Apr 20, 2023 DWS Research Institute

Direct lending & the European transformation

A financing solution for SMEs to participate in the transition

Maria Milina

Maria Milina

ESG Research Analyst
Murray Birt

Murray Birt

Senior ESG Strategist
Michael Lewis

Michael Lewis

Head of Research, ESG
  • European transformation is an ambitious project, requiring significant capital deployment. High debt levels limit what governments can do. Private debt will need to fill the investment gap
  • Small and medium-sized enterprises (SMEs) are the backbone of Europe’s economy. They account for more than half of Europe’s GDP and employ around 100 million people
  • SMEs have no direct access to capital markets or other sources beyond credit. Private investments via direct lending are an alternative addition to bank loans, which provide SMEs with the capital needed for their transformation
  • SMEs have a key role to play in the European transformation. Their growth is expected to be significantly accelerated by key technological, societal and geopolitical mega-trends, with SMEs providing products and services

Critical investment gap for European transformation

In December 2022, we published our framework for European transformation[1] that emphasized the importance to mobilize capital to solve multiple challenges faced by Europe’s economies, such as adverse demographics, industrial competitiveness and the climate transition. The investment required to transform Europe is worth trillions of euros, and the investment gap is considerable. In 2019, the EU estimated[2] that the level of public investment in the EU-27 was insufficient to keep the public capital stock constant as a share of GDP. The same study estimated that the investment needs for delivering the green transition and the digital transformation were at least €595bn per year. The estimate includes €470bn per year associated to the additional investments needed to reach the EU’s current 2030 climate and environmental policy goals, and €125bn related to the EU’s goals for digital transformation. Some of these investments were to be covered through public spending, but the remaining investment and hence financing gap was expected to be around €1.77 trillion for the 2021-2027 period, or €250bn per year[3]. This will likely fall heavily on the shoulders of the private sector[4].

We find that banks typically provide about 70% of corporate financing in Europe. In the US, by contrast, about 70% percent of companies are financed on the capital market[5]. This reflects the heavy reliance on the banking sector in financing economic activities in Europe, where financing has been hindered by the after-effects of both the 2007-08 Global Financial Crisis and the subsequent euro sovereign debt crisis. Listed equity markets ought to step in and provide financing for long-term transformative projects in Europe, but this is largely absent. At the same time, the euro area economy has seen growing importance of the non-bank financial sector in supporting the financing of the real economy and financial market integration. The share of financing through debt funds (in terms of number of transactions) in the leveraged loan mid-market in the euro area grew from less than 14% in 2013 to almost 60% in 2022[6].


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1. DWS Research Institute (December 2022). A framework for European transformation https://www.dws.com/en-gb/insights/global-research-institute/a-framework-for-european-transformation/

2. European Commission Staff Working Document. SWD (2020) 98 - Identifying Europe's recovery needs

3. Climate & Company for Agora Energiewende (July 2020)

4. IEA (2022). World Energy Outlook

5. Deutsche Bank Research (March 2019). How to fix European banking and why it matters

6. Houlihan Lokey MidCapMonitor Q4 2022. The data refers to number of transactions and only includes senior and unitranche mid-market transactions seen by Houlihan Lokey. This is not the “entire” lending market

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