Professional services use alternative finance most regularly, UK leads market

09 January 2018 Authored by Consultancy.uk

Alternative finance deals saw a bumper year-on-year result, particularly in the UK, on the back of continued demand for M&A funding. The industry continues to see interest from mid-cap clients seeking to avoid the more risk adverse traditional banking market, while the professional services industry remains the sector most regularly employing alternative finance.

The alternative lending space emerged rapidly in recent years, on the back of online platforms and relatively inexpensive capital doubling in size by 2016 alone. Deloitte’s latest report into the segment explores demand for direct lending, and its impact on the alternative finance market.

Earlier in 2017, the European alternative finance market had already hit a value of €91 billion. The European economy has since enjoyed solid growth, with Eurozone countries, on average, up by 2.5% this year, while equity markets are hitting new heights. Growth opportunities have seen mid-market businesses increasingly turn to alternative lending as a means to acquiring capitalisation without the more lengthy and less flexible funding available from banks.

Year-on-year deals

Year-on-year, the end of 2017 saw a glut of deal activity, with 120 in the UK and 197 across Europe more widely. The UK upped the number of deals over the same period in 2016 by 31, while the rest of Europe saw an additional 10 deals.

Fenton Burgin, Head of UK Debt Advisory at Deloitte, commented, “In spite of political uncertainty an improved economic environment in Europe helped to bolster direct lending in the second part of this year. As optimism has grown, mid-market businesses have looked away from traditional bank loans and seen the flexible, reliable and significant advantages of using alternative sources of capital.”

Professional services

The firms leveraging alternative finance most regularly found in the ‘business, infrastructure & professional services’ segment at 27% of respondents, followed by ‘technology, media and telecommunications’ at 14%. Financial services, too, has a relatively strong share of total deals, at 13%. In the rest of Europe, meanwhile, ‘manufacturing’, ‘business, infrastructure & professional services’ and ‘healthcare & life sciences’ are the most likely to access funding in the segment at 18% respectively.

Deals by sector past 12 months

The research found that, M&A was the most often cited use of the financing, at 61% of UK and European deals respectively – LBO funding at 44% of UK total funding and 47% of the rest of Europe, while 16% went to bolt on M&A in the UK and 14% in the rest of Europe. Refinancing saw 23% of total funding respectively between the UK and Europe, while few companies, 5% in the UK and 11% in the rest of Europe, used it for organic growth.

In terms of loan structure, senior and unitranche were the most common forms – at around 85% of all deals – with similar levels between the continent and islands. Growth in the market varied across Europe, meanwhile. The UK remains the market leader, with total deals climbing rapidly to more than 450 between the end of 2012 and 2017, France was noted for solid growth too, at more than 300 over the same period.

Deal activity by region

Germany has been more reserved, at around 120 deals between the end of 2012 and 2017, while the Netherlands recorded a solid 60 deals in the period. The Nordics have been relatively reserved, with Finland’s 25 deals being the highest across the region.

Floris Hovingh, Head of Alternative Capital Solutions at Deloitte, concluded, “2017 will be a bumper year for direct lending fundraising after a disappointing 2016. New liquidity from mainstream institutional investors is fuelling direct lending with increasingly cheaper funds. It is in this turbulent, yet still cautiously optimistic context, that direct lending is appealing so much to mid-market businesses across Europe. These firms, while trying to keep the requirement for new equity to a minimum, are turning increasingly to alternative sources.”

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