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Private Debt: A Financing Option for Ambitious SMEs


By Harrie Thorrington
Gambit Corporate Finance.

Harrie joined Gambit in August 2021, after studying Economics at the University of Bath and undertaking a Finance Analyst position at Deloitte. He is responsible for supporting live transactions and assisting Executives, Directors and Partners by conducting detailed research and analysis. Harrie is a member of the Debt Advisory team, having had exposure to, and currently supporting, numerous debt fundraising and refinancing transactions.

According to government statistics, small and medium-sized enterprises (SMEs) account for 99.9% of the business population in the UK. The UK is dependent on SMEs for economic growth, so a dynamic funding framework for the segment is paramount. Alternative lending has rapidly grown since the 2008 financial crisis, providing an increasingly diverse range of funding options for SMEs. There are a broad variety of alternative lending opportunities for SMEs, but private debt funds have risen to particular prominence.

‘Private credit’ or ‘private debt’ refers to debt instruments which are not financed via banks or traded on an open, public market. The private debt market is now the third-largest asset class in private capital, behind only private equity and real estate, with 200 funds closing in 2020, raising an aggregate $118bn in the process. Private credit transactions tend to primarily fund business growth through merger and acquisitions, as well as financing development projects and providing working capital. Private debt investment is sourced from long-term funds, willing to finance the dynamic credit risk of SMEs and mid-market firms, in exchange for higher returns. As a result, private credit funds are flexible, open-minded, and eager to introduce new financing options to SMEs and mid-market businesses.

Factors Driving Private Debt Growth

Since the 2008 financial crisis, high street banks have been subject to increased regulatory requirements. Therefore, alternative lenders such as challenger banks and particularly private debt funds, have identified this as an opportunity and “plugged” the financing gap.

SMEs and mid-market businesses, seeking capital to fuel growth plans, can receive funding in line with their specific requirements, with private credit funds offering bespoke debt packages.

The Private Debt Outlook

The private debt market is an attractive financing option, especially for SMEs and mid-market businesses. Private credit has become increasingly important by assisting the funding of ambitious businesses as they recover from the damaging Coronavirus pandemic. According to the British Business Bank, the private debt market is geographically diverse, with 82% of deals occurring outside of London in 2018 and 2019, with this trend set to continue.

Ambitious businesses are increasingly able to receive backing from a growing range of private debt funds, unlocking ammunition for crucial, future growth plans and bolt-on acquisitions. SMEs and mid-market firms should leverage experienced corporate finance advisers to support them in assessing the debt capacity of their business, identifying the most relevant funder pool, and fine-tuning business plans before presenting to potential funders.