In today’s evolving economic landscape, private credit is undergoing a powerful transformation, one I believe is ushering us into what can rightly be called “Private Credit 2.0.” As banks across Europe increasingly focus on de-risking and shifting non-core activities into asset management, we find ourselves with unprecedented opportunities. Private credit is no longer a monolithic single category; it’s now a diverse ecosystem offering a wide range of lending opportunities beyond direct lending. To capitalise on these shifts, we must adapt our approach and expand our capabilities.
For instance, the distressed debt landscape in Europe is rapidly evolving. Varying economic pressures across countries are reshaping opportunities. In Germany, the dual impact of rising input costs and a high reliance on industrial sectors has put new pressures on businesses, a scenario mirrored across other Northern European economies. Real estate, particularly residential development, will likely benefit as interest rates stabilise. The demand is enormous in housing-short regions, though rising costs and pre-sale volatility in some areas present challenges. Furthermore, with macroeconomic shifts like an aging population, labour shortages, rising defence costs, and an ongoing energy crisis, it’s clear that we’re only seeing the beginning of this wave. Interest rates, which were once negligible, have introduced new strain on borrowers, pushing more businesses into restructuring—a field we at Arrow are well-prepared to navigate with our established expertise and robust European presence.
The role of banks is a focal point of change. Banks are stepping back from many types of specialised lending, allowing private credit funds to step forward. Given the regulatory shifts post-Global Financial Crisis, mostly notably the European Banking Authority stress tests and the upcoming Basel IV, banks now focus primarily on low-risk core activities, moving riskier capital allocations toward private credit and third-party asset managers. This shift is creating space for us to enter fields previously dominated by traditional banks: construction loans, bridge financing, agricultural lending, specialised mortgages, and buy-to-let products. As banks redefine their roles, we’re presented with opportunities to engage in these “non-core” areas—lending categories that can deliver strong returns with the right expertise and infrastructure.
In a European economy where defaults and non-performing loans are on the rise, certain sectors stand out as particularly vulnerable. Industries like airlines face intense operational complexities, from regulatory pressures to fluctuating commodity prices and financing challenges, making them vulnerable in challenging times. Similarly, the office sector, grappling with shifts in demand post-pandemic, has seen a sharp downturn as investors reassess the risk of office properties as stable investments. Nonetheless, the shifting economy brings opportunities in areas like tourism, decarbonisation, and real estate development that align well with our platform-led model, allowing us to capitalise on assets that benefit from structural tailwinds and retain long-term value.
Success in distressed investing demands an understanding of one’s core competencies. Valuing assets accurately, having the skill to manage them, and knowing when and how to exit are foundational to our strategy. These pillars allow us to navigate distressed situations effectively, from corporate restructuring, real estate to tourism and hospitality assets. With a team of over 4,000 people spread across 24 platforms, we’ve built the capabilities necessary to seize opportunities, especially in Western Europe. Our preference for real asset-backed lending over corporate exposure underpins this approach and ensures our success in sectors where we possess the expertise to create value.
Many have asked if we’re in a golden moment for private credit. The private credit market has evolved rapidly, moving from primarily direct lending into a broad, multifaceted asset class that now includes real estate financing, construction lending, infrastructure debt, litigation finance, and capital expenditure finance. This is private credit’s second wave, with a long runway of growth. This runway is expected to drive AUM to an all-time high of $2.6tn in 2029, 1.8X the 2023 figure of $1.5tn . The symbiotic relationship with banks is crucial here, as they remain essential for providing capital even as they reduce direct lending. Banks will still finance many of these specialised lending categories, often through loan-on-loan or warehousing structures, but the last-mile lending role increasingly falls to private credit funds like ours, allowing us to take advantage of this long-term growth opportunity.
Asset-based lending (ABL) has long been one of my preferred areas, offering a compelling alternative to corporate lending. Unlike corporate loans, which may leverage earnings, ABL provides a more secure position with, for example, a 60% loan-to-value ratio on tangible assets. The scalability may be limited, but this model has immense value, especially when coupled with local expertise and a strong compliance foundation. Our platform-led approach makes ABL a natural fit for us, as we possess the infrastructure to meet regulatory requirements across Western Europe. While this business model diverges significantly from traditional corporate private credit, it enables us to operate with greater confidence in sectors where tangible assets back our loans.
Real estate credit is a particularly vibrant area. Banks’ retreat from specialised lending categories has left a vacuum in markets like bridge loans, construction loans, and agricultural loans, as well as unique mortgage products. We’re filling these gaps, especially as demand for housing increases in regions across Europe. The complexities of real estate finance in Europe demand both expertise and the operational structure to handle the varied challenges in this market, and with our network and experience, we’re well-positioned to capitalise on this expansion.
Interest rates, too, have impacted private credit in profound ways. Floating rates have yielded attractive returns as rates have climbed. However, we’re prepared for eventual rate declines, with safeguards like rate floors and redemption fees that preserve returns even if the rate environment shifts. These mechanisms ensure we can continue delivering value to investors, regardless of macroeconomic changes. Of course, it goes without saying that true expertise comes from accurately assessing asset value and knowing what you’re willing to pay and having the technical skill to manage it and implement value-add steps that ultimately drive a profitable exit.
The ESG agenda has also shaped our approach. Despite some slowing of momentum in certain regions, the alignment of lending with ESG principles remains essential for us. Real estate, for example, offers vast potential for improvement. Much of Europe’s housing stock predates the 1980s, and as we shift toward newer, more energy-efficient buildings, we can drive sustainable change through our investment practices. Our deep involvement in local communities, alongside initiatives in affordable housing, aligns with our commitment to ESG and to creating a positive impact where we operate. This localised approach is central to our success and to fostering long-term relationships, ensuring we remain valuable members of the communities where we work.
As private credit continues to evolve, this is our moment to help shape the future of the asset class. Private credit’s expansion into new categories is a testament to its growing relevance, offering us, as practitioners, a tremendous opportunity to drive growth while staying true to our core values of local engagement and sustainable practices. The journey of Private Credit 2.0 has only just begun, and I am confident that our approach will not only meet the demands of this new era but help define it.
By Zach Lewy, Founder, CEO and Chief Investment Officer, Arrow Global
