European Credit’s Underappreciated Resilience

Contrary to popular belief, Europe today presents one of the most structurally sound credit environments among developed markets. As a firm, KKR has been actively investing across the region for over 25 years, building local expertise in private equity, real assets, and credit. From our vantage point, headwinds such as a slowdown in M&A activity and renewed concerns over trade policy – most recently from the sharp tariff “Liberation Day” escalation – have added to broader market volatility and uncertainty, but do not appear to be slowing down the region’s momentum. In fact, European high yield and leveraged loans have outperformed their U.S. counterparts during the recent market sell-off. One reason for this relative stability is the lower proportion of daily liquidity vehicles—such as mutual funds and ETFs—in the European market, which has helped reduce the risk of sharp, flow-driven drawdowns that can be triggered by forced selling in more retail-heavy markets. Notably, our private equity colleagues recently announced KKR’s agreement to acquire Karo Healthcare from EQT in a take-private transaction. While not an IPO, the deal reflects a clear market appetite for high-quality European assets—and speaks to investor conviction despite macro uncertainty. Just as telling is the expected financing approach, which is likely to involve direct lenders, underscoring the growing role of non-bank capital providers as traditional bank appetite goes off risk. As my colleagues Henry McVey and Aidan Corcoran recently noted , Europe is experiencing an important, and “potentially pivotal” economic moment.

This relative strength is underpinned by structural fundamentals. A key driver of this stability is the region's comparatively conservative use of leverage, particularly at the sovereign and corporate levels. Germany, for example, even after announcing a historic fiscal package in early 2025, maintains a debt-to-GDP ratio far below that of the United States. More broadly, European sovereigns exhibit greater fiscal discipline, which sets the tone for a capital system that rewards prudence and long-term value creation.

The resilience of the UK’s services-driven economy further reinforces these opportunities, especially in areas such as financial and professional services, which have proven relatively resilient even amidst renewed tariff-related uncertainty. As recently highlighted in " KKR: Thoughts From the Road Europe and the Middle East ," the UK continues to benefit from being a leading global exporter of services, bolstering its competitive advantage and providing additional support for related asset-backed lending opportunities.

This underlying dynamic translates into global credit markets as well. European private credit deals can often exhibit structurally lower leverage multiples – commonly one to one-and-a-half turns below comparable U.S. transactions – reflecting regional variations in risk profiles and lending practices. The conservative backdrop is further influenced by regulatory regimes, notably Basel IV, which is expected to impose more stringent capital requirements on banks holding securitized or risk-weighted exposures. Unlike some foreign counterparts, European regulators have so far shown limited appetite to delay or dilute implementation. These regulatory changes are likely to accelerate banks’ focus on capital optimisation – even for lower-risk, secured assets. Notably, as bank profitability has improved, banks have also shown greater willingness to take decisive steps to structurally reshape their balance sheets to enhance returns on equity.

As banks continue to pivot away from certain capital-intensive activities, non-bank lenders with the flexibility to step in are well positioned to capture increased opportunities to provide financing on favorable terms. This evolving regulatory backdrop, coupled with what we believe to be, an undervalued region, reinforces the growing relevance of European leveraged credit, direct lending, junior debt and other structured capital solutions as complementary components of thoughtful portfolio construction.

State of Play

The start of 2025 has seen a meaningful pickup in activity across Europe. Following a muted 2023 and choppy 2024, many sponsors and issuers have returned to the market with renewed inspiration and urgency. The catalysts are clear: a more stable interest rate environment, improving macroeconomic sentiment, and a shift in European fiscal policy to be more supportive.

As capital becomes more available and strategic realignment accelerates across industries, market participants are once again becoming active in acquisitions, carve-outs, and platform expansion. Additionally, the persistent valuation gap between the U.S. and Europe further fuels the thesis for investors to lean into take private and M&A transactions to extract optimal value. This will contribute to a resurgence in deal flow and is already generating demand for tailored credit solutions that direct lenders are well-positioned to provide.

EXHIBIT 1: A Record Valuation Gap: European Public Markets Still Offer Attractive Targets for M&A as Well As Public-to-Private Activity

The U.S. vs. Europe Cyclically Adjusted P/E

EXHIBIT 2: The German Government is Now Expected to Run Fiscal Deficits in the 5-6 % Range for Years to Come

German Governments Budget Surplus/Deficit, % of GDP

A Market Ripe with Inefficiencies

Europe remains a less efficient credit market than the U.S., owing in part to a more fragmented banking system and differing regulatory regimes. These structural inefficiencies can often create pricing premiums for direct lenders, particularly pronounced in non-Euro currencies like GBP and SEK. Additionally, Europe's bank-centric financial system can often leave many mid-sized companies underserved by traditional lenders.

Furthermore, as banks reposition their balance sheets in response to the evolving regulatory landscape, credit investors are increasingly viewed as solution-oriented partners, including by the banks themselves, valued for their ability to move quickly and structure tailored solutions. The scenarios span the gamut, creating a wide range of interesting origination opportunities for those with deep market knowledge and the ability to invest up and down the capital structure.

EXHIBIT 3: World Capital vs. Non-Capital Intensive

USD Price Return Indexed to 100

Many public companies are shedding capital-intensive assets through securitizations and divestitures, reducing exposure to cyclical or lower return segments in favor of more sustainable, higher margin opportunities. This, in turn, is driving the emergence of high-quality assets in the market, which were historically unavailable to private capital .

Basel IV’s implementation introduces the concept of capital floors and more conservative treatment of credit exposures — even for high-quality assets. One clear example is the auto leasing sector, which remains heavily bank-dominated in Europe. Despite its historically strong performance, capital requirements for these exposures have risen materially. This shift is prompting both bank-owned leasing companies and the captive finance arms of original equipment manufacturers to reassess how they balance growth ambitions with capital limitations. As a result, we have seen interesting trends and a rise in opportunities for private capital providers to deliver creative financing solutions designed for businesses operating in this space.

Traditional tools such as ABS can provide funding diversification, but do little to relieve capital requirements, as originators typically retain much of the underlying economic risk inherent in the standard structures (i.e. leases). This dramatically limits their effectiveness as tools for capital and risk optimization. All of this opens the door for private credit investors with the expertise to structure around specific capital and economic considerations – offering solutions that better align with the evolving regulatory capital landscape.

While headlines often focus on geopolitical tension, trade uncertainty, or structural reform, we believe the real story in Europe may be its underappreciated credit resilience. Recent tariff headlines may test market sentiment, but Europe’s underlying fundamentals remain intact. Relatively conservative leverage, improving fundamentals, and renewed market momentum are combining to create an attractive landscape for investing in direct lending, capital solutions, and collateral-based cashflows. For investors seeking both consistency and return in a shifting global environment, Europe’s quiet strength deserves a closer look.