivity to the recent bouts of volatility. At the same time, tight spreads across public fixed income have pushed investors to look for less well-traveled sources of risk premium. A strategy offering around 200 basis points over equivalent public credit, at investment grade quality and without leverage, we believe provides a strong solution.
Conclusion
EPLs should not be read as simply another form of private credit. They are better understood as, on average, investment-grade bank lending made accessible through private markets. Seen through that lens, both the opportunity and the role they can play in a portfolio become much clearer.
The asset class itself is not complicated. It is a large, bank-dominated segment of European corporate credit that offers investment-grade quality, covenant protection, broad sector and geographic diversification, with a yield premium over public markets. The opportunity exists precisely because the market is fragmented, non-public and reachable only through deep banking relationships. Going forward, we see a clear argument for this asset class across a large portion of European fixed income investors.
Key Risk Factors to Consider
Market Risk: The risk of a change in the value of a position as a result of underlying market factors, including among other things, the overall performance of companies and the market perception of the global economy.
Credit Risk: The risk that the loan issuers may fail to meet their interest repayments, or repay debt, resulting in temporary or permanent losses to the strategy.
Interest Rate Risk: The risk of interest rate movements affecting the positions.
Currency Risk: Investors who subscribe in a currency other than the base currency of the strategy are exposed to currency risk. Fluctuations in exchange rates may affect the return on investment.
Counterparty Risk: The risk that a counterparty will not fulfil its payment obligation for a trade, contract or other transaction on the due date.
Liquidity Risk: The risk that the strategy may be unable to sell an investment at its fair market value, resulting in losses for the investors. In extreme market conditions, this risk could be amplified.
Operational Risk: The risk of direct or indirect loss resulting from inadequate or failed processes, people and systems, including those relating to the safekeeping of assets or from external events.
Changes in Regulation / Tax Treatment: Legal, tax, and regulatory changes are likely to occur during the term of the investments and some of these changes may adversely affect the positions, perhaps materially. The positions are exposed to potential losses, liabilities and to legal, compliance and other related costs.
