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The Deloitte Alternative Lender Deal Tracker Q2 2017

Liquidity in all shapes and forms

The Deloitte Alternative Lender Deal Tracker now covers 58 leading Alternative Lenders, with whom we track primary mid-market deals across Europe.

The sixteenth issue covers data for the second quarter of 2017 that closed with 70 deals completing, representing a 5% increase in deal flow on a last 12 months basis in comparison with the previous year.

Key highlights

  • The number of deals covered has increased to 1082 transactions over the past 19 quarters.
  • Of 70 deals we observed in Q2 2017, over 65% were completed in Continental Europe, representing a significant increase when compared to the previous quarter.
  • With 4 Alternative Deals completed in Belgium in Q2 2017 and a healthy pipeline, pace for alternative lending in Belgium is slowly picking up.
  • Where traditionally debt and equity have been mutually exclusive, lines are beginning to blur as we see an increase in hybrid fund raising strategies, where the product straddles both debt and equity.

 

Previous editions

The Deloitte Alternative Lender Deal Tracker Q1 2017

The fifteenth issue covers data for the first quarter of 2017 that closed with 79 deals completing, representing a 7% increase in deal flow on a last 12 months basis in comparison with the previous year.

Key highlights

  • 2017 has been a bumper start for Europe where in Q1 2017 we saw US$9.1bn of closings, nearly twice the value of all of 2016 European fundraising.
  • The number of deals covered has increased to 1011 transactions over the past 18 quarters.
  • This issue covers data for the first quarter of 2017 that closed with 79 Alterative Lender deals representing a 7% increase in deal flow on a last 12 months basis in comparison with the previous year.
  • Of 79 deals we observed in Q1 2017, over 60% were completed outside of the UK, representing a significant increase in comparison with the previous quarter.
  • In the race for growth, Europe is gaining strength and is closing in on the US, with GDP across the Eurozone increasing by 0.6% quarter-on-quarter during the first three months of 2017, and 1.9% on prior year versus 2.0% for the US.

 

Deloitte Alternative Lender Deal Tracker - Issue 4 2016

The uncertainty caused by political events in the preceding quarters of 2016  has had little effect on the overall performance of the UK economy, with GDP  growth coming in at 2% for the year, the highest of the G7 countries. Similarly,  in the US, the new Administration’s pro-business fiscal policy has accelerated  growth expectations and increased the potential for further interest rate rises in  2017. The UK deal count in Q4 2016 increased by 48% compared to the previous  quarter, marking a bounce-back in transaction activity following a wait-and-see  period in Q3 after June’s Referendum result.

Loan issuance was up as investors continued to pursue yield in a low interest  rate environment, which underpinned new highs in valuation levels in Europe,  reaching 9.6x EBITDA for the first time in 10 years according to S&P LCD.  On the whole, Alternative Lenders increased their deal flow in 2016,  with a total of 267 deals completed, up 2% on 2015. This was driven by  an increased penetration throughout the rest of Europe, offsetting a 13%  decline in the UK on a LTM basis, mainly caused by subdued volumes seen

in H1 2016 and the aftermath of the Brexit Referendum during the summer.

Whilst Direct Lending fundraising returned to growth in Q4, 2016 as  a whole closed down almost 40% lower than in the previous year, at US$23bn. This trajectory was more pronounced in Europe, down  50% to US$10bn, primarily driven by smaller average target sizes  of European funds in the market compared to 2015. This trend was  also in part due to a weaker fund raising climate in 2016, reflecting  market uncertainty and the effects of a bumper year in 2015.

We understand that there are currently c.125 Direct Lending funds  in the market, seeking aggregate commitments of c.US$50 billion,  of which US$17bn is in Europe.

Finally, although the market has seen some consolidation, we  expect institutional investors will continue to increase their asset  allocation to Direct Lending strategies. They will do this through a  continued expansion of product penetration in Europe but also via  product diversification, in targeting senior debt risk strategies at  lower returns to compete more directly with bank clubs and the  syndicated market. This is also likely to accelerate the convergence  between the high yield bond and loan markets.

Deloitte Alternative Lender Deal Tracker - Issue 3 2016

The short term political events in the third quarter of 2016 fuelled uncertainty in the markets. On the whole, equity and credit markets have quickly shrugged off volatility post the Brexit referendum and the US Presidential election and new issuance levels were up on the quarter and prior year. Overall, while Alternative Lenders in Europe increased their deal flow by 7% in Q3 2016,  the UK deal flow decreased due to reduced M&A activity in the mid-market, by 21% on an LTM basis. This decline was more than offset by the deal flow in the rest of Europe which increased by 29% vs. prior year.

This comes as a result of an increasing acceptance of Alternative Lenders in Continental Europe, where conditions continue to attract more participants who are looking to diversify their strategies outside the UK across Europe. In this issue we focus upon the Dutch market, one that has traditionally been dominated by local banks, and more recently one which has been disrupted by the arrival of Alternative Lenders. Overall, the Netherlands has seen a 42% increase in Alternative deals on an LTM basis as of Q3 2016.

When looking to Belgium, the market remains heavily dominated by the 4 domestic banks, lagging significantly the trend of funding diversification and disruptions by alternative lenders that can be seen in the Netherlands. Mid-market Belgian companies, family- or sponsor-owned, remain for the vast majority reliant on bank funding. While this gives them a significant pricing advantage, they renounce on greater flexibility in terms of longer tenors, bullet structures, covenant package and permissions to fund their buy-and-build strategies, while the higher tolerance for leverage by alternative lenders could assist them in realizing their IRR objectives more easily.

Nevertheless, awareness for alternative lending in Belgium is growing and that fact that more fundraising for the Belgian market is scheduled for 2017 should provide the necessary levers for the alternative lending activity in Belgium to slowly catch-up with the rest of Europe.

Deloitte Alternative Lender Deal Tracker: Issue 2 2016

The second quarter of 2016 has seen increased uncertainty on the European markets associated with Brexit. We are yet to see what the full impact of the referendum result will be on the Alternative Lender market. Current deal volumes show continued growth with 67 deals completed in the second quarter and a combined value of approximately €3.5bn.

The year on year increase in the market over the last 12 months was over 3% and 6% compared to the previous quarter. 

From starting as a mid-market lending product, Direct Lending continues to evolve and now often competes with traditional debt capital market solutions as deal sizes continue to increase. 

Furthermore, as the Direct Lending market continues to mature in Europe, we see increasing numbers of new debt managers focussing on niche strategies within the market. Beyond plain vanilla unitranches, such strategies include either providing a product that is closer in yield to what banks can offer or targeting more complex, higher yielding situations.

Regarding the Belgian context, an increasing amount of Alternative Lenders have started to focus on the Belgian market which has been lagging the rest of Western Europe in terms of Alternative Lending activity. 

Against the backdrop of a healthy stream of mid-market M&A activity, the increased inbound marketing activity from the Alternative Lending community is now raising their profile in the Belgian market and having them recognized as a full-fledged financing alternative to traditional bank financing.

Deloitte Alternative Lender Deal Tracker: Issue 1 2016

From being a hypothetical possibility; Brexit has now become a reality that created an earthquake in the financial markets immediately after the UK referendum result on 24 June 2016. For companies in the midmarket Brexit will likely mean in the short term a flight to quality from bank lenders and more restrictive financing conditions until there is more visibility on what the ramifications will be for the UK and potential contagion in market confidence globally. For direct lenders who have locked in capital this will create opportunities as banks will likely become more risk averse, therefore accelerating growth of non-bank alternative lending market.

As the Direct Lending market is evolving and rapidly becoming an asset class in its own right with currently in excess of 300 direct lending professionals active in Europe, this edition includes a summary of those professionals by country and seniority and an overview of some of the most recent moves.

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