Private equity firm KKR has agreed to purchase a substantial portion, or up to 40 billion euros ($43.71 billion), of payments company PayPal's buy now, pay later (BNPL) loans in Europe, the companies said on Tuesday.

Even though BNPL remains popular after the pandemic-led surge in its use among millennials and Gen Z customers, the sector's fortunes turned last year as rising interest rates and red-hot inflation dampened the purchasing power of consumers.

PayPal shares were last up 1.7% following the news of the deal, which is expected to generate about $1.8 billion in gross proceeds and close in the second half the year.

The company said its growth forecast for adjusted profit, made in May, of about 20% on a per share basis, which was above Wall Street estimates, already included the deal.

After the deal closes, PayPal expects to allocate roughly $1 billion to incremental share repurchases in 2023, contributing to an updated outlook of about $5 billion in total share repurchases so far this year.

"Strategically, we like this move, as we view offloading credit risk as a positive for payment processors," Brett Horn, a senior equity analyst with Morningstar Research Services, said in a note.

"Additionally, given the still nascent nature of BNPL offerings and the uncertainty around future performance of BNPL offerings, we think this deal removes an element of risk for PayPal," Horn added.

The companies said private credit funds and accounts managed by KKR will purchase up to 40 billion euros loan receivables originated by PayPal in France, Germany, Italy, Spain and the United Kingdom.

PayPal last year processed more than $20 billion of BNPL payment volume globally, up nearly 160% from 2021. Since launching its BNPL service in 2020, PayPal has issued more than 200 million loans to more than 30 million customers globally.

The company said it will continue to remain responsible for all customer-facing activities, including underwriting and servicing associated with its European BNPL products.