Why local knowledge wins in European private credit

How would you describe the current environment for both opportunistic and distressed credit investments in Europe? What macro conditions are shaping the opportunity set and the risks today?

Our second credit fund, which was a 2022 vintage, experienced dramatic movements in interest rates. The rate environment has since stabilized across most countries, although the effects of those shifts are still being felt. In markets with heavily leveraged real estate entities, burdened by both asset- and corporate-level debt, significant distress continues. Germany is a good example, where imprudent capital structures collapsed like dominoes and the clean-up exercise took years.

Although Europe is recovering from a period of considerable rate volatility, the knock-on impact on capital structures remains.

How do the legal regimes, restructuring processes, and enforcement practices influence the quality of origination and recoveries?

Where does local presence add more value than scale? The idea that European credit markets are uniform from a regulatory or legal perspective is simply not true. It is essential to have expert local platforms. Arrow owns non-performing loan (NPL) servicing businesses in the countries where we pursue credit strategies, and assumptions around timing and enforcement procedures vary significantly. When buying credit instruments in a distressed context, it is crucial to understand those details thoroughly. That is why we maintain the local platforms we do.

How important is time to resolution in the mid-market vs. bigger deals?

There are three factors that make the mid-market more attractive and show why granularity matters. First, it represents the majority of the market. More than 80% of European credit positions are local, so to access the largest potential addressable market, you have to deal in smaller tickets.

Second, these opportunities are less competitive. Larger GPs will not consider investments below $100mn, while many smaller GPs lack either local presence or the capability to originate granularly. Off-market dynamics create deeper discounts, greater market access, and stronger competitive advantages.

Finally, portfolio construction plays a key role. When building a multi-billion portfolio, it makes a difference whether you hold 100 positions or five. Capital is returned more quickly when selling from a deep pool of diversified collateral, producing a more granular and balanced profile.

Is there anything else you want to call out as especially important for investors looking to get into European private credit?

The quality of the assets you buy determines outcomes. You can do all the right structuring work and buy at a heavy discount, but if all you have to enforce against is an illiquid piece of agricultural land, the result is unlikely to be favorable. To achieve outsized returns, you need to select collateral with structural undersupply and attractive macro tailwinds.

As a result, the majority of what we do is focused on the living sector. It remains the most structurally undersupplied and price-stable form of real estate in Europe. The secondary collateral we have invested in over the past five years has been hospitality, which in southern Europe offers greater upside compared to residential.

Distressed debt returns have varied more than other private credit strategies. What frameworks help you avoid selection bias and maintain discipline?

The first consideration is the quality of security. Many deals include unsecured components, and recoveries are often more limited due to the lack of enforceability. We therefore assess the collateral types carefully – is it high-quality residential collateral, or less liquid assets such as commercial property, offices, or land? What is the composition of that collateral pool?

The advantage of having in-house platforms is that the screening work can be done locally. We check whether the collateral mix makes sense from a topology perspective, whether it is well located, and whether it is enforceable. We have seen other players cut corners and end up with security positions or collateral packages that are less enforceable than they appear.

All of this leads to a high degree of selectivity, producing a truly cherry-picked final portfolio. It would be impossible to do this with a small team, but because we have 4,700 people, we are able to conduct our own work.

Where have you generated returns for investors in this cycle? What’s the most important part of adding that value?

I would divide it into three areas. First, buying at a discount. Motivated sellers at end-of-life funds and banks are looking to offload granular assets. Credibility as a local player is crucial when negotiating discounts; for example, we recently bought a residual position in the Irish market at a 70% discount.

Second, mispriced capital structures. Over the past couple of years, we have provided a significant amount of rescue finance in the living sector, pricing loans in the high teens. These are situations where existing debt is no longer aligned with the underlying asset value or risk, creating opportunities for us to step in with tailored capital solutions. The rates reflect the complexity and urgency of these deals, but they are typically secured against strong collateral and structured with robust covenants. These bespoke instruments are attractive in a high-rate environment, and we value them because we can write the documentation and include the protection we want.

The third area is value-add and value creation, where our operational footprint enables us to improve and transform real estate. We have deep institutional knowledge at both the underwriting and execution stages, which is ultimately where the value is generated.

What do you find are the questions that investors come to you with most often? What kinds of concerns do they raise most often?

Investors are most often concerned about ongoing global macro uncertainty, pockets of inflation, and instability in international trade.

As part of our underwriting process, we run sensitivity and stress tests at both the deal and fund level. Because we generally buy assets at a discount, we can afford to model downside scenarios aggressively and still achieve attractive returns.

Each deal is assessed using a proprietary in-house composite risk score, which evaluates asset quality, borrower strength, capital structure, jurisdiction, and servicing platform. This score allows us to group deals by risk and ensure that pricing reflects the underlying exposure. The framework keeps us disciplined in calibrating return expectations. We share it with investors, showing where each deal sits within the fund and how it has performed.

How important is private wealth in your fundraising efforts?

Private wealth is a segment where we have seen strong momentum. Beyond our core opportunistic credit strategies, we also offer more vanilla, downside-protected, asset-backed lending opportunities. One example is our evergreen bridge lending program, which is effectively composed of short-duration senior mortgages.

This strategy is attractive from a liquidity perspective, offering hedge fund-style liquidity but with senior secured private credit returns. We have raised over $300mn into this pool of capital. It has become a popular choice as a high-quality liquidity management tool within a simple product. There is tremendous interest from the private wealth community, and we expect this segment to remain an important part of our fundraising strategy.

About
Adam Baghdadi is a Managing Director in Arrow Global’s central investment team, focusing on lending and credit strategies. He has over 13 years of experience in credit, lending, and corporate finance, having previously held investment roles at Sixth Street, HBK, and Morgan Stanley. Founded in 2005, Arrow Global is a European alternative asset manager with a vertically integrated model across private credit and real estate. Managing approximately €125bn in third-party AUM, Arrow operates 25 servicing platforms across Western Europe, combining local expertise with institutional scale to deliver value throughout market cycles.

This article originally appeared in Private Credit in 2026.

_{This is a sponsored opinion by Arrow Global. The views expressed are provided as of December 2025, do not constitute an endorsement, recommendation, or any other advice, and are subject to change. The content does not necessarily reflect the views of BlackRock, Preqin, or any of its affiliates. Arrow Global is not affiliated with Preqin. Preqin received compensation from Arrow Global in exchange for publishing this content.}