The North West has the only dedicated debt funds outside of London. There is a lot of money waiting to be spent and the debt funds are naturally looking for companies with strong management and a good market value to lend money to. So what kind of companies are likely to benefit from these sources? With debt funds and asset based lenders coming into the market what transactions can we expect to see?
Partner and head of debt advisory Mark Taylor discusses debt fund in the UK and North West.
Almost a decade since the financial crisis struck, the European funding market has changed significantly. Banks became more selective of the businesses they support as risk appetite altered to reflect changes in regulation and capital requirements. This created an opportunity for alternative lenders, commonly known as “Debt Funds” to enter the UK market.
The key driver behind this is the continuance of low global interest rates. Investors are looking for places to deploy their capital and have therefore been attracted to the returns being offered by debt funds who are looking to lend money in the UK.
Why the UK?
There are three primary reason why the UK is attractive:-
- A lot of the investors are US based…we speak the same language! The UK is seen as a stepping stone into Europe…even in light of Brexit
- The legal environment is well established and predictable therefore lenders know what protections they have when taking security
- Despite the perceived impact of Brexit, the UK is still viewed as economically stable
The number of debt funds has grown exponentially, with literally hundreds of them now operative with these, until recently, being solely operative in the Capital albeit looking for deals in the Regions. Specific examples where we have seen the fund deploy capital “up North” would be:-
- European Capital supporting LDC’s secondary buyout of medical communications business Fishawack
- Beechbrook Capital financing the Palatine backed MBO of Gusto from Living Ventures
- Crescent Capital supporting the buyout by LDC of leading powder & aseptic containment valve business Chargepoint Technology
Manchester emerges as a focus area
The most interesting development over the last 12/24 months is the amount of liquidity heading to Manchester. The community has a fantastic coverage of Private Equity, including now becoming the location that some international funds chose to open their only UK offices – the Dutch firm Waterland Private Equity and Canadian entity Ardenton have both opened offices here during 2017; confirming the fact that the North West continues to be an incredibly attractive environment to invest.
This trend has now emerged in the world of the debt fund! Manchester is the only city, outside of London, with a specific debt fund presence:-
- Tosca Debt Capital currently have one office in the UK with this based in the City. They supported the Palatine Private Equity backed buyout of Verdant Leisure by providing a junior tranche of debt finance behind Yorkshire Bank’s senior tranche
- Muzinich & Co are an International fund with representation in London and Manchester. Muzinich & Co provided finance with The Royal Bank of Scotland to fund the take-private of hybrid and managed cloud services specialist ANS Group
- Infinity Asset Management are again Head Officed in Manchester. Infinity worked alongside HSBC on the secondary buyout of LDC backed distribution business The Pallet Network
We understand, Beechbrook Capital are close to appointing an individual to run a Manchester office, following a commitment to the UK Government backed British Business Bank who invested in the latest fund raising.
Other established funds are approaching individuals with knowledge of the North West region to spearhead their operations with Manchester….so we expect the current number, 3, of funds operating in the North West Region to double over the next year!
Why Manchester and the North West?
Manchester and the wider North West region are attracting debt funds due to the large number of these quality owner-managed businesses and the established corporate finance community. This includes a number of boutique and larger corporate finance advisors, along with the well-established private equity firms, global law firms etc. This local advisory community can provide introductions to the numerous high-quality mid-market businesses operating in the North West who are often looking for long-term flexible debt capital.
What are the Debt Funds looking for?
All lenders will have a view on sectors that they find attractive however there are universal characteristics which exist:-
- Reasonably well established businesses with a track record of profitability
- Occupy a solid position within its market/sector
- And importantly, well balanced Management teams who have knowledge and capabilities
What do we expect to see?
Historically, the majority of funds looked to work alongside Private Equity investors when offering debt facilities; we expect this trend to continue with PE investors developing strong relationships with Debt funds.
However we also expect the funds will begin to compete with traditional PE, they have funds available which they need to put to use i.e. a case of over supply! In short, debt fund transactions will be seen as an alternative to undertaking a PE transactions or as a stepping stone towards it.
With local debt funds now in the North West, we expect to see an increasing number of locally funded transactions and buyouts. This will include growth financing for businesses looking to take advantage of opportunities; along with the continuation of PE transactions. The flexibility of debt fund finance will also lead to shareholder transition and cash-out deals will take place.