When the Safe Bet Gets Risky: Rethinking Sector Risk in Private Credit

Software has long been one of private credit’s favourite sectors, sticky revenue, high margins, predictable cash flow. AI tests those assumptions, and other sectors carry new risks of their own. We spoke with Martin Siml, Managing Director for Private Credit DACH & BeNeLux at Barings, about how sector risk is being reassessed, where he still sees opportunity, and where he thinks his peers are getting it wrong.

Martin, you’ve been in leveraged finance and private credit since 2005, starting at WestLB, twelve years at ODDO BHF, and now at Barings since 2024. You’ve seen multiple cycles, how has your own view of risk changed?

It’s really been one long cycle since the financial crisis, low rates, low defaults, slow but steady growth, which made underwriting straightforward, even in cyclical sectors. That’s changed. The shift toward higher-multiple, more specialized sectors in private equity and subsequently private credit isn’t new, it happened a few years back, moving from typical structures around seven- or eight-times valuation and three-and-a-half to four times leverage toward higher-multiple targets. Credit funds have been instrumental in developing this segment.

What’s different now is that positioning needs a fresh look: underwriting at the top of that risk spectrum means taking on more hybrid/mezzanine-like risk, and higher exposure to exit multiples.

Software has long been one of private credit’s favourite sectors, sticky revenue, high margins, predictable cash flows. But AI is starting to challenge some of those assumptions. How has this changed the way you evaluate a software credit?

What’s said about the attractiveness of software is still true today. The question is whether it still holds in five or seven years, by the time the company gets sold. Some business models are clearly exposed to AI risk, but most are still deeply entrenched. How that evolves is genuinely hard to predict. 

We take comfort from access to proprietary data or genuine embeddedness in a client’s value creation process. AI due diligence is now standard for us; we won’t look at a software deal without an AI scope. 

On structuring, we’ve seen more mezzanine risk stacked on top of unitranche, sometimes one to three turns of second lien, to achieve attractive blended returns which we’re critical of. The market has adapted; there’s a premium being charged now for software credits and we’re in the middle of an adjustment period I think will last a while.

Barings just announced the close of over $19 billion in capital for its direct lending strategy. Does that mean a different sector is now getting more attention from you?

Players heavily focused on software are now looking for alternatives and a more balanced sectoral approach. We were never overexposed to software; we spread across Europe to widen the pool of investable sectors. 

In Germany specifically, medtech is one of our favourite sectors, and healthcare more broadly, tricky in the past, is attractive if you’ve learned the lessons. Generally, we stay open rather than segment-focused, it’s about a diverse portfolio, regionally and sectorally.

How does that same lens apply to Germany compared to other regions, given the market is less tech-weighted? Is there anything else shaping your view of different regions right now?

DACH and BeNeLux differ slightly in their industrial base but have highly attractive companies at mid-cap level. BeNeLux for instance leans heavily on business services or suppliers tied to the ASML ecosystem. 

BeNeLux has always been ahead on private equity penetration and is a very commercial, terms-driven market. It used to be overlooked, that’s no longer true. Germany is a big economy with a large funnel of deals and sectors, and there are plenty of mid-cap tech companies here, contrary to what people assume. 

Currently, even manufacturing is back in scope, but the challenge is to avoid the obvious automotive exposure which has been a feature of the German market. There are some hidden gems in the space of technical components which can achieve attractive margins and are well diversified on the customer side beyond the automotive sector. 

Hot take: what’s one view you have on sector risk in private credit that some of your peers would disagree with?

What’s genuinely difficult is defense. It’s a hot topic, but these companies are typically concentrated in client base, sometimes product too, and while long-term contracts make revenue look visible, the timing of when it flows in is uncertain. Growth that used to be shallow is now substantial, shifting capital needs toward working capital rather than a standard term loan, a structure credit funds generally struggle with. 

We are invested in defense ourselves, just in situations where those specific features aren’t present.

This interview is part of Leverest Credit Talk — featuring senior voices from across the private credit and leveraged finance landscape. Learn more about Leverest → leverest.net

Guest: Thomas Grau, Head of Acquisition Finance Germany; Amber Glaeser, Director; Ivan Seneka, Director – at Bank of Ireland

Topic: Mid-Market LBOs & the Blurring Line Between Funds and Banks / Finding Growth Together: When Banks and Funds Team Up

A Bank Building Its Own Private Credit Partnership: Bank of Ireland on Its First Year With Kennedy Lewis

Bank of Ireland’s Acquisition Finance team has spent the past year testing something few banks fully commit to: a direct, structured partnership with a private credit manager to commit large senior secured loans out of one hand. Announced in March, the tie-up with Kennedy Lewis targets over €2 billion for European mid-market buyouts, and the platform has already closed four transactions, three add-ons and one fully bilateral deal.

We spoke with Thomas Grau (Head of Acquisition Finance Germany), Amber Glaeser (Director) and Ivan Seneka (Director) about how the partnership works in practice, where the real competition sits, and where the market goes from here.

Thomas, you’ve been with Bank of Ireland since 2008, heading the German Acquisition Finance team since 2012. Ivan joined in 2010, and Amber in 2023 as a Director – a lot of experience between the three of you. How do you see the German leveraged finance market developing today?

Thomas: It’s a very attractive market, underpinned by a broad set of players, so it’s always evolving. We’re seeing M&A resistance driven by global uncertainty, weak GDP growth and AI as either a disruptor or an enabler. But LBO financing remains an unavoidable discipline in corporate finance, and senior debt is a good financing solution also in the future.

Amber: There’s significant capital chasing a limited pool of high-quality assets, on both the sponsor and lending side. Given how long many PE-owned assets have been held, we’d expect exit and refinancing activity to pick up, though sentiment has turned more cautious in some sectors, software being one.

Ivan: What’s underappreciated is that although we’re arguably in a crisis or economic turmoil, the transaction market isn’t behaving like we are. In previous downturns, you’d see players go risk-off. That’s not happening now. Deal volume is there, even if quality is volatile, and nobody, banks or funds, is really pulling back.

In March, Bank of Ireland announced a strategic partnership with Kennedy Lewis to jointly deploy over €2bn in senior secured loans for European mid-market buyouts. What was the thinking behind it, how does it work in practice, and how does it broaden your team’s product range?

Thomas: This builds on a long road: BOI carried mezz, second lien and small equity positions before the financial crisis, and later added a unitranche sub-bucket alongside super senior RCF and first-out. Finding the right partner for a bigger, dedicated senior bucket took time, we needed the right risk appetite and an entrepreneurial mindset. With Kennedy Lewis, that fit clicked: by the end of August we’d already closed four transactions, three add-ons and one fully bilateral deal, and the experience has been very positive.

Ivan: Having the firepower to write a large senior ticket alone is an advantage, but it doesn’t guarantee the deal, you’re still competing against unitranche and bank club deals. It gives us speed, since there’s no club to assemble, lower legal cost, and less management time fielding multiple lenders. Getting that operating model established on our own terms, within the credit box we’d defined, was genuinely the hard part.

Amber: BOI originates and stays the sponsor’s single point of contact throughout the holding period. Our credit process and Kennedy Lewis’s run in parallel so nothing loses time, and BOI handles the legal workstream. That upfront work is why it ran smoothly from day one, though as our first fully bilateral deal, there were still lessons learned for next time.

While banks are partnering with private credit managers, those same managers have increasingly moved into territory that used to be exclusively banks’ – senior debt, club-style structures. What’s your take on this development?

Ivan: A lot of traditional bank competitors have pulled back or exited the mid-cap over the last decade. For senior structures, we don’t see private credit managers as competitors so much as collaborators, they are happy to form senior clubs or often want to participate if we underwrite. With this partnership behind us, we’ve got an even stronger case for sponsors to choose us. Our real competition is still unitranche, and it’s increasingly fought on leverage and pricing.

Amber: Pricing is the most recent shift. It’s always been a competition on leverage against unitranche, but with pricing in some cases coming down toward 475bps, the differential to bank debt isn’t what it used to be.

Thomas: The market’s still attractive, if not at the return levels of ten or fifteen years ago. Global liquidity means investors need this financing as part of how they manage capital. You’ve got asset managers leveraging their own networks, and investors without a European footprint looking for a partner with aligned risk appetite. That’s exactly the gap Kennedy Lewis and BOI fill for each other.

Based on all this, what are the next steps for your team?

Thomas: It’s about conversion. We’ve taken several transactions to the final stage and lost them because of the process, not through fault of the product. This is a senior debt product, not unitranche, and we believe in it. With the agency capability we already have, we can deliver the whole package from one place.

Amber: Offering agency and FX hedging alongside the lending is something only a bank partnership brings. Kennedy Lewis isn’t the only tool either, we can still run normal senior clubs, underwrite with a Kennedy Lewis anchor ticket to cut syndication risk, do super senior, or take a slice of unitranche.

Hot take: what’s one view you have on the German leveraged finance market that most of your peers would disagree with?

Ivan: In this market environment lenders need to get used to financing assets that aren’t growing, but still can make a compelling debt story.

Amber: After the next economic crisis, regulation for private credit is going to get a lot harsher, and that will level the playing field between banks and funds.

Thomas: Being an optimist is like buying a computer, there’s always a better one coming next quarter. But you still have to invest, and you can still make good investments, because there are smart people around. And sometimes I’d appreciate better collaboration.

This interview is part of Leverest Credit Talk — featuring senior voices from across the private credit and leveraged finance landscape. Learn more about Leverest → leverest.net

Guest: Alexander Schröder, Managing Director & Head of Leveraged Finance at Commerzbank

Topic: Mid-Market LBOs & the Blurring Line Between Funds and Banks

About Commerzbank, your role & the market

1. You’ve been heading Leveraged Finance at Commerzbank for about 8 months now, after previously running the German and small-cap teams. How do you see the leveraged finance mid-market developing?

We had a good start to the year, but I think overall activity is still a little muted. There’s reluctance from buyers given the macroeconomic uncertainty and the lack of tailwinds from the economy. We’ve seen consolidation in the mid-market and weaker financials, which is driving that uncertainty. 

So, we see muted M&A activity overall, and for the strong credits that do come to market – which is what we and private equity are focusing on – everyone ends up chasing the same names. That leads to increasing competition for mid-market assets, especially given the massive dry powder on the private debt side and the lack of their favourite sector, software, which has become a tainted industry since the AI disruption.

Now everyone is chasing the same assets in industrial tech, business services, healthcare, medtech and so on. That drives competition and ever-decreasing standards on documentation. Pricing on the unitranche has also come down massively. Banks, to be fair, have stayed quite disciplined on margins – you can see that best in the super senior structures we’re doing right now. 

For strong assets we can no longer compete with the unitranche, but we’re still getting better upfront fees and very decent margins on a very low-risk product. The market needs to pick up for us to deploy more into classical senior structures.

2. Commerzbank has built co-investment partnerships with StepStone and Apollo. What are you doing together, and what was the thinking behind it?

We recognized that debt funds are here to stay. I’ve been in the industry for more than 20 years, and I saw them coming – I had my doubts, but they are clearly here to stay and now a dominant part of the market, owning 60–70% market share. 

So, we looked at what makes them so attractive to clients, given they’re usually higher priced and don’t always require 6x leverage. What distinguishes them from banks is the ability to hold larger transactions and enable bigger deals without taking on market risk. 

For banks, the only way to do a €100m deal in Germany is still to underwrite it yourself – we see that from players like UniCredit here and there. We chose a different path: partnering with private credit managers who hold pockets of liquidity, through two vehicles we set up with StepStone and Apollo. 

Bank vs. debt fund

3. How is it working in practice – In front of a sponsor, how does having StepStone or Apollo as partners change the conversation?

Both vehicles are managed by Commerzbank – that’s the important part, so we have a good steer on their ability to deliver alongside us. That lets us provide €100m of volume out of one hand, almost like a small unitranche. 

We remain the only client-facing entity – the client only talks to Commerzbank. Sponsors and management teams trust us, and StepStone and Apollo stay in the background, providing the liquidity. We have ongoing pipeline discussions with them so they’re aware of what’s coming and can plan their liquidity and funding, but we run the ICs, do the credit work, and they fund on request. 

The conversations with private equity and debt advisors have definitely changed as a result. Our strategy has paid off – we’re seeing a strong pull effect, because they know we’re now an alternative, especially in the lower mid-market, to the classical unitranche players. Although we do see some funds, under increased competition, pushing further down into the lower-cap segment – even €10m-EBITDA deals are heavily contested these days. 

We can be a real alternative to unitranche where leverage doesn’t need to be maximized and where cheaper pricing matters. We’re pricing at bank pricing.

4. While banks are partnering with funds, funds have increasingly moved into territory that used to be exclusively banks’ – senior debt, club-style structures. What’s your take on this development?

Let me be a little cynical here – they’re asset managers, they want to earn management fees, which is why they keep coming up with new structures like senior debt funds. 

I haven’t seen one that’s actually successful, at least not in the German mid-market – might be different in other jurisdictions. I’ve never seen them partner with us, because they’re too expensive. No German mid-market PE client or management team will pay 500bps for a 4x-leverage senior credit when they can get it from us at 400, 425bps at most. So, senior debt funds are, I think, just another product to increase management fees. 

Club-style structures are a result of the ever-increasing competition, and clients make use of that by having various debt funds competing in the same club. We first saw that on larger caps, especially when the market was dislocated and you needed to bring together different direct lenders. But now we’re seeing it even on a €150m transaction – three debt funds, each with a €50m ticket. 

You can guess the result on documentation and structure: the client gets what they want because the debt advisor plays them off against each other and gets an even better deal – the same thing that happened with the banks back when you were with us. 

The market was booming, there was massive competition, banks were in clubs, and you always ended up with the lowest common denominator. We’re seeing the same now in the more mature private debt market, where competition is overburdening and there needs to be a correction or consolidation at some point.

5. Where do you see limitations to the bank-fund partnership model? Could you end up competing with the same funds you partner with on other deals, or could Commerzbank end up partnering more than competing over time? 

There has to be consolidation among private credit players, I think. Consolidation among banks has already happened – all the players you knew from back in your time, like IKB, BayernLB have gone off the market; others are on-and-off or at least less active. We’ll see the same on private credit – as we go through a cycle you’ll see churn among teams, which will eventually result in consolidation. 

On whether bank partnership models could end up competing with them – we touched on that with them very early. They want to deploy in Germany but know they won’t have an edge in the mid-market; they have no people on the ground. I know their originators for their larger-cap private credit business well – they told me they’re totally agnostic: if we bring them a deal through the vehicle, they have the same incentive as if they’d done it themselves. 

So we are their way into the mid-market. If it moves into the larger caps, yes, there might be some overlap – Apollo could compete with us on a project where we provide a syndicated structure and they provide the one-stop-shop unitranche. But their focus is a bit different, so my gut feel is we’d only compete with Apollo on the larger caps.

6. Based on all this, what are the next steps for your team?

We have ambition to grow. 

Clearly the new circumstances – the potential new owner, the merger with UniCredit – could have a bearing on the strategic direction. UniCredit has a different focus, less on the mid-market and more on the underwritten business, whereas our partnerships are our way of tackling the lower mid-market. I’m actually looking forward to the merger, because I know a lot of the people there – some are former colleagues – and I’m relaxed about it because I see limited overlap. 

At the same time, we have ambition to grow the book – we’re running a roughly €4.5bn portfolio, and that’s supposed to grow further. We want to keep growing our co-investment vehicles, especially with Apollo, which has almost endless firepower.

Closer

7. Hot take: Looking ahead, what’s one view you have on the leveraged finance market that most of your peers would disagree with?

Given that a lot of my peers are now in private credit, I think there will be a correction at some point – on valuations, with more realism and more pressure from LPs to really look into how good their portfolios actually are. 

That will bring consolidation, and there’ll be churn among senior people. The big players are here to stay, but there has to be a correction among the smaller, less active managers – there’s a massive number of them out there.