Sixth Street Raises €3.75 Billion for European Direct Lending

Sixth Street has raised €3.75 billion ($4.4 billion) for its European direct lending initiative, marking the third such fund from the San Francisco-based private capital manager according to Bloomberg.

The firm has hit its hard cap for Sixth Street Specialty Lending Europe III, according to a statement. The previous fund raised roughly €1 billion. With anticipated leverage, the new fund will have about €7 billion of firepower.

The capital raising reflects growing interest in direct lending as an alternative to traditional bank financing in Europe. This trend is being driven by an increase in deal activity and a shift in capital sourcing strategies.

Why Did This Happen?

The European direct lending market has seen increased activity as companies seek non-bank financing options. This shift has been supported by regulatory changes, which have impacted traditional bank lending in the leveraged finance space.

Sixth Street's move into this space has been strategic. It has been investing in Europe since 2009 and now has the ability to provide capital solutions ranging from €30 million to over €2 billion. This capability is enhanced by its access to capital from the firm's $30 billion TAO platform.

How Did Markets React?

European markets opened higher on the day of the announcement, with the FTSE 100 rising 0.3%. The broader Stoxx Europe 600 also hit a record high, reflecting investor optimism about European economic conditions.

In the direct lending sector, competition remains fierce. For instance, a potential €4.5 billion debt package is currently under discussion for a takeover of Polish parcel locker operator InPost SA. This demonstrates the active nature of the market, but also the high bar for deal execution and pricing.

Sixth Street's European direct lending team has completed over 75 transactions since 2015, and the firm now employs about 75 people in the region. This local presence and transaction experience are key factors in the firm's appeal to investors.

What Are Analysts Watching Next?

Analysts are monitoring how effectively Sixth Street can deploy the raised capital. The firm's mandate is broad, targeting deals that require creative capital solutions. These include cross-border transactions, family-owned business transitions, and complex acquisitions.

The firm's recent involvement in projects like treasury management software provider Kyriba Corp. highlights its ability to operate in niche markets.

Investors will also be watching how the firm's capital is used in relation to its global asset base of over $125 billion. Sixth Street's ability to balance European opportunities with its broader global strategy will be key to its long-term performance.

The growth of the direct lending space in Europe is not without challenges. Increased competition means that pricing pressures are likely to persist. Additionally, the market is still evolving, with traditional banks seeking to re-enter or strengthen their presence through direct lending strategies.

The expansion of the direct lending market is also tied to broader economic conditions. For example, the European Union's €90 billion loan to Ukraine is expected to stimulate demand for European defense-related goods, potentially creating new opportunities for capital providers.

At the same time, the EU's decision not to specify a repayment timeline for the Ukraine loan highlights the political and economic complexities of the region. These dynamics could impact the overall risk profile of direct lending investments in Europe.

The recent acquisition of Spanish impact investing platform Bolsa Social by Goparity also reflects growing interest in sustainable finance across the continent. While not directly related to direct lending, this trend highlights the broader shift toward alternative investment strategies.

Investors are also keeping a close eye on performance metrics. For example, Tech Mahindra's Q3 results showed a 27% year-over-year rise in profit, driven in part by improved European operations. Such performance indicators can influence investor sentiment toward European markets more broadly.