By Taron Wade and Alexandra Krief
The recovering British economy looks very different to that which existed prior to the last financial crisis. For instance, bank lending continues to contract, which threatens the growth of UK mid-market companies – firms with revenues between €100m and €1.5bn (£85m-£1.3bn).
Indeed, such firms are more affected than their larger peers, and the shortfall in their funding requirements is expected to total £450bn between now and 2017.
In response, public and private initiatives, such as the Business Finance Partnership (BFP), aim to spur lending by institutional investors to the sector. And the UK private placement (PP) market is growing, with an estimated £6bin raised in the past three years. But the UK PP market lacks deal-flow transparency, and other obstacles – such as regulation – make further development a challenge for policymakers, investors and intermediaries.
Government schemes aim to spur growth as private placement shows promise
A direct response to the downturn in bank lending, the UK government’s BFP matches government funding with investment from fund managers. The scheme has seen some success – as of last November, 18 midsize companies have received a total of £827m and at least six new funds were created by Alcentra UK, Ares Mangement, Hayfin Capital Management, Intermediate Capital Group (ICG), M&G Group, and Pricoa Capital Group.
Increasing investor appetite is also reflected in growth in the UK PP market. Deal flow rose in 2013 to between 30 and 50 loans (increasing from only a handful in 2011 and 2012), with the total amount raised in the UK since 2011 estimated to be between £3bn and £6bn. Unfortunately, as these somewhat vague figures demonstrate, there is a lack of transparency in the market’s deal-flow which can harm investor confidence in the depth of the market.
Indeed, the alternative funding market for UK mid-market companies is relatively immature, and there are a number of issues which policymakers, market analysts and intermediaries must address to help the market reach its full potential. As mentioned, deal-flow transparency is one. Regulation is another, given the EU’s Solvency II Directive works to discourage insurers – perhaps the largest potential investors in mid-market firms – from increasing their exposures to the sector.
As a report published by the Association of Corporate Treasurers (ACT) makes clear, “the Solvency II complications act as a fundamental barrier for insurance company investors such that without some loosening of the regulatory burden, a UK PP market is unlikely to develop in much volume in the near term”.
And there are many other potential improvements to be made, such as boosted liquidity, better market performance monitoring from indices, a robust track record of investment (including default history), credit analysis for investors, and standardised documentation.
Capitalising on the rebound
Ultimately, for UK mid-market companies to exploit the economic recovery – and for the UK’s PP market to achieve its potential – a greater amount of information on their creditworthiness is needed to increase investor appetite further still. And intermediaries can work to fill this gap. As such Mid-Market Evaluation (MME) services can provide independent and private opinions of midsize companies’ relative creditworthiness and the factors underpinning this assessment.
Considering the increasing interest on the part of investors in this emerging asset class, it’s clear that the UK PP market has the potential to help plug the funding gap for mid-market companies. But the market will not fulfil this potential without policymakers, intermediaries and market analysts redoubling their efforts to link businesses in need of funds with willing investors.
Taron Wade and Alexandra Krief are analysts at Standard & Poor’s Rating Services
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