What's Next for Europe?
Europe's private credit market has reached an inflection point. With approximately €450 billion in assets under management and record fundraising of $65 billion in the first nine months of 2025, the asset class is no longer niche. But the current market size understates the structural opportunity and the structural risk.
The opportunity is defined by a simple asymmetry. European banks still provide roughly 70–76% of corporate credit, compared with 21–25% in the United States. Non-bank lending market share in Europe stands at approximately 12%, versus 75% in the US. Europe's combined private and public leveraged credit market is roughly one quarter the size of its US equivalent, despite the two economies being comparable in scale. This gap is closing, driven by Basel 3.1 implementation, which is raising the capital intensity of bank lending and accelerating the migration of credit origination toward nonbank channels through instruments such as significant risk transfers and forward flow agreements.
At the same time, Europe faces investment needs that far exceed public sector capacity. The financing requirements for energy transition, digital infrastructure, defense, and Mittelstand modernization are measured in trillions. Germany's Deutschlandfonds — €30 billion in public funds and guarantees targeting €130 billion in total mobilization — exemplifies a new generation of policy instruments designed to use public capital catalytically, absorbing first-loss risk to crowd in private investors. But the capital that needs to be mobilized sits overwhelmingly on insurance and pension balance sheets, where regulatory constraints have historically penalized private credit allocations.
Two regulatory developments are changing this. The Solvency II review is recalibrating capital charges that have made unrated private credit prohibitively expensive for insurers under the standard formula, particularly for long-dated, buy-and-hold positions that match liability profiles. ELTIF 2.0, effective since January 2024, provides a regulated, cross-border product wrapper that supports semi-liquid structures and broadens the eligible asset universe to include direct loans, asset-based finance, and infrastructure debt. Together, these reforms lower the cost of holding private credit on insurer balance sheets and provide the vehicle through which that capital can be deployed. German insurers alone hold roughly €1.8 trillion in invested assets; even a modest reallocation of 2–3 percentage points toward private credit would represent capital flows larger than the market's current annual fundraising.
The strategic response from European asset managers reflects this logic. DWS's cooperation with Deutsche Bank gives the asset manager preferred access to bank-originated private credit for distribution to insurance and wealth clients, a template for the European "co-opetition" model: banks originate and de-risk, asset managers package and distribute, insurers and pension funds provide long-term capital. This model addresses Europe's origination bottleneck, which has historically prevented European managers from competing with US platforms that built direct lending at scale over the past decade.
But scaling private credit in Europe also imports risks that the current governance architecture is not designed to manage. Three deserve particular attention.
The European private credit market has not yet been tested through a full credit cycle. The 2021–22 vintages are approaching maturity walls in 2026–27, potentially against a higher cost of funding backdrop. Rising defaults in leveraged loans and increasing use of payment-in-kind toggles in direct lending point to mounting stress in underlying credit quality — patterns well documented in US markets but only beginning to surface in Europe.
As the investor base broadens from sophisticated institutional allocators to private wealth and retail channels via ELTIF structures, the monitoring and governance capacity may not scale proportionally. The US experience with BDCs and insurance-affiliated private credit vehicles suggests that wider distribution often coincides with weaker oversight, valuation opacity, and conflicts of interest — precisely the dynamics that concern financial stability authorities.
The very regulatory reforms that enable private credit growth create a tension between competitiveness and stability objectives. Lowering capital charges and broadening eligible asset wrappers makes it cheaper for insurers to hold less liquid, harder-to-value exposures. If governance keeps pace, this is a productive reallocation of European savings toward the real economy. If it does not, Europe risks solving its competitiveness problem by importing the financial stability vulnerabilities that US regulators are only now beginning to address.
The central question for European policymakers is therefore not whether private credit should grow — that is already happening and is broadly desirable. The question is under what conditions private credit growth strengthens European capital markets versus when it destabilizes them. Answering this requires better data on credit quality, leverage, and interconnectedness within private credit portfolios; robust monitoring frameworks that can keep pace with product innovation; and empirical evidence on whether the governance mechanisms that discipline lending in benign environments survive contact with stress.