Thanks to the rate cut, Direct Credit becomes a key tool to finance the green and digital transitions

While in North America (USA and Canada) and Great Britain more than 70% of the credit granted to companies comes from financial sponsors including direct credit funds, with the remaining share financed by the banking system, the balance of power appears to be reversed in Europe: in France, bank credit is 55% of the total.  in Italy at 47% and in Germany at 37%, compared to 22% for the United States. Non-bank direct lending volumes – so-called shadow banking – are very significant globally and are characterised by high growth. However, 58% of this stock is concentrated in North America, with capital available for direct lending financing  amounting to $182 billion globally, for total AUM of $546 billion.

Following these numbers and trends, together with experts such as Claudio Scardovi, Senior Partner and Private Equity Leader of Deloitte Italy, and Luigi Cutugno, Partner Corporate Finance and Debt & Capital Advisory Leader at Deloitte Italia, we tried to better understand what is the direct credit state of the art in Italy and why it could be a useful tool to finance the current green and digital transition, looking forward to the future growth and development of the entire Italian business industry.  

"The ECB's recent decision to reduce the Official Discount Rate seems to indicate a return to "normality" for the credit market, which will lead to greater access to and a lower cost of financing for Italian SMEs, with positive effects on growth and profitability. The green and digital transition of Italian companies cannot be financed only by the public sector or the banking system. Resources must necessarily also pass through private savings and, in this sense, Direct credit represents a fundamental financial instrument as well as an opportunity for growth for companies, investors and banks", stated Claudio Scardovi, Senior Partner and Private Equity Leader of Deloitte Italy. "The growth of Direct Lending in Italy would largely benefit the banking sector itself, which is increasingly reorienting itself towards asset and wealth management, with progressive diversification of sources of income and asset risks assumed, with less dependence on the economic value created by the Official Discount Rate, which is destined to fall. Italian banks, in the last two years, have largely benefited from the rise in rates, especially in terms of record dividends and profitability. Italian banks will be able to support the development of direct credit, both by raising private savings to invest and by working in partnership with mid-market funds  already active in this sector through origination and co-financing activities on their customers," continues Scardovi.

Direct Credit: a tool that is still little known and used in Italy

Looking at investment activities, Italy's share of private debt amounted to just €2.9 billion in 2023, recording, according to Aifi, a 12% drop compared to 2022, with more than two-thirds of the disbursement granted to large companies. The number of deals fell by 37%, from 262 to 164, involving 109 companies. Of these, 55% were loans, 38% bonds and 7% hybrid instruments. Moreover, more than 30% of mini-bonds are subscribed by the banks themselves, with limited use of basket bonds (diversified mini-bond portfolio). At the same time, funding from private debt operators active in Italy increased by 14% in 2023 to €1,141 million. Independent funding, which accounts for 96% of the total, comes mainly from the public sector and institutional funds of funds (46%), followed by banks (19%) and pension funds and provident funds (16%).

"Considering the vast universe of over 10,000 companies in Italy with a turnover between 30 and 100 million euros, the considerable growth potential of the private debt market is evident, which can be seized by further developing funding from institutional investors, hopefully supporting it with tax benefits. This would make it possible to increase product penetration among Italian small and medium-sized enterprises and reduce dependence on the banking sector to finance organic growth projects (mainly investments) or through external channels (e.g. M&A)," comments Luigi Cutugno, Partner Corporate Finance and Debt & Capital Advisory Leader at Deloitte Italia.

More credit for businesses and low-risk investments

Direct credit is characterized by longer weighted average loan durations (over 5 years the average duration in the United States, over 6 years in Italy), against an average cost competitive with that of banks (6.8% in 2023, according to Aifi). "This form of credit guarantees Italian companies more credit, for longer, at reasonable costs, and represents a low-risk investment opportunity (default rates are currently very limited  ), with attractive and uncorrelated net returns compared to other assets in the portfolio for both institutional and retail investors," concludes Cutugno.