24/10/2019 - News
Looking to raise capital and engage with debt providers?
An often overlooked trend since the financial crisis has been the massive inflow of capital to the UK over the past decade, predominantly from US insurance companies and pension funds who see the UK as a good place to gain a financial return.
As well as feeding through into private equity, much of this capital has found its way into funds who specialise in the provision of debt rather than equity. Indeed our estimate is that there are over 150 specialist debt funds, or commonly known as Direct Lenders, operations within the UK. This has proved to be a genuine competitive threat to the traditional banks!
These entities regard Britain as being economically stable for the long term, a relatively safe place to lend money because of the excellent legal environment, a good way of getting a footprint into Western Europe, and – last but by no means least – a place where we speak the same language!
Such a scenario should be music to the ears of the boss of any mid-market owner-managed UK business (OMB), who is looking to access cash to grow his or her business through increased plant and capex spending, or perhaps through an acquisition. Although, questions are being asked; are they taking advantage of the opportunity? Are they aware of their options and how to make the most of them?
On the positive side, our experience is that OMBs are definitely becoming more aware that there are debt providers out there which are willing to lend money with borrower-friendly structures.
Part of this is undoubtedly driven by their own natural desire to access capital to fund growth. Although the situation varies from sector to sector, a mid-market company, which is looking to invest or acquire will typically have greater capital needs than it can generate from cashflow or via its existing capital base. As such they can benefit significantly from a debt offering, particularly if the owner or owners are reluctant to dilute any of their equity to a private equity backer (at least for the time being).
However, accessing the funds is where things can become more challenging. In the UK debt funds are overwhelmingly based in London with only a few players operating in the regions and each has its own target market, be that minimum earnings, minimum investment size or required interest rate, and as such they are looking for well-prepared memorandums to consider. They do not wish to do their own sifting but want the finished article. Which means that to access such funds the borrower needs to prepare themselves properly. They need to be approaching the funder with the correct data and need to understand exactly what the debt provider is looking for.
For all the above reasons this is, of course, where an independent voice such as a corporate finance house like us comes into play.
Understanding the debt market can be tough at the best of times, not least in the present economic climate where certain sectors such as automotive and leisure can struggle to access capital.
Crucially, what we possess is market information about which debt funds might be interested in which sectors. We understand the subtle nuances, we know which lenders are attracted to particular situations.
There are other benefits too. As part of the whole process we can help improve a ‘credit rating’ by identifying areas that might not be top of the list of the boss but are important to potential funders, such as management information or “gaps” in a management team.
The key throughout is to engage early with us, and well before you consider approaching a debt provider.
Borrowers shouldn’t be fixated on the cost of borrowing either. Debt pricing can alter significantly depending on the sector, product and specific type of funding arrangement. Ultimately, the price of debt is secondary to actually what you want it for in the first place but by running a structured process you can be sure to finish with a competitive rate.
What about Brexit?
In the present economic and political climate some might baulk at the prospect of putting more debt into a business. Our message however would be that if your business is in need of capital to reach the next stage in its growth story, then delay at your peril.
My sense right now is that in the UK regional market there is a certain resolute spirit, there is a sense among companies that they just ‘need to plough on’ and cannot afford to hold back any longer. And, as history will tell you, opportunities can always arise out of political uncertainty too!