By Hamlin Lovell, NordicInvestor

Higher interest rates and credit spreads now mean that yields on senior mid-market private lending can approach double digits, with no fund leverage and roughly half of the company level leverage seen in the broadly syndicated loan market. Investors still need to select borrowers carefully, because the near zero defaults of the QE era are unlikely to continue into the next cycle.

A significant proportion of loans can also make a positive ESG contribution through ratchets and KPIs, though investors should be realistic in their ambitions about how much “impact” can be achieved.

Allianz Global Investors (AGI) runs EUR 91 billion in private markets in total, including private equity and infrastructure, and Allianz itself is a substantial investor alongside external allocators. AllianzGI’s European private credit team manage EUR 9 billion, of which EUR 3 billion is invested in mid-market direct lending deals, across nine vehicles including funds and managed accounts, which share nearly all of the deal-flow; The team contains 17 people in France and Germany, which are also two of the key markets for lending, along with the Netherlands. The Nordics may be added later but there are no plans to lend in the UK.

AllianzGI runs a pure European strategy in response to client demand: “most clients are institutional investors who want a European only fund or at least a Eurozone one,” says Paris-based Damien Guichard, Head of European Private Credit at AllianzGI, who joined in 2013. He previously worked in mid cap finance and leveraged finance since 2000.

Yield Pickup

AllianzGI has recently been somewhat opportunistic in timing to take advantage of yield trends in private lending, which can follow public markets with a time lag. “In the third quarter of 2022 we paused new deal-flow because the level of pickup was not attractive enough. In general, it has now repriced,” says Guichard. Yields for the European strategy are closely clustered around EURIBOR +6%, with a maximum range of plus or minus 50 basis points. Most of the loans are floating rate, with virtually zero interest rate duration, so the coupons will follow interest rates higher and, unlike fixed income, the loans should not face any valuation downside risk from higher rates. Their effective maturity is usually 3-4 years.

Yield pickup for the strategy works out at an average 0.75% per turn of leverage, though this needs to be considered in the context of company size: a medium sized company cannot be exactly compared with a large one.

Borrowers’ average net senior leverage is 3.5x, which also means that they can generally afford higher interest costs that might have doubled in some cases. “In contrast in the broadly syndicated loan markets, leverage multiples can be 6 or 7 times, which means that a doubling of interest costs is very substantial,” points out Guichard.

Larger private companies within the mid-market space

The strategy is nearly always lending to private companies, and against cashflows. “The loans are also backed by the equity value of private companies, which we carefully assess based on brands, franchises, market shares and value chains,” says Guichard.

AllianzGI’s average size of borrower has increased, from EUR 35mm EBITDA in 2022 to EUR 50 mm this year, because some companies with as much as EUR 75 million EBITDA are shut out of public markets in what has been a structural change in investor appetite. Though the average is rising, AllianzGI can also provide loans as low as EUR 25 million.

Defining “sponsored” and “sponsorless” dealflow

Around 65% of deal-flow is private equity sponsored, which is defined as companies majority owned by private equity. Some 35% of deal-flow is “sponsorless” which could be family companies, though they can also have minority private equity ownership in some cases. The reality is that private equity is a very important provider of equity capital for medium sized companies in Europe, and it would be difficult to construct a strategy without any PE exposure.

Private equity leveraged buyouts are one use of funds where AllianzGI provides acquisition finance. AllianzGI may provide finance on a contingent basis, and would sometimes earn a fee even if a deal breaks after a long period and no financing is provided.

Defining seniority

The loans could be loosely called unitranche in the sense that they are not structured into senior and junior tranches, but the word “unitranche” also has a specific meaning in direct lending. “Unitranche means as a replacement for mezzanine and senior. We are distinguished from “unitranche” deals because we only provide the senior piece of the debt,” explains Guichard.

Covenants, defaults and workouts

This is one of many safeguards. There are widespread concerns about “cov-lite” loans and bonds in public and private markets. For AllianzGI, maintenance covenants are important: “we set them at a meaningful level so that company equity is not in negative territory when they are breached. The company has some incentive to deliver in future and our interests are aligned. We will discuss the appropriate steps while there is still value, and before the company becomes distressed”.

Default forecasts (from Standard and Poors) for the broadly syndicated loan (BSL) market are 3.5%. This covers public markets and it is very hard to get market level forecasts and data for private debt, according to Damien Guichard.

He has seen near zero defaults (a rate of below 0.1%) in the past ten years, but recognises that the next cycle may bring some corporate failures. “We hope our default rate would be less than the 3.5% market rate. If we assume an equivalent B+ credit rating, a 2.3% to 2.4% default rate could be conservative. Our assumption would then be 75% recovery rates”. This could imply default losses of only 0.6% or so per year, if 75% of the 2.4% default rate is recovered.

Guichard has been through workouts before, which need to follow the protocols in different countries: “The negotiations can require waivers and equity injections. Workouts follow a very specific process in France or the Netherlands, and would require specialist expertise in each country. The costs of this would be paid by the fund, on top of management fees”.

Workouts and restructurings can involve board discussions, though most discussions are with the CEO and CFO. AllianzGI occasionally has a board presence when it is alone in the deal, but generally does not.

Sustainability linked loans and meaningful KPIs

The G in ESG, governance, is rarely part of sustainability linked KPIs but is rather negotiated at the start of the deal as part of the initial selection.

In contrast, around 30-50% of loans are expected to have ratchets, which vary yields according to E and S related KPIs. A typical ratchet for mid-market loans could be plus or minus 15-20 basis points coupon if all KPIs are met (in investment grade ratchets can be smaller). The KPIs map onto tiered levels of coupon changes, that could be plus or minus 5, 10 or 15 basis points.

AllianzGI contributed to the France Invest SSL Best Practices working group, which produced a best practices guide for sustainability linked loans (SSLs), and has clear views on the appropriate use of KPIs. AllianzGI want to be selective about identifying meaningful KPIs that represent demanding targets. There is potential for opportunistic behaviour whereby borrowers try to negotiate a ratchet based on KPIs that have already been met or are too easy to achieve. It is therefore actually healthy to see that less than 100% of borrowers fully met the KPIs and obtained the maximum coupon reduction.

Most companies – about 90% – have both environmental and social KPIs. “The environmental ones tend to revolve around C02 carbon emissions. Social KPIs usually cover the companies’ own employees in areas such as diversity and permanent employment. They could be extended to the wider community so long as there was a clear link with what the company does as a business,” explains Guichard.


The ratchets and KPIs only apply to some companies and might not anyway be broad meet some definitions of “impact investing”. AllianzGI runs other strategies, including some in infrastructure, reporting under SFDR 9 but this strategy will report under SFDR 8. “We are comfortable with SFDR 8 based on the spirit of what we do, and are waiting for some details to be clarified. We promote better standards, but do not target specific activities with a positive ESG contribution. It is more about broad sectors,” explains Damien Guichard.


Economies and financial markets are clearly in new territory with inflation and interest rates at multi-decade highs and the consensus forecast is that the ECB will continue raising interest rates somewhat further. The Eurozone economy slipped into a very mild recession in the first quarter of 2023, according to some economic statistics, though growth forecasts have recently been increased. European private debt now offers a substantial risk premium that could provide equity-like returns under benign scenarios, and also potentially absorb material levels of default related losses under more adverse scenarios.

Important information

Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Past performance does not predict future returns. This is a marketing communication issued by Allianz Global Investors GmbH,, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht ( Allianz Global Investors GmbH has established branches in the United Kingdom, France, Italy, Spain, Luxembourg, Sweden, Belgium  and the Netherlands. Contact details and information on the local regulation are available here ( The Summary of Investor Rights is available in English, French, German, Italian and Spanish at