Private credit allocations: Why Europe has the edge

The growth of private credit has appeared relentless and is now estimated to be a $1.8 trillion global market¹. The reasons for such enthusiastic adoption are clear: inflation protection; volatility reduction; and attractive risk-adjusted return potential. Perhaps the biggest catalyst, however, has been investors seeking to diversify their traditional fixed income allocations.

But recent events, so far confined to the US market, have led to increased investor concern about the health of the asset class overall. Led by high-profile defaults by US auto parts manufacturer First Brands, and subprime auto loan lender Tricolor, investors are questioning whether these were isolated or systemic events. Specifically, they are asking whether the speed of private credit’s expansion has led to poor due diligence, and whether these events are an early warning of possible trouble ahead.

For the moment, it appears both First Brands and Tricolor were stand-alone defaults, not least as in both instances they were accompanied by allegations of fraud. Reassuringly, US banks are not presently increasing loan loss provisions, and US Fed chair, Jerome Powell, recently stated he does not view private credit as a systemic problem – though he is remaining vigilant rather than dismissive.

But these concerns are prompting a wider question. Within private credit, the US and Europe dominate accounting for almost 90% of the global market². However, both these markets offer very different risk/return profiles. For investors with a heightened focus on both risk and the potential return available, is there a clear winner between these two regions?  

Europe’s structural edge

As a starting point, European  private credit is a far less mature and less competed market relative to the US, typically leading to a larger number of lenders in the US chasing the same deals. This level of competitiveness results in more aggressive (i.e. lower) pricing and yields in the US than has historically been the case in Europe.

With more limited financing alternatives available to European borrowers, lenders are in a more favourable negotiating position, typically leading to a consistent yield premium over US loans.

A quality advantage

But Europe does not only deliver better returns; it also offers a more conservative credit risk profile. Over the last 10 years, for example, European private credit has been characterised by both higher interest cover as well as lower default rates compared with the US:

As a result, there appears to be a clear qualitative advantage within the European private lending market. For wary investors, a preference for European private credit rather than US may provide additional reassurance.

Rethinking allocations

What tips the balance further in Europe’s favour, however, is the overall investment backdrop.

Some investors perceive the US as far less predictable at the moment, both in terms of policy making and key economic indicators. Added to that is a US equity market at historically elevated levels, together with investors increasingly questioning a long-held belief in American ‘exceptionalism’. Led by tariffs, rising debt levels, and a weaker US dollar, the trend of investment flows starting to shift away from the US and towards Europe may well accelerate.     

Overall, not only can European private credit tempt investors with superior risk-adjusted returns, but it also currently appears to be a more reassuring and exciting prospect than the US. Stronger European covenants and lower default rates offer superior investor protections and serve as a strong buffer should either a global economic shock or wider private credit concerns emerge.

The structural and return advantages Europe offers over US private credit markets are sustainable and long-term. This may position Europe as a preferred choice for investors seeking higher returns with less risk within their fixed income allocations.    

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The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.

For Institutional Investors in Singapore and Professional Investors in Hong Kong only. Not for onward distribution. No other persons should rely on any information contained within. In Hong Kong, this material is issued by M&G Investments (Hong Kong) Limited., and in Singapore, by M&G Investments (Singapore) Pte. Ltd. (UEN 201131425R), regulated by the Monetary Authority of Singapore. The contents of this document have not been reviewed by the SFC in Hong Kong or the MAS in Singapore.

^{Source
[1] Bank of England, Non-bank risks, financial stability and the role of private credit’, January 2024
[2] Source:  Preqin, ‘European Private Credit Asset Under Management’, July 2025}