Making the “post crisis” debt markets work for you
The good news is that for businesses looking to fund growth or transactions, debt markets offer more choice than they have for over a decade. The bad news is that the multitude of options currently available are the result of a fragmented market that is increasingly difficult for owner managers to navigate. This is making expert, knowledgeable advice essential if you want to take advantage of the opportunities out there.
A brief history of debt markets
To explain the current situation, please forgive a short history lesson. Before the financial crisis, business borrowers could access a wide variety of financing options through their bank. Increased competition between banks and a ‘generous’ regulatory environment drove the banks to become a one-stop shop for lending across the spectrum.
After the financial crisis, banks reverted (a little too late, some might say) to more straightforward lending driven in no small part by the increased capital requirements imposed on banks by the regulators, themselves reeling from numerous bank failures and nationalisations. That left a lot of businesses out in the cold. If they didn’t qualify for a standard bank loan, then their only option was equity funding. Nature abhors a vacuum, so the gap soon started to fill up. Initially, with government-driven initiatives targeted at increasing SME lending then, once the ship had steadied, the private sector stepped in.
This trend has continued and accelerated. The low interest-rate environment has driven many institutions – from pension funds to insurance companies and even large family offices – to enter the debt market to generate yield. It’s because of these factors the market is both so healthy and so complex. It’s also why we can add real value by guiding you through the maze and helping you secure the deal that’s best for you and your business.
Play to your strengths
Our clients are owner managers whose experience, understandably, is largely in their business and sector, not the vagaries of the debt markets. On their own, how likely is it that an owner manager will have heard of many of the new entrants, let alone how to access their funds or present themselves as an ideal candidate?
To take a recent example, last month we helped specialist recruitment firm Baltimore Consulting to fund a seven-figure management buyout using an unsecured loan facility from Caple, a new entrant to the debt fund market that’s backed by BNP Paribas Asset Management. So new, in fact, that we were able to help Baltimore secure the very first loan that Caple had written.
To emphasise the earlier point, your bank manager isn’t likely to point you towards an option like Caple. Nor would an owner manager, even if they were aware of Caple, be able to access its funds because it only lends via professional advisors, of which Shaw and Co is one.
Striking while the price is right
One other feature of this rapidly evolving market is that pricing is yet to settle down. It’s not uncommon for a variation of five percent or more on margin between lenders offering similar products. Armed with the right advice, you have a good chance to take advantage of these market anomalies. Without advice you may pay dear.
When the original founders of Vouchercloud, Scott Davidson and Greg Le Tocq, were offered the opportunity last year to buy back the business they originally sold in 2012, they needed to raise an eight-figure sum to finance the deal. Keen to retain all the equity, but unlikely to secure the full sum from traditional bank lending, they asked us to help. Aware of the opportunities in the market, we ran a competitive process to identify both the best priced and most flexible facility for the business. As a result, we were able to arrange a well priced senior secured debt facility from a specialist debt fund, backed by a family office, to support the transaction alongside management investment.
Preparing for success
We can also help you with the preparation and presentation required to satisfy the lender. Generally the best approach is to provide all the necessary information clearly and convincingly. Knowing exactly what information a debt provider is looking for, and the form in which they can best absorb it, takes a level of experience. Lenders are usually sifting through a stack of applications and will take any anomaly as an opportunity to slim down their shortlist. Make sure there is no reason to pass yours over.
It’s not just the market that’s moving quickly, our clients are often in positions where they want to strike while the iron is hot. In such situations, a quick ‘no’ can be as useful as a slow ‘yes’. Again, having everything in order supports a quick decision by the lender. And if it’s a ‘no’, you can quickly move on to the next option in a buoyant market.
Two asides to add in here. Firstly, whether you are looking for funds to grow organically or to support transactions, the same market conditions apply and we can help you get the right outcome. Secondly, although I’m concentrating on debt in this blog it may not always be the best route. If equity funding is the right choice for your business, we can help with that too.
In summary, debt markets currently offer great opportunities, but finding the best option for you and your business is more complicated than ever. We can help you through the process and, if it’s currently on your horizon, now may be the time to act before pricing settles.
Please feel free to get in touch so we can talk you through the options available and help you identify the best route for you and your business.