Sometimes it’s good to mix things up a bit. There’s real strength in diversity, and what we’ve discovered since the financial crisis ten years ago is that plenty of businesses want a more blended approach to their financing.
Obviously we’re happy that Asset Based Lending has become a more established solution for larger businesses – and their backers in private equity (PE). That’s down to more sophisticated deal structures, changing perceptions and greater flexibility. What we’re seeing already in 2018 is a growing appetite for the kinds of £20m-plus finance packages we’re offering in the PE and M&A markets.
First, smarter Asset Based Lenders have built up more sophisticated offerings when it comes to financing working capital alongside other tangible assets. There’s some real innovation going on and we can expect that to continue as we see clients evolve new business models around software, services and brands.
Second, debt advisers have played an important role in championing these blended approaches. It spreads risk, balances cost and creates additional headroom. Third, we can tailor debt packages – and covenants – much more appropriately around a business’s specific needs. You only have to look at recent retail business failures to see why that’s important.
State of the market
True, there is a lot of liquidity around – from banks, debt funds and public markets. We’re also seeing a lot of dry powder, not just from private equity – where un-deployed funds globally topped $1 trillion last year – but also from larger corporates with large balance sheets.
But multiples are also high. At the end of 2011, the FTSE price/earnings ratio was a depressed 10x. At the end of late year, it was almost 19x. Public companies are not cheap; and many privately held companies haven’t been bought cheap, and so won’t be sold cheap either.
Yet 2017 was the most active year since the crisis for buyouts, including those expensive public-to-private deals. Europe’s PE deal-doers had a buoyant year, with the UK leading the charge. In other words, this is a mixed-up marketplace. Economic and political conditions are relatively volatile; growth is sluggish. Deal-doing is pricey – but for both PE houses and corporates, there are compelling strategic reasons to reshape businesses as sectors collide and technology changes the rules.
No wonder Asset Based Lenders have started to provide more complex solutions to those problems – moving away from vanilla receivables lending to more complex structures including for example cross border multi assets facilities, off balance sheet and single debtors structures. In an uncertain market, simplicity and flexibility has helped Asset Based Lending gain traction in both private equity and corporate investing.
In the (uni-)tranches
That simplicity and flexibility is typified by ABL unitranche. The initial unitranche idea was imported from the US around 2012 and provides businesses with a single tranche term loan alongside a revolver that combines a blend of senior and junior risk with a single interest rate. That enabled to push debt capacity and blend pricing which was welcomed by a lot of businesses across Europe that have embraced the structure. What an ABL unitranche facility does is to open this type of financing to potentially more cyclical businesses in transformation, as well as lowering the overall cost of capital given the competitive cost of the ABL product. It also enables the parties to better manage risk: the borrower having generally more covenant flexibility to navigate difficult situations whilst the lender remain secured by the assets and can therefore better manage its risk than a traditional cashflow unitranche lender.
Borrowers, private equity and debt advisors are beginning to recognise that there is greater scope to use asset-based lending across more situations than in the past.
Agility demands speed
Blended, tailored structures aren’t just simpler and more appropriate for borrowers. Many clients come to us having been turned down or just stalled by their banking partner. If a company has low risk with good assets, it will find plenty of banks that will offer very competitive terms. Anything outside your typical credit profile and all of a sudden there’s much less offer in the market.
Asset Based Lenders like us are happy to play and make a fair assessment on whether they can help. And because of their comparatively smaller size, it’s easier to respond quickly. That’s certainly the case when it comes to international deals. ABN AMRO is particularly good at this thanks to our centralised European team. For the larger segment of the market, we have a simplified credit process that bypasses the multiple layers of risk and of decision-makers that often prevent traditional banks from progressing deals quickly.
It’s this forward-looking, blended and agile approach adopted by avant-garde Asset Based Lenders that will help bring private equity and other deal-doers further into the fold in 2018.