De-banking and the growing influence of private debt - SME and Midcap Lending
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Article Type
Insights
Topic
Alternative Fixed Income
Published
April 23, 2025
Read time
5 mins
Authors
Bart Lugtenburg
Mickey Teunissen
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On April 10th, 2025, Aegon Asset Management (Aegon AM) presented at the CFA Society Netherlands “Debanking and the Expanding Influence of Private Debt” event, shedding light on the attractiveness of direct lending strategies, particularly within the SME (Small Medium Enterprises) and Midcap segments. This article covers the origins and benefits of private debt, highlighting Aegon AM's approach and expertise in this domain.

 

Origins of private debt

Private debt refers to non-tradable, often illiquid, corporate debt. In the case of the Aegon AM SME and Midcap strategy, the loans are provided to small or mid-market companies. Today, an increasing number of these corporate loans are funded using long-term capital provided by pension funds, insurers, and other institutional investors.

 

Historically, these loans were held on banks' balance sheets and funded by consumer deposits. However, following the Global Financial Crisis, regulatory changes (namely the Basel III regulation) required banks to reduce exposure to certain types of loans and de-risk their balance sheet. This, in turn, created opportunities for institutional investors looking to diversify their portfolios beyond traditional fixed income.

 

Over time, private debt funds began working alongside banks as co-lenders, complementary providers, or originate-to-distribute partners who are able to step in where banks face capacity limits or leverage restrictions. This paved the way for specialized lending strategies, such as those targeting SMEs and Midcap companies.

 

How does it work and Aegon AM’s approach

Aegon AM capitalizes on its well-established banking network to gain access to attractive deal opportunities. We also work with private equity firms, corporate finance, and debt advisors to source high-quality investment leads. We target profitable and growing companies with stable business models and strong cash flows. Investments are often related to acquisitions or growth and the deal structure can be tailored to meet the specific needs of the borrower whilst protecting the investors from downside risks.

 

“Seeing as many leads as possible is of great importance, as it helps us to select the stronger companies to finance which subsequently reduces credit risk for our investors”  - Mickey Teunissen, Senior Portfolio Manager SME lending.

 

What makes private debt, particularly SME and Midcap loans attractive to institutional investors?

 

Structural advantage

With the market being less transparent and more relationship-driven compared to public markets, investing in private debt requires significant expertise, local networks, and relationships. This, in turn, offers investors higher yields and better terms.

 

Attractive returns

The yield on SME/Midcap loans exceeds that of high yield bonds with the same credit rating, with spreads of around Euribor + 400bps for (floating rate) senior loans to over 10% (fixed) yields on subordinated loans. This is partly driven by the illiquidity premium.

 

Greater downside protection 

Investments come with greater downside protection in the form of conservative documentation with lender-friendly terms and covenants, and EIF (European Investment Fund) or similar guarantees for subordinated loans.

 

Diversification

Private debt offers access to a different part of the fixed income universe (and real economy, by extension), thereby creating exposure to alternative risk drivers. Moreover, this strategy can minimize exposure to correlation risk which can arise when holding both public company debt and equities simultaneously.

 

Tailored towards ESG/impact

Private debt can be tailored to meet specific impact and Environmental, Social, and Governance (ESG) criteria. Investors can get exposure to projects and companies that align with their ESG goals, such as reducing carbon emissions, promoting social inclusion or supporting sustainable business practices.

 

Conclusion

By collaborating with banks to provide tailored loans where regulatory or capital constraints limit their involvement, private debt funds bridge critical funding gaps thanks to their flexibility and expertise. As can be demonstrated by Aegon’s SME and Midcap lending strategies, this partnership delivers attractive risk-adjusted returns for investors while supporting businesses that seek to grow, become more sustainable or refinance their business.

 

Important Information

Authors

Bart Lugtenburg
Senior Investment Manager Midcap Loans

Bart Lugtenburg is an investment manager in the midcap lending team.

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Mickey Teunissen
Senior Investment Manager SME loans

Mickey Teunissen is an investment manager in the EU SME & small midcap lending team.

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