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Private credit's overlooked opportunity: the case for non-sponsored direct lending
10 min read 10 Aug 26
Sponsored, direct lending continues to dominate the European private credit market representing approximately 80% of the region’s debt market1. The growth of European direct lending is continuing apace with almost €100 billion raised over the last 2 years and total AUM now estimated at roughly €450 billion2.
The growth drivers for private credit continue undiminished – further retrenchment by European banks from certain lending segments, and more companies choosing to remain private for longer. However, in Europe, private equity (PE) backed companies represent around 80%3 of direct lending deal flow and are the prime focus for the large proportion of direct lending funds. However, these sponsored companies represent less than 10%4 of the total overall European corporate sector – while family and entrepreneur owned firms comprise 70% of the sector5. This is a clear mis-alignment and highlights the compelling opportunity outside the sponsored credit market.
The European non-sponsored market is far less competed compared to the sponsored market with pricing power consequently stronger and security and covenants stronger.
Institutional investors continue to increase private credit allocations, tempted by its attractive risk and return profile. Historically, non-sponsored credit has offered attractive risk-adjusted return characteristics, with lower leverage and stronger protections making it a potentially sweet spot in European private credit.
Why non-sponsored private credit?
Lower leverage
The motivation for debt raising varies significantly between PE sponsors and family/entrepreneur owned businesses. With PE sponsors, leverage, minimising equity contribution and enhancing IRR are the main focus – higher leverage amplifies potential return.
In contrast, family/entrepreneur owned companies typically borrow to drive enterprise value, such as organic expansion or acquisitions. These type of businesses are typically reluctant to take on high levels of leverage in order to avoid undue risk.
More attractive pricing
The European non-sponsored market is far less competed compared to the sponsored market with pricing power consequently stronger and security and covenants stronger. Pricing is further strengthened by high barriers to entry such as relationship-driven access, structuring expertise and complex sourcing. Whereas PE-backed companies provide lenders with standardised data rooms and due-diligence packs, the equivalent underwriting process with family/entrepreneur businesses is typically more complex.
This is where highly experienced private credit managers such as P Capital Partners (PCP) may be well positioned. Financing companies within this segment for almost 25 years, they have the expertise to navigate complexities, assess risks and structure transactions accordingly. Historically, non-sponsored yields have consistently provided a 150-200 bp premium over directly originated upper mid-market loans6.
Stronger covenants
In the broader European leveraged loan market, loans with no financial covenants (‘cov-lite’ loans) account for 90%7 of transactions. Further, ‘creative’ use of accounting adjustments e.g. using projected but unrealised cost savings, have raised legitimate concerns about the accuracy of financial reports.
By contrast, family/entrepreneur owned businesses favour more engaged relationships with their lenders, ensuring financing more tightly aligns with their long-term business objectives. Additionally, non-sponsored transactions are bilaterally negotiated giving lenders greater influence over key terms.
Better borrower-lender alignment
Strong alignment between borrowers and lenders is a key factor in downside protection – both parties need to be incentivised to support the business across market cycles. Family/entrepreneur owned businesses are typically more aligned with debt providers from a risk perspective than sponsors in a private equity backed deal. Owners have their business often as the main or sole asset prompting a more conservative approach to risk and a strong emotional and reputational commitment to ensuring the company’s long-term success.
Importance of monitoring
Sponsored lenders have an indirect relationship with borrowers, the sponsor effectively acting as a filter. The relationship with non-sponsored lenders is far more direct with access to internal financial reporting, performance metrics and often board observer rights. As an illustration, PCP holds observer seats in 32 of its 428 investee companies where it has made a primary investment, providing enhanced oversight.
Non-sponsored credit may represent an attractive and differentiated segment of European private credit, offering a large, diverse and high quality opportunity set.
Importantly, non-sponsored private credit is neither better nor worse than sponsor-led lending, it is simply different. It has a distinct profile providing access to different parts of the corporate sector. In terms of investor allocations, it is likely to be a complement rather than a competitor to traditional direct lending.
P Capital Partners – a differentiated private credit lender
Embracing the opportunities within the non-sponsored market requires a manager with proven experience across multiple credit cycles, providing insight and perspective. PCP, majority acquired last year by M&G Investments, is an established specialist non-sponsored lender with a key focus on Northern Europe. Founded in Stockholm almost 25 years ago, PCP provides primary capital within the SME market.
PCP has a differentiated profile. Geographically, the European non-sponsored market is heavily represented by France and the UK, together these two markets account for 60% of deal flow9. Setting PCP apart from competitors is its focus on the alternative markets of the Nordics, DACH, Netherlands, the UK and Ireland. These markets are characterised by stronger legal protections for lenders, and are some of the most creditor-friendly jurisdictions10 in Europe.
PCP have three strategies across the risk-return spectrum: Corporate Credit, Transition and Growth Capital. Each address distinct segments of the market, but all are anchored in a consistent investment approach: a primary focus on intensive analysis, building low-risk structures even in complex situations, and becoming trusted partners with business owners and management teams.
The market drivers for the continued growth of private credit remain undiminished with Europe’s banks continuing their retrenchment. Non-sponsored credit may represent an attractive and differentiated segment of European private credit, offering a large, diverse and high quality opportunity set. Competition is typically more limited, leverage is generally lower, margins are often higher and lender protections are typically stronger compared to the sponsored market.
PCP’s strategic focus on the most creditor-friendly jurisdictions within Europe further enhances the risk-return profile of this approach.
1,3,4,5 Source: LCD EU Leveraged Lending Report, Q3 2024
2 Source: Pitchbook, April 2026
6 Source: Deloitte Private Debt Report, Autumn 2024
7 Source: PCP, ‘Non-sponsored mid-market direct lending’, September 2025
8 Source: PCP, ‘Non-sponsored mid-market direct lending’, September 202
9 Source: Deloitte Private Debt Report, Autumn 2024
10 Source: EuCham. Score average of ‘Ease of Doing Business’ (World Bank) and ‘Corruption Perception Index’ (Transparency International), 2020
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