‘Private debt’ is not a term that has much resonance outside the financial services industry. Unlike, say, crowdfunding and peer-to-peer lending, the concept doesn’t attract much coverage in the mainstream press and, as yet, it probably isn’t on the radar screens of the majority of small and medium sized business owners.
And yet, along with the more celebrated exemplars of alternative finance – and again we’re talking crowdfunding and peer-to-peer lending – the rise in private debt provision has helped to radically change the business finance landscape over the past half decade or so.
The catalyst for that change was – perhaps unsurprisingly – the great financial crisis. Recessions come and go and once the upswing is well and truly underway, things generally return to normal quite quickly. But the financial crisis was different. The trigger was not – as is often the case with recessions – the ‘boom and bust’ economic cycle, but weaknesses within the banking industry itself.
Initially, lending dried up because a great many banks were in serious financial straits. But when the immediate crisis passed, new requirements on capital adequacy meant that lending remained muted.
One result of that was arrival of platform-based alternative finance. But the same conditions also served to boost a small and hitherto uncelebrated – in Europe anyway – private debt market.
The private debt market is often dominated by institutions – such as private debt funds – but the beneficiaries have been SMEs.
It’s often said – and that doesn’t make it less true – that SMEs represent the backbone of the economy, both here in the UK and elsewhere in the world. But despite their importance, they were particularly vulnerable to a downturn in bank lending while also be as hungry for funding as ever – perhaps more so.
And according to a new OECD (Organisation for Economic Development)), figures collected up to 2016 show that lending to SMEs has continued to fall since the crisis in 16 out of the 25 countries surveyed.
The Rise in Private Debt
And it’s against this backdrop that we’ve seen a rise in large institutions and wealthy individuals being prepared to support funds that lend directly to small and medium sized companies. Even five years ago, this was almost unknown.
Of course, investors have their own incentives. Low returns from other investment classes have prompted institutions and individuals to seek out more lucrative options. Private debt can offer superior returns and because of the due diligence carried out by fund managers, the risks are not necessarily high.
Meanwhile, SMEs have their own very good reasons for turning to private debt providers. As the OECD report points out, the big picture is that to some extent at least, small and medium sized owners have responded to a muted bank lending market by seeking out alternative finance options. Indeed, in the UK, US and China, the Alternative finance markets have been growing particularly quickly. Private debt is part of that picture.
According to a report by Intertrust, published earlier this year and citing figures by Preqin the global private debt market was worth $595bn at the end of 2016 and could grow as high as $2.5trillion in the next decade. .
Peer-to-Peer or Private Debt
You could probably make a case that peer-to-peer lending via online platforms represents one manifestation of the private debt marketplace and in the broadest sense, there would be some truth in that argument. After all, peer-to-peer sites facilitate non-bank lending and most of the money (at least in terms of business lending) goes to SMEs.
But there are differences. Private debt, as it is generally described, is the province of large specialist funds backed by institutional investors. Peer-to-peer lending platforms are increasingly attracting institutions and High Net Worth individuals (HNWs) but they are mostly quite generalist in terms of their investment communities.And peer to peer platforms are still very attractive to retail investors.
The Route – Finance, on the other hand, is positioned as a Private Debt Platform and it operates in a different space from many of the P2P players. Perhaps the biggest difference is that The Route has a relatively concentrated group of High Net Worth, sophisticated investors who are prepared to commit cash on a pre-mandated basis. For companies seeking finance, that means the funds are available, subject to due diligence checks and acceptance.
The Route’s Members also understand business, risk and their own risk/reward profiles.In return for superior returns, they are prepared to lend in ‘special situations’ that would not necessarily be appropriate for banks or for retail investors. And like the big Private Debt Funds, The Route plays a vital role in selecting candidates for borrowing that are viable (as established by due diligence) and in line with the risk/reward requirements of Members.
It would be wrong to describe The Route as a halfway house between Private Debt and P2P. More accurately, The Route is part of the Private Debt universe but operating via a platform, making it accessible to a broad range of businesses.
To find out more call 020 3141 9040