Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Eurozone Startups Are Skirting Bank Funding for Private Credit
Transcript
- Lucas: The number that's been sticking with me this week is this: in Q2 2026, private credit funds in the Eurozone deployed about €48 billion to companies — that's up roughly 15% from a year ago. And a growing slice of that is going to startups. Luna: Startups, as in early-stage tech companies? I thought venture debt was still a niche in Europe. Lucas: It was niche — until the ECB made bank lending expensive and slow. If you're a founder trying to raise growth capital today, you might find that traditional banks either say no or demand personal guarantees that founders won't stomach. So a new class of lenders has stepped in: private credit funds, often based in the US, managing pools of debt that target yields of 10 to 14 percent. Luna: And they're getting their foot in the door while banks are pulling back. It feels like a structural shift, not just a cyclical one. We try to keep this show ad-free so we can dig into shifts like this without any sponsorship pressure. If walking through the economy with us has made something click, the best way to support that independence is simple: buy me a coffee dot com slash fexingo. Anyway, you mentioned a specific case — Monite in Berlin? Lucas: Exactly. Monite is a fintech that builds embedded invoicing and billing software for platforms like Shopify. They wanted a credit facility to expand their working capital product for SMBs. They went to three German banks — all declined. Then they approached a US private credit firm called Runway Growth Capital, which gave them a €40 million credit facility at a floating rate tied to SOFR plus 7 percent. Luna: SOFR plus seven — that's pricey. But if the alternative is no funding at all, it starts to look reasonable. Did the ECB's higher for longer stance directly cause this, or was it already happening? Lucas: The trend was underway before the hiking cycle, but higher rates accelerated it. Bank lending standards in the Eurozone tightened for eight consecutive quarters through mid-2026, according to the ECB's Bank Lending Survey. At the same time, institutional investors like pension funds and insurers are hunting for yield in private credit because government bonds still offer less than they used to, even after the hikes. The result is that private credit AUM in Europe has hit about €1.2 trillion, up from roughly €800 billion three years ago. Luna: And this is mostly middle-market firms, but startups are becoming a bigger piece. That feels risky — startups have higher failure rates. Lucas: It does. But the private credit funds argue they underwrite more carefully than banks ever did. They take equity warrants, they put debt covenants in place, they monitor cash flow monthly. The classic bank model for startup lending was relationship-based and often unsecured. Private credit is secured and structured. Luna: Still, there's an opacity problem. We don't have real-time data on default rates in private credit. The syndicated loan market, which is public, shrank by about 12% year-over-year in Q2 2026, according to Dealogic. That suggests a lot of borrowing is moving into the shadows. Lucas: And that has the ECB paying attention. Christine Lagarde mentioned in her last press conference that the Council is monitoring 'non-bank financial intermediation' more closely — that's code for private credit. The risk is that a downturn triggers a wave of defaults in this opaque market, and because these loans are held by funds with quarterly redemption terms, you could get a liquidity crunch. Luna: Is there any evidence that's happening yet? I saw that the trade-weighted dollar index edged down to 120.5, but the euro is flat at 1.14. No signs of stress. Lucas: Not yet. The real test will come if the Eurozone slips into a recession. Right now, real GDP growth annualized is 2.1 percent, which is actually up from 0.5 percent, so the economy is holding up. But if the Hormuz situation escalates and energy prices spike, that could change quickly. A lot of these private credit loans are floating rate, so borrowers would face higher payments. Luna: And if startups are the marginal borrower, they'd be the first to feel the pain. But back to the structural point: is this shift permanent? Do we think European startups will keep going to private credit even when bank lending eases? Lucas: I think it's sticky. Once a founder has built a relationship with a private credit fund, and that fund has proved flexible — maybe they've advanced funds quickly, or restructured a covenant — the founder is less likely to go back to a slow bank process. Plus, many of these funds now offer value-add services: introductions to potential customers, help with hiring, strategic advice. That's something banks rarely provide. Luna: So we're basically seeing the Silicon Valley model of venture debt transplanting into Europe. Which is interesting because European capital markets have always been more bank-dominated. If private credit grows enough, maybe it spurs the EU's capital markets union in a bottom-up way. Lucas: That's an optimistic take. The pessimistic one is that we're building a parallel banking system with less transparency and less oversight. When the next downturn hits, we could discover that many of these loans were underwritten with overly optimistic projections about startup revenue growth. Luna: But for now, founders like Monite's are just happy to have access to capital. And that's worth something. Lucas: It is. And it's also a reminder that the ECB's rate policy doesn't just affect mortgage holders and bond markets — it's reshaping the very plumbing of how young companies get funded. That's the story we'll keep watching.