Private debt has long ceased to be a niche topic in institutional investing. However, especially in the current market environment, investors are taking a closer look: Which segments still offer attractive risk-adjusted returns? Where are late-cycle signals emerging? And how do US direct lending and European corporate credit strategies differ in terms of structure, competition, covenants, and proximity to the borrower? Markus Hill spoke with Mario Almer and Florian Wegmann of DANEO Partners AG for FINANZPLATZ FRANKFURT about the increasing differentiation within the asset class, opportunities in the European and DACH-focused SME sector, and the questions currently of particular concern to institutional investors in Germany and Switzerland. The focus here is not on marketing buzzwords, but on credit quality, selection, collateralization, monitoring, and the question of where private debt can be meaningfully deployed in a portfolio over the long term.
Hill: The topic of “US direct lending versus private debt in Europe” is currently the subject of critical discussion in the trade press. What should be kept in mind here, and what are the key differences in this comparison from your perspective?
Wegmann: While US direct lending and European private debt fall under the same umbrella term, they are structurally two different markets. Many investors are only now truly recognizing this. The US market is deeper, more mature, and more standardized. But that is precisely its problem today: competition has increased massively, spreads have compressed, covenants have been weakened, and leverage levels have risen. A large portion of the capital is flowing into large, sponsor-driven transactions (i.e., companies held by private equity funds) with aggressive EBITDA adjustments and increasing payment-in-kind structures—mechanisms that can mask economic weakness on the part of the borrower. If default rates are adjusted for these instruments, the so-called “shadow default rate” in the U.S. market now stands at around 5–6%—significantly higher than the officially reported figures and a classic sign of late-cycle credit conditions.
Europe is more fragmented, less efficient—and precisely for that reason, in our view, more attractive today. Banks still dominate a large portion of corporate financing but are increasingly pulling back due to regulation—Basel IV is accelerating this trend. In Switzerland, another structural factor comes into play: with the departure of Credit Suisse, a major lender in the middle market segment has disappeared. Companies and intermediaries in the market are feeling this directly, creating room for specialized private credit providers, particularly in the lower mid-market segment. European transactions typically feature more conservative leverage levels, stronger covenants, and more attractive risk-adjusted spreads—and for euro-denominated investors, the currency hedging issue that often neutralizes a supposed U.S. yield advantage is eliminated. This is precisely where we find opportunities that we can negotiate directly with owners and entrepreneurs and structure on a tailor-made basis—usually senior-secured, with strong covenants and attractive pricing, away from the crowd in the U.S.-dominated direct lending market.
Almer: What I would add in discussions with institutional investors: Even in “ ” Europe, one must differentiate. In our view, large (private equity) sponsor-driven deals in the upper mid-market are increasingly showing the same trends as in the U.S. Selection and a focus on the right segment are crucial. At Daneo Partners, we have been active exclusively in the European, DACH-focused SME sector since 2018—in the financing segment between €10 million and €75 million, where large Anglo-Saxon platforms cannot scale efficiently and local banks are too small or too heavily regulated.
Hill: What role should private debt generally play in institutional investors’ asset allocation?
Almer: In Europe, too, private debt has evolved from a niche strategy into an established asset class. In Germany in particular, private debt is now viewed by many institutional investors as a core component of a well-diversified portfolio. Senior secured direct loans combine low volatility with returns that can compete with equity-like returns. For pension funds and retirement plans, what public credit structurally cannot provide is also crucial: a direct contractual relationship with the borrower, active monitoring, and the ability to intervene early and exert influence when a situation changes. This offers a meaningful complement to existing public credit allocations. Allocation should be strategic—with a clear focus on the quality of the manager and the structures. We are also observing growing interest among European institutional investors in European managers, with the aim of shifting exposure from the U.S. market to local markets. This reinforces our conviction that we are well-positioned with our strategy.
Hill: As a Swiss fund boutique, you engage with institutional investors across the DACH region. What topics are currently at the forefront?
Almer: Discussions with institutional investors are currently heavily focused on risks rather than returns. Three topics clearly dominate. The critical coverage surrounding private debt in the U.S. is currently the dominant theme: Investors either have substantial U.S. exposure themselves or are reading the press, noticing the warning signs, and specifically asking how we differentiate ourselves from these developments—keywords: covenant-lite, high leverage, payment-in-kind.
Second, the macroeconomic and geopolitical environment: How resilient is the portfolio in the event of a further economic downturn? What happens in the event of a workout? How quickly can we react, and what protection do the structures offer?
Third, the issue of valuation and leverage: Many investors are concerned about exposure to heavily overvalued, highly leveraged companies—often in large sponsor-led deals (e.g., U.S. sponsored SaaS firms). The question of whether and how one invests in such deals, and how one views the issue, is being assessed with increasing scrutiny.Wegmann: For German investors in particular, there is another issue: In recent years, many have invested in Germany under the “private credit” label—specifically in real estate-backed financing such as mezzanine and whole loans—and have had painful experiences. This has partially eroded confidence in the asset class and raises legitimate questions regarding scope and structural quality. We are happy to explain our corporate credit strategy: medium-sized companies in the DACH region, senior-secured, without excessive leverage, and with direct access to management.
Hill: You are currently deepening your dialogue with investors in Germany. Are there differences in how private debt is viewed between the German and Swiss financial centers?
Almer: Yes, absolutely. In Germany, the strategic allocation of institutional investors to private credit is already significantly more advanced than in Switzerland. German pension funds and retirement plans integrated the asset class into their portfolios earlier and more broadly. According to the latest Investor Survey by the German Association for Alternative Investments (BAI), the average strategic allocation to private debt is already at 3.3%. In Switzerland, penetration is still lower—but the topic has clearly gained momentum in recent years. In terms of substance, the issues are largely the same: both markets prioritize security, transparency, and track record. It is also notable that pension funds—in both Germany and Switzerland—are showing increasing interest in directly supporting mid-sized companies in their domestic markets. In Switzerland, for example, the investment guidelines for pension funds were expanded as of January 1, 2022. Since then, these funds have been permitted to classify “unlisted Swiss investments” as a separate strategic asset class. Lending to debtors (private debt) and investments in the form of equity stakes (private equity) are both permitted.
Hill: Where do you currently see the greatest opportunities and challenges in the private debt market?
Wegmann: We currently see particularly attractive opportunities in the European lower mid-market segment, a sector that is structurally underserved by debt capital. While banks are increasingly pulling back, large international platforms and managers often cannot scale efficiently in this segment. At the same time, a large portion of capital has flowed into large-volume, sponsor-driven transactions in recent years. This has led to intense competition, rising leverage levels, and an erosion of credit standards (and margins)—particularly in the U.S. market. Based on our observations, Europe is currently clearly favored by institutional investors: Fundraising for European private credit funds reached a record high in 2025, and the European mid-market is considered a “lender’s market” with better structures and stronger covenants. However, we are also observing increasing deployment pressure here: Large funds with significant “dry powder” are pushing into smaller segments, which is intensifying competition even in the “core” mid-market and making selectivity in underwriting all the more important. Against this backdrop, we see a clear opportunity in less competitive transactions with solid structures, attractive pricing, and greater influence on loan structuring.
Almer: We see the greatest challenge as the growing uncertainty—both geopolitically and within the asset class itself. Should tensions in the U.S.-dominated segment continue to escalate, distortions could arise that generally undermine investor confidence in private debt and make raising capital more difficult. However, we see ourselves as well-positioned—even in a more challenging environment: as a locally rooted DACH manager with proprietary deal flow, a focus on the lower-mid-market, and consistently well-secured structures.
Hill: Thank you very much for the interview.
Dialogue & Information:
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