Lending Where the Banks Won’t Go: What’s Fueling Europe’s Growing Real Estate Private Credit Market?

Episode Summary

Executive Summary: The episode argues that private credit is far broader than direct lending, and that capital crowding has created allocation distortions. Zenzit Capital focuses on opportunistic European real estate and asset-backed credit, exploiting areas banks and mainstream credit funds avoid due to regulation, risk-weighting, and herd behavior. Thomas Lloyd-Jones emphasizes short-duration, granular, hands-on lending to transitional assets, development, and preferred equity where liquidity is scarce and underwriting discipline matters most.

Main Topics: Private credit is not synonymous with direct lending (Priority: 5/5): The conversation opens by challenging the media’s tendency to equate private credit with direct lending. Lloyd-Jones explains that direct lending has absorbed most inflows, while asset-backed credit spans real estate, infrastructure, specialty finance, consumer finance, shipping, and aviation. Allocation failure and crowding in private credit (Priority: 5/5): Lloyd-Jones argues that both retail and institutional investors have clustered into a narrow set of managers and strategies. He frames the recent stress in BDCs and redemptions as a herd-driven phenomenon, but one that also raises broader questions about allocation concentration. European real estate credit opportunity set (Priority: 5/5): He explains why Europe is less bank-disintermediated than the US: cultural banking reliance, fragmented regulation, and fewer private credit dollars. This creates opportunity where banks are retreating due to Basel-related constraints and cross-border friction. Zenzit’s strategy: opportunistic, transitional, and granular (Priority: 5/5): Zenzit targets lower-middle-market real estate and asset-backed opportunities, especially transitional assets, development finance, and selectively preferred equity. The firm prefers shorter-term, smaller-ticket, active lending with strong structural protections. What makes a good vs. bad premium in lending (Priority: 4/5): The key underwriting distinction is whether lenders are being paid for liquidity, speed, and certainty versus simply taking worse risk. Lloyd-Jones says private credit is attractive when borrowers have alternatives but choose private capital; it is less attractive when the lender is merely warehousing weak credits. Macro, regulation, and sector selection (Priority: 4/5): The discussion covers Basel III/IV, insurance-company leverage, back leverage, interest-rate uncertainty, and how macro conditions affect sector liquidity. Lloyd-Jones says his team constantly maps where banks are not lending and where sector momentum is genuine versus overheated. Hands-on structuring, downside protection, and preferred equity (Priority: 4/5): Zenzit emphasizes detailed covenants, cash sweeps, security packages, and active post-close engagement. Preferred equity is used where the firm helps build enterprise value across a portfolio and wants uncapped upside alongside downside priority.

Key Arguments: Private credit should be understood as a broad ecosystem; direct lending is only one segment, albeit the one that captured most capital and media attention. The recent stress in BDCs and direct lending reflects retail-style redemption behavior and herd mentality more than a systemic failure of all private credit. European credit markets are less mature and less bank-disintermediated than US markets because of regulation, cultural banking dependence, and fragmented legal systems. The opportunity for private credit expands as banks retreat into larger, vanilla, syndication-friendly loans and as Basel rules raise holding costs and capital requirements. Good lending premium comes from providing liquidity, certainty, and speed to borrowers who could access capital elsewhere but value private execution; bad premium is just compensation for taking inferior credit risk. Lower-middle-market real estate is attractive because public debt markets are not a realistic funding source, so borrowers with transitional needs are underserved. Zenzit prefers transitional assets because they offer meaningful pricing premium without the valuation uncertainty and stale-asset risk of long-stabilized properties. A hands-on lender can create value through business plan oversight, refinancing coordination, and active structuring rather than passive capital provision. Preferred equity is most compelling when the lender is helping build enterprise value across a platform or portfolio and wants uncapped upside to offset subordination. The biggest underwriting mistake is treating development or stabilized assets as inherently riskier or safer based on labels rather than analyzing macro, borrower quality, and execution risk. Sector selection should be guided by liquidity flow and macro sentiment, but distress is only attractive when the catalyst is fixable and not structural or secular.

Data Points: Private credit capital concentration: ~80% of all capital raised between 2022 and 2026 went into direct lending - Used to illustrate how narrowly capital has been allocated within private credit. Lower-middle-market hold size: 50 million and below - Zenzit’s definition of lower-middle-market opportunities. EU real estate credit origination: 80% bank-originated - Describes how much European real estate credit still comes from banks. UK real estate credit origination: 60% bank-originated - UK sits between Europe and the US in private-credit maturity. US real estate credit origination: 80% non-bank - Shows the greater maturity of private credit in the US. Cross-border bank lending in Europe: 14% - Illustrates that Europe is not truly one market from a lending perspective. Senior investment finance share: ~61% of European credit fund capital - Shows crowding into the vanilla end of real estate private credit. Typical senior investment finance LTV: 60% to 65% - Generic template for stabilized real estate senior lending. Typical senior investment finance ICR: North of 1.3x to 1.4x - Indicative underwriting level for stabilized senior loans. Typical senior finance term: 3 to 5 years - Standard tenor for vanilla senior investment finance. Transitional loan term: 12 to 24 months - Zenzit’s preferred shorter-duration structure. Portfolio hold size per transaction: 15 to 50 million - Zenzit’s target position size per loan or facility participation. Minimum portfolio position count: 20 to 25 positions - Target diversification level as the fund scales. Fund structure: Evergreen vehicle - Designed to reinvest capital rather than force a fixed-life exit. Income Fund distribution rate: 7.9% - Fundrise advertisement for the Income Fund. Fundrise Income Fund invested capital: More than $600 million - Paid promotion details in the episode. Fundrise Income Fund 2025 total return: 8% - Advertisement cites 2025 performance. Fundrise average annual total return since inception: 7.8% - Advertisement cites long-term performance.

Pivotal Quotes: "The dominant media narrative at the moment is, as you say, that private or direct lending and private credit are virtually synonymous. But that is obviously not how the industry is structured." — Thomas Lloyd-Jones: Opening critique of the public narrative around private credit "We always underwrite from a downside to say: if it doesn't work out, if we never get another tenant, can we recover capital." — Thomas Lloyd-Jones: Explaining Zenzit’s downside-first underwriting approach in transitional real estate "Macro will always beat micro in real estate." — Thomas Lloyd-Jones: His framework for evaluating sectors and distress opportunities

Implications: Investors should look beyond direct lending and avoid crowding into the same private-credit trades. The most attractive opportunities may be in underserved, short-duration, hands-on real estate credit where structure, liquidity, and borrower quality matter most.