Professional services use alternative finance most regularly, UK leads market

09 January 2018 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.”

Profile

×

Private equity firms ramp up sustainability focus

19 April 2019 Consultancy.uk

In line with business leaders across the industrial gamut, private equity firms are increasingly on board with sustainability projects. According to a new study, the investment arms for major funds are implementing a number of strategies aimed at supporting sustainable economic development in line with global goals.

While the business world has finally begun to acknowledge the danger of climate change, effective action plans remain difficult to achieve. The Paris Agreement has stipulated a clear target for the decades leading up to 2100, although massively reducing emissions while not crashing the economy could be a tall order.

Businesses that are able to acquire capital can use it to boost productivity and output, thereby creating a virtuous cycle of development. However, some businesses are better able to utilise resources than others, both in terms of their relative productivity, as well as the value of the respective outcomes relative to costs (including environmental harms). Financing can therefore provide an avenue to select businesses that are aligned with various global sustainability goals, while shunning those that drive little or unsustainable social value creation.

Top moves made by investment arms towards responsible investment

Profit has for the longest time been the central criterion for investment decisions. Yet profit at any cost is increasingly seen as creating considerable social harms, while often delivering only marginal value. As a result, the private equity sector, which was initially sluggish to change its ways with regards to sustainability, has started to see the topic as an opportunity as much as a challenge.

A new study from PwC has explored how far sustainability goals have become part of the wider investment strategy for private equity (PE) firms. The report is based on analysis of a survey of 162 firms and includes responses from 145 general partners and 38 limited partners.

Maturing sustainability

Top-line results show that responsible investment has become an issue for 91% of respondents. For 81% of respondents, ESG (environmental, social, and corporate governance) was a board matter at least once a year, while 60% said that they already have implemented measures to address human rights issues. Two-thirds have identified and prioritised Sustainable Development goals that are relevant to their investment segments.

Change in concern and action on climate-related topics over time

While there is increasing concern around key issues, from human rights protections to environmental and biodiversity protection, the study finds there are mismatches between concern and action. For instance, concern among investment vehicles around climate change has increased since 2016.

In terms of risks to the PE firm itself, concern has increased from 46% of respondents in 2016 to 58% in the latest survey. However, the number who have taken action remains far below those concerned, at 9% in 2016 and 20% in 2019. Given the relatively broader scope of investment opportunities, portfolio companies face higher risks – and more concern – from PE professionals, at 83% in the latest survey. However, action is less than half of those concerned, at 31%.

Changing climate

In terms of the climate footprint of the portfolio companies, 77% of respondents state concern in the latest survey. 28% of respondents are taking action through the implementation of measures to mitigate their concerns.

Concern and action taken on ESG issues

In terms of the more pressing issues for emerging responsible investment or ESG issues, governance concern of portfolio companies comes in at number one (92% of respondents), while 60% have taken action on it. Firms have focused on improving awareness – setting up policies and a range of training modules for their professionals around responsible investment decision making. Cybersecurity takes the number two spot, with 89% concerned and 41% implementing strategies to mitigate risks.

Climate risks take the number three spot in terms of concern for portfolio companies (83%), but falls behind in terms of action (31%). Health and safety track records are a key concern at 80% of businesses, with 49% implementing action. Gender imbalance within PE firms themselves ranks at 78%, which is being dealt with by 31%. A recent survey from Oliver Wyman showed that there is gender balance at 13% of GP teams in developed countries.

Biodiversity is also an increasingly pertinent topic, with risks from pollution and chemical use increasingly driving wider systematic risks around environmental outcomes. It featured at number eight on the ranking of most likely global risks for the coming decade, with its impact at number six. As it stands, biodiversity is noted as an issue at 57% of firms, with 15% implementing action.