Federated Hermes: the rise of sponsor-less lending in the European private credit market
9 SEPT, 2025
By Joanna Piwko from RankiaPro Europe
Private credit in Europe has experienced unstoppable growth over the past decade. Since 2015, the direct lending market has expanded at an annual rate of 20%, reaching USD 317 billion in assets under management in 2024. Despite this progress, the slowdown in buyout activity driven by inflation, higher interest rates, and geopolitical tensions, is reshaping the competitive landscape.
In this context, Federated Hermes has published a new report highlighting a distinctive opportunity: sponsor-less lending (direct loans to companies without private equity backing), particularly in the lower mid-market segment in Northern Europe.
Growing competition and margin pressure
The growth of direct lending has attracted a wave of new entrants, with USD 391 billion raised across the industry since 2015. This excess capital – known as dry powder – stood at USD 87 billion at the end of 2024. The result has been fierce competition, shrinking margins, and weaker discipline in loan terms.
According to the report, sponsor-backed deals continue to dominate the market (89% of direct lending transactions in 2024), largely due to the additional comfort provided by private equity ownership. However, this concentration also limits diversification opportunities.
The appeal of sponsor-less lending
For Federated Hermes, sponsor-less lending represents a compelling alternative for investors with the right expertise and infrastructure. Its main advantages include greater diversification, return premiums of 1–2% compared to sponsor-backed transactions, and more conservative leverage structures, as the focus is typically on stable, well-established SMEs with strong local market positions.
The report also highlights that, despite the challenges, this segment offers more direct access to regional leaders that are less exposed to global shocks such as tariff wars or supply chain disruptions.
Challenges and solutions
Sponsor-less lending comes with its own set of hurdles: the absence of a financial sponsor reduces perceived security, due diligence processes are more intensive, and transactions often require more complex documentation. On top of this, the fragmented SME landscape makes origination more difficult.
Nevertheless, these risks can be managed with prudent leverage structures, robust collateral, and mechanisms such as cash sweeps. Partnerships with local banks also play a crucial role, providing access to high-quality borrowers and enabling closer, more sustainable relationships.
Conclusion: a path to differentiation in private credit
In a market strained by excess capital and tightening margins, Federated Hermes sees sponsor-less lending as a clear opportunity for managers who can navigate the segment’s complexity. The strategy, focused on the Northern European lower mid-market, offers the potential to diversify portfolios, enhance risk-adjusted returns, and create a distinctive edge in private credit.
As the report underlines, success depends on having the right expertise, infrastructure, and local networks. For those who meet these requirements, sponsor-less lending could become the next growth engine in Europe’s private credit market.
