"Those that wake up early get ahead". And a vacuum in finance often proves to be incredibly profitable for those that wake up early.
Money lending for SMEs
The credit crisis has bitten the banks hard. Extra controls from regulators, more shareholder scrutiny, together with huge financial losses have contributed to banks putting more focus on servicing their top-rated clients.
Money lending toSMEs has become trickier.New players like digital marketplaces have stepped into this vacuum. They allow SMEs to issue a bond by a private placement,. Access is harmonized and the traditional bank loan process seems outdated.
Loans at the smaller end of the market requires standardisation and automation to be efficient and cost effective. Numerous banks have built partnerships with credit specialists, offering web based credit approval interfaced loan services for SMEs.
Private Debt Funds
We are all familiar with the concept of large listed companies raising money through publically offered securities. However there are some privately owned businesses of significant size ranging from family owned businesses to other structures outside the stock market which have never had to issue a bond or raise capital.
But how are these companies financing when the need arises? They must turn to the private debt space. Private debt funds are a new attractive asset class. Those funds act like a bank and provide credit to European SME businesses through bespoke financing solutions.
Private Debt funds have a useful business model of marrying the need of small and medium enterprises for funding with institutional investors who are hungry for higher yields at a time where interest rates are at historic low levels.
Private Debt barely existed prior to 2008 when banks were happy to lend money. With the credit crisis this supply from banks ended abruptly and in stepped asset managers of pension funds, insurance companies and private equity firms, mostly sitting on mountains of cash looking for the opportunity in markets they were comfortable with. According to the data provider Preqin, the private debt industry could reach $2.5tn in size in another decade at current growth rates. This would rival the private equity world in importance. Direct lending is one of the biggest and fastest-growing sectors , and boasts some of the biggest players.
SME credit spreads can be higher partly because the creditors do their homework much more thoroughly and no-one lends money easily. Private debt is also very labour-intensive. Also should a company default, then funds that are exposed to it will likely suffer terrible recovery rates and such loans in the fund will be near impossible to trade. Smaller companies also might be extra susceptible to industrial cycles,new regulations or the emergence of strong competition.
Despite the vibrant future this new asset class has, it is no surprise that a lot of private debt fund managers consider the valuation of their loans as their biggest concern. Valuations requirements are also often motivated by directives such as AIFMD or IFRS, as well as investor scrutiny and the need to protect reputation
The world of Private Debt does not necessarily sit comfortably with today’s requirements having previously been happy to mark loans in a simple fashion until things go wrong.
Given all this active market participants are trying to find the best market practices for valuations issues and we can expect a lot of development in this area in the coming couple of years.