European debt funds have equitized a record level of loans to private equity-backed companies but most are struggling to exit those investments, new research has found.

Debtwire analysis showed that since 2018, European credit funds have fully or partially equitized at least 61 loans provided to private equity-backed companies.

However, of those 61 deals, only five have been fully realized, leaving debt funds with 56 equity positions on their books at a time when exits are at a three-year low.

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A debt-for-equity swap is a refinancing deal in which the debt holder gets an equity position in exchange for the cancellation of the debt. These deals are typically done to help a troubled company continue to operate.

Goldman Sachs, KKR and CVC Credit are among the credit behemoths that have participated in debt-for-equity swaps since 2018.

Last year saw a surge in activity, with at least 23 transactions taking place, Debtwire found.

Read more: Moody’s: Private credit returns could fall this year

“For participants in Europe’s private credit market, 2023 marked a record-setting year despite a dismal climate for M&A – the lifeblood of direct lending,” said John Bringardner, head of Debtwire.

“In the background, elevated interest rates lifted private credit’s returns above private equities for the first time ever.

“Private credit proponents tout its ability to provide flexible solutions for borrowers, but when corporate distress strikes, direct lenders still often end up taking over the business. As loans issued during the ‘golden age of private credit’ begin to mature, we expect to see more alternative asset managers swapping their debt for equity – and looking for ways to exit those investments.”

 The majority of equitized transactions involved the private credit arms of asset managers, Debtwire found, while a minority were carried out by their CLO funds.

Read more: Private debt diversifies from direct lending

Most equitized loans were provided to private equity-backed companies, with only a few non-sponsor-backed transactions recorded.

Consumer-related deals made up more than a third of the deals, with the industrials, business services, healthcare, and TMT sectors collectively accounting for the remaining majority of debt-for-equity swaps.