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

Episode Summary

Executive Summary: Thomas Lloyd-Jones argues that private credit is much broader than direct lending, with real estate and asset-backed lending offering attractive opportunities as banks retreat under regulation. He says Zenzit focuses on opportunistic lower-middle-market real estate credit, especially transitional assets and development, where illiquidity, regulatory constraints, and borrower-specific situations create better risk-adjusted returns than crowded vanilla lending.

Main Topics: Private credit is broader than direct lending (Priority: 5/5): Lloyd-Jones pushes back on the media narrative that private credit and direct lending are synonymous, emphasizing that asset-backed lending spans real estate, infrastructure, specialty finance, consumer finance, shipping, and aviation, each with distinct risk profiles and underwriting. Allocation concentration and redemption stress in direct lending (Priority: 5/5): He argues that recent stress in BDCs and direct lending reflects herd behavior, retail-driven redemptions, and institutional over-allocation to a narrow group of managers rather than a sector-wide failure. Europe vs. US private credit market structure (Priority: 4/5): European real estate credit remains more bank-originated because private credit is less developed, borrowers are more bank-dependent, regulation is tighter, and cross-border friction is high; the UK sits between the EU and US in maturity. Regulation is expanding the opportunity set for private credit (Priority: 5/5): Basel III/IV, output floors, and risk-weighting changes make bank lending more expensive and restrictive, pushing banks toward syndicated vanilla loans and leaving smaller, transitional, and non-standard deals to private credit. Zenzit’s strategy: transitional, opportunistic, lower-middle-market real estate credit (Priority: 5/5): The firm targets short-duration, illiquid, idiosyncratic deals where assets are built but not fully stabilized, or where development/lease-up risk creates a liquidity gap that banks and many funds avoid. Underwriting philosophy: downside protection and active partnership (Priority: 4/5): He stresses borrower quality, structural protections, active monitoring, and understanding macro conditions. Zenzit aims to get repaid through a recovery, not by relying on perfect execution, and stays involved post-close to help execute business plans. Sector-specific opportunities: office, development, and student housing (Priority: 3/5): Office is re-emerging selectively in Europe; development can offer alpha when crowded sectors are avoided; UK student housing remains supported by strong universities and supply-demand dynamics, though some markets are now oversupplied.

Key Arguments: Direct lending has attracted most private credit capital, but it is only one segment of a much larger asset-backed universe. Recent pain in BDCs looks more like a retail-style run and an allocation failure than proof that private credit as a whole is broken. Europe’s real estate credit market is less private-credit-driven than the US because private capital depth is thinner, banking culture is stickier, and regulation is more fragmented. Basel III/IV and the output floor are making bank lending more expensive, which increases demand for private credit solutions. Banks increasingly want large, vanilla, syndication-friendly loans, leaving smaller, transitional, and business-plan-risk credits underserved. Zenzit seeks 'good premium' deals where borrowers choose private credit for speed, certainty, and relationship value, not because they are shut out of all other financing options. Bad premium comes from lending to borrowers that cannot access public markets or are simply too risky, forcing lenders to accept inferior risk-adjusted returns. Real estate private credit is most attractive where the asset is good but needs time, execution, or refinancing support to reach stabilization. Active lender involvement after closing is part of creating and protecting value, especially in transitional and portfolio-building situations. Short-term capital is valuable because there is no meaningful yield curve premium in private credit for longer duration. Macro matters more than micro in real estate because exit routes depend heavily on market sentiment, rates, and refinancing conditions. Development risk is not automatically worse than stabilized assets; sometimes mature, aging assets with poor ESG or short leases are riskier than best-in-class development projects.

Data Points: Private credit fundraising allocation to direct lending: ~80% - Thomas cited statistics suggesting around 80% of private credit capital raised between 2022 and 2026 went into direct lending strategies. Lower-middle-market hold size: 50 million and below - Zenzit defines its target lower-middle-market real estate/asset-backed deals as hold sizes at or below $50 million. EU real estate credit deals bank-originated: ~80% - He said roughly 80% of real estate credit deals in Europe are bank originated. UK real estate credit deals bank-originated: ~60% - He said the UK is around 60% bank originated, reflecting a market between Europe and the US. US real estate credit deals non-bank originated: ~80% - He said around 80% of US real estate credit is non-bank originated. Cross-border bank lending in Europe: 14% - He cited a figure that only 14% of bank lending in Europe is cross-border, underscoring market fragmentation. European real estate credit fund share in senior investment finance: 61% - He said roughly 61% of European real estate credit fund capital is in senior investment finance, the sector’s vanilla, competitive end. Zenzit fund position count target: 20 to 25 positions minimum - As the fund scales, Zenzit wants to maintain a granular book with at least 20-25 positions. Typical loan term: 12 to 24 months - Transitional loans are usually short duration, often 12 months at the shortest and 24 months at the longest, with extension features. Typical senior investment finance leverage: 60% to 65% LTV - He described generic senior real estate investment finance as peaking around 60-65% loan-to-value. Typical senior investment finance coverage: ICRs north of 1.3 to 1.4 - He said typical interest coverage ratios in vanilla senior deals are generally above 1.3-1.4x. Student housing exposure geography: UK only - He said Zenzit’s student housing exposure is currently entirely in the UK. Fundrise Income Fund assets: more than $600 million invested - This was mentioned in the sponsored segment advertising the Fundrise Income Fund. Fundrise Income Fund distribution rate: 7.9% - Sponsored ad claim for the Fundrise Income Fund. Fundrise Income Fund 2025 total return: 8% - Sponsored ad claim stating the fund's total return in 2025 was 8%. Fundrise Income Fund average annual total return since inception: 7.8% - Sponsored ad claim about historical performance since inception.

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: He is correcting the common public framing of private credit and outlining the broader market structure. "What we’re seeing with banks is they are herding a little bit towards large syndicated positions where they can originate the loan, charge the fee... and then move on to the next one." — Thomas Lloyd-Jones: He explains why banks are leaving a large portion of the credit market open to private lenders. "Macro will always beat micro in real estate." — Thomas Lloyd-Jones: He uses this line to explain why sector and rate conditions are central to underwriting and exit planning.

Implications: Private credit investors should look beyond direct lending headlines and focus on market segmentation, bank retrenchment, and liquidity gaps. In Europe especially, transitional real estate, development, and other idiosyncratic credits may offer stronger risk-adjusted returns than crowded vanilla strategies.