Private debt: a financing option for ambitious SMEs

By Harrie Thorrington
Analyst,
Gambit corporate finance.

Harrie joined Gambit in August 2021, after studying economics at the University of Bath and working as a financial analyst at Deloitte. He is responsible for supporting live transactions and assisting executives, directors and partners by performing detailed research and analysis. Harrie is a member of the Debt Advisory team.

According to government statistics, small and medium-sized enterprises (SMEs) make up 99.9% of the UK business population. The UK depends on SMEs for its economic growth, so a dynamic financing framework for the segment is essential. Alternative loans have grown rapidly since the 2008 financial crisis, offering an increasingly diverse range of financing options for SMEs. There is a wide variety of alternative lending opportunities for SMEs, but private debt funds have taken on particular importance.

“Private credit” or “private debt” refers to debt securities that are not funded by banks or traded in an open public market. The private debt market is now the third-largest private capital asset class, behind private equity and real estate, with 200 funds closed in 2020, raising a total of $ 118 billion. Private credit operations tend to primarily finance business growth through mergers and acquisitions, as well as the financing of development projects and the provision of working capital. Investment in private debt comes from long-term funds, willing to finance the dynamic credit risk of SMEs and mid-size companies, in return for higher returns. As a result, private credit funds are flexible, open-minded and eager to introduce new financing options for SMEs and mid-size businesses.

Factors Driving Private Debt Growth

Since the 2008 financial crisis, large banks have been subject to increased regulatory requirements. Therefore, alternative lenders such as challenger banks, and in particular private debt funds, have identified this as an opportunity and have “closed” the funding gap.

SMEs and mid-cap companies, looking for capital to fuel their growth projects, can receive financing tailored to their specific needs, with private credit funds offering tailor-made debt packages.

The outlook for private debt

The private debt market is an interesting financing option, especially for SMEs and mid-cap companies. Private credit has become increasingly important in helping finance ambitious businesses as they recover from the coronavirus pandemic. According to the British Business Bank, the private debt market is geographically diverse, with 82% of transactions carried out outside London in 2018 and 2019, this trend is expected to continue.

Ambitious companies are increasingly able to receive backing from a growing range of private debt funds, unlocking ammunition for crucial future growth plans and targeted acquisitions. SMEs and mid-market companies should use experienced corporate finance advisors to help them assess their company’s debt capacity, identify the most relevant donor pool, and refine plans. business before presenting them to potential funders.

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