For many business owners and managers, the moment they reach a point where they require additional cashflow, they immediately turn to their existing bank or another high street lender who automatically spring to mind.
For over a decade now however, a new capital outlet has quietly increased in prominence and now sits as the third largest private market option. Private debt is, as the name suggests, a debt like capital option which now sits behind Private Equity and Venture Capital in terms of the amount of capital raised and deployed. Almost $200bn was raised by fund managers in the sector during 2021 – the second highest amount in the sector, with 2017 being the most active year according to funds raised. The explosion in the market is no surprise when you consider the low interest environment and the surge in M&A activity – with leveraged buyouts now back on-trend and non-bank lenders benefitting from slick decision making and execution processes which their “bank” counterparts lack. Whilst private debt naturally carries a cost premium due to the cost of their own funds, the deviation between their rates and that of the big banks has narrowed and private debt has become an incredibly attractive option.
Alike the equity markets, dry powder exists – with an estimated 2.5 years of capital ready for deployment as we enter 2022, albeit this has reduced since 2018. Default rates too have remained notably low despite the headwinds caused by Covid19, although the curtailment of government support schemes will expectedly see these default rates nudge upward in the coming periods.
The capital available is skewed toward North America- with only one of the top ten funds sitting in the UK, and a large percentage of this capital resides in the upper ends of the market. Key for SMEs and OMBs however is that this capital has found itself in our end of the eco system, as seen with PE/VC capital, and the dry powder in the market should mean that this availability of credit remains – especially in an era where M&A activity continues to track at and above record levels. Debt allocated to distressed and special situations is a growing component which the layperson could expect to be increasingly popular in a period of increased impairment and default.
What does this mean for us in the small/mid cap space? It means we have options, and for those businesses looking to recapitalise, grow and acquire you should be considering all options of credit ahead of the delivery of your business plans. Capital is available. Those with a track record, with a robust well-thought business plan and supporting collateral which conveys your plans on a balanced basis (with an eye on risk), have a great opportunity of raising capital. This should help facilitate your plans. Timely advice will no doubt assist – of which there are numerous advisors in the market more than willing to support.
