Direct Lending market booms on the back of deal and merger activity

24 October 2016

Direct Lending alternative finance hit $37.3 billion last year, as companies across the globe hike their search for additional channels to fund growth strategies and M&A activity. The UK remains a dominant player in the sector, with 327 deals to the rest of Europe’s 457 deals over the past three and a half years. While activity remains relatively robust into 2016, the alternative finance market may find itself in downturn as risks increase.

The alternative finance market has in recent years grown considerably across the UK – according to a study by the University of Cambridge, Nesta and KPMG, the market today is worth £3.2 billion, up from £666 million in 2013. The market is being lifted by, among others, the growing popularity of non-bank solutions and the currently low interest rates, which makes lending relatively cheap. 

A new report, by Deloitte, finds that in the mid-cap market alternative finance space, Direct Lending continues to see strong demand from particularly UK-based companies. The study, titled ‘Entering New Waters: expanding beyond the mid-market’, tracks the developments of 47 major European alternative finance lenders, such as Ares, Bain Capital and Tikehau, for a snapshot of activity across the continent and the UK.

Global direct lending fundraising

Global direct lending fundraising

Last year alternative finance lenders completed more than 600 deals, with deal activity hitting $37.3 billion, up from $22.7 billion in 2013. Among the largest funds that have reached financial closing in 2015 are the $3.3 billion Ares European Loan Programme, the $3 billion ICG Senior Debt partnership II, and the $2.4 billion Park Square Capital Credit Opportunities deal. Across Europe, the Direct Lending market saw just over $15 billion in registered deal activity.

In terms of the sectors leveraging Direct Lending deals across Europe, Technology, Media & Telecommunications and Healthcare & Life Sciences saw the largest number of deals at 17% each, followed by Business, Infrastructure & Professional Services at 14%. Human Capital, Retail and Financial Services took the least interest in Direct Lending at 1%, 2% and 4% respectively.

Deal purpose

The UK market shows a relatively similar pattern, with Technology, Media & Telecommunications on top at 18%, followed by Business, Infrastructure & Professional Services at 16%. Leisure however, came third at 11%, while Healthcare & Life Sciences took the number four spot with a 9% share. 

In terms of the reason for companies leveraging Direct Lending opportunities, the vast majority were linked to M&A activity – in the UK this stood at 45% of deals, while in the rest of Europe the percentage amounted to 53%. Refinancing too took a considerable slice of Direct Lending activity, at 25% in the UK and 27% in the rest of Europe. Dividend Recapitalising came in at 16% in the UK and 6% in the rest of Europe, representing the largest discrepancy between the UK and its mainland neighbours.

Deal structure

Unitranche was the most commonly leverage loan type in the UK, at 47% of Direct Lending, whilst in the rest of Europe senior structure is more dominant with 39% utilisation. The high level of first lien leverage, at 73% across the region, reflects that alternative lenders are competing mainly with banks. Mezzanine lending saw a 9% share of utilisation in the UK and 8% in the rest of Europe, while payment in kind (PIK) saw 6% utilisation in the UK and 10% in the rest of Europe.

Funding risk profiles

The analysis also looked at the wider funding arena, which includes a range of debt products across a several institutions. The research finds that investment grade bonds represent a large area of funding that offers relatively large debt sizes at high credit worthiness, this is followed by senior bank loans, bilateral & syndicated, offering a range of risk profiles for relatively large debt sizes. Private placements provide higher risk lending for lower loans sizes, while high yield bonds offer high debt sizes for higher risk profiles. Direct Lending has a similar risk profile to high yield bonds with a lower loan size threshold.

Return to normal

The growth in the market for Direct Lending, as with other alternative finance options, may be relatively short lived as rates increase and risk profiles for loans may return to long term trends – boosting bank offerings and creating too much risk for investors that can make gains in other quarters of the economy.


8 tips for successfully buying or selling a distressed business

18 April 2019

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.