Europe’s non-sponsored lending adds ballast as market risks multiply: PCP

Private credit investors are confronting a more complicated risk map after years of rapid growth, from weaker borrower quality and artificial intelligence disruption to tariffs, supply-chain tensions and geopolitical uncertainty.

That is putting a less familiar corner of European credit into sharper focus: non-sponsored direct lending.

Unlike sponsored lending, where borrowers are owned or backed by private equity firms, non-sponsored lenders provide capital directly to independently owned companies, from established family businesses to entrepreneur-led growth companies.

For Korean pension funds, insurers and other institutional investors with mature allocations to private equity and direct lending, the case for non-sponsored lending increasingly lies in adding exposure to different borrowers, sectors and geographies, according to P Capital Partners (PCP), a Northern European private credit manager specializing in non-sponsored lending and majority-owned by M&G Investments.

That diversification rationale has gained urgency since late 2025, as the global private credit market has come under closer scrutiny over deteriorating credit quality, opacity and concentrated software exposure, according to the European Central Bank.

“The sweet spot (of non-sponsored lending) is explained by the fact that it’s a very large market, but it’s very under-competed,” Robert Heaney, head of capital formation and managing director at PCP, said in a recent interview with The Korea Economic Daily in Seoul.

“We can be very selective with less competition. What that translates into is significantly higher margins with better downside protection for our investors.”

AN UNDERSERVED MARKET

About 90% of European direct-lending volume goes to sponsor-backed companies, while only around 10% reaches family-owned and other non-sponsored borrowers, Heaney said.

Yet family-owned businesses alone account for roughly half of European gross domestic product (GDP) and as much as 70% of its corporate base.

“Family-owned businesses can be considered the backbone of the European economy,” Heaney said, pointing to businesses across industrials, consumer, healthcare and transport.

“There is a significant mismatch in terms of private credit flows supporting these businesses,” he added.

That scarcity of capital gives lenders more room to negotiate pricing and protections.

Margins on PCP’s corporate loans average around 7%, compared with the low-5% range in broader European direct lending and below 4% in syndicated leveraged loans, according to the firm.

Its borrowers also carry average net debt of less than four times earnings before interest, taxes, depreciation and amortization (EBITDA), versus roughly five to six times in the wider direct-lending market.

About half of PCP’s loans carry additional security over hard assets such as property, plants and equipment.

Heaney said family owners also tend to be more conservative about leverage because preserving the business, often their largest asset, takes precedence over financial engineering.

PAID FOR COMPLEXITY

Part of the opportunity has emerged as European banks retrench under regulatory and capital pressure and become less willing to finance transactions that fall outside standardized lending criteria.

That can leave independently owned companies short of capital for acquisitions or expansion.

Owners may be asset-rich but cash-poor, while banks can require additional equity before financing a deal, said Heaney.

PCP can step into that gap by refinancing existing bank debt and providing additional acquisition or growth capital in a single transaction.

“We’re getting paid more because we can be more flexible than the banks,” Heaney said. “It’s often complexity rather than just additional credit risk that is the issue.”

For borrowers, the proposition is also about speed, flexibility and retaining control.

Rather than sell equity to finance an acquisition, a family owner or entrepreneur can accept a higher financing cost for several years while keeping ownership intact.

Much of PCP’s lending provides primary capital, typically funding M&A, capital expenditure and expansion.

Non-sponsored loans are generally structured for five years and held for around four years on average.

If the investment lifts EBITDA, leverage can decline naturally, allowing borrowers to refinance later into cheaper bank financing.

CAPITAL FOR EUROPE’S GROWTH

That financing role extends beyond traditional family businesses.

PCP’s Growth Credit strategy targets entrepreneur-led companies with established products and operating histories that need capital to commercialize and scale without diluting ownership and control by selling to private equity firms.

PCP’s Transition strategy provides another access point into the opportunities in European private credit, via senior-secured infrastructure debt targeting the themes of decarbonization, resource efficiency and resilient infrastructure, which includes data centers, renewable energy and battery storage.

Across its platform, Heaney said PCP focuses on “underserved, under-competed segments of the market which have structural tailwinds,” linking the strategy to Europe’s broader need for capital to finance infrastructure, innovation and competitiveness.

DIVERSIFICATION IN PRACTICE

The differences extend beyond ownership structure to sectors and geography.

Technology, predominantly software, accounted for about 30% of broader European direct-lending origination last year, Heaney said. At PCP, technology represented around 7%, with software below 1%.

Geographically, roughly 45% of deployment is in the Nordics and 25% in German-speaking Europe.

Unlike the broader European direct-lending market, which is heavily concentrated in the UK and France, PCP has less than 10% exposure to the UK and none to France.

It also favors the Netherlands and Ireland, where Heaney points to strong creditor protections, restructuring frameworks and recovery rates.

Less than 3% of PCP’s portfolio companies generate revenue from the US, Heaney said, limiting direct tariff exposure and reliance on extended global supply chains.

For Korean institutional investors, those characteristics can add another source of risk and return alongside existing private equity and sponsored-credit holdings, rather than replacing them, said Heaney.

An institution invested in both PE funds and loans to PE-backed companies can otherwise build exposure to similar businesses across different layers of the capital structure.

“The feedback we’re getting is that there is increased interest in the non-sponsored segment as a diversifier,” Heaney said.

“You’re getting sector diversification and less AI risk. You’re getting geographic diversification. You’re getting less exposure to tariffs and extended supply chains.”

“We’re also usually the sole lender to our businesses, so unlike other more competed segments of the market where different lenders often invest in the same names, there is less risk for investors of replicating exposure”.

THE UNDERWRITING TRADE-OFF

The strategy, however, places more responsibility on the manager.

Non-sponsored borrowers typically do not arrive with a PE sponsor and pre-packaged due-diligence materials.

The lender itself must investigate the company’s financials, industry, governance and the individuals behind the business.

“There have been some widely publicized cases in the larger market segments essentially of fraud and poor underwriting, and we’re very sensitive to those risks in our market,” Heaney said of recent problems in private credit.

“I think it’s a reminder to investors that there is a credit cycle, and that people need to undertake detailed due diligence and underwriting.”

There is also no guarantee that a PE sponsor will inject fresh equity if a borrower runs into trouble.

PCP argues that lower leverage, hard-asset backing and stronger documentation can help offset that absence, together with borrowers that tend to be conservative and fully aligned with protecting the business as a going concern.