UK debt transactions with alternative lenders up 48% in Q4 2016 despite a mid-year pause

• Non-bank lenders made 276 deals in 2016, compared to 263 in 2015
• Fundraising levels slowed by almost 40% in 2016 at US$23bn

Non-bank lenders performed 267 deals in Europe last year, according to Deloitte’s Alternative Lender Deal Tracker, published today. Following a slowdown in the middle of the year, there was a domestic rally at the end of 2016, with a 48% increase in transactions involving non-bank lenders in the UK in Q4, compared to Q3 2016.

Fenton Burgin, Head of UK Debt Advisory at Deloitte, comments: “Non-bank lending held up last year, just beating 2015’s total of 263 deals. This despite a decrease in European M&A volumes around the time of EU Referendum.”

Currently, there are around 125 direct lending funds in the market, seeking to raise fund commitments of c.US$50 billion, of which US$17bn is in Europe.

Burgin continues: “Today, the divergence between the US and European economies, especially with the continued quantitative easing programme in Europe, is creating ideal conditions for borrowers here. The next two years should be strong for the private lenders with continued liquidity and valuation levels reaching 9.6 x EDITDA for the first time in ten years. With high levels of competition for good assets, the flexible financing offered by non-bank lenders will attract private equity sponsors.

“However, some managers with global direct lending funds could refocus lending capital back to US markets with further interest rate rises anticipated and a stronger economic outlook than some European markets. In the UK, M&A levels are likely to be subdued in the next twelve months; hence increased focus of direct lending managers towards faster growth markets in the rest of Europe.”

Fundraising levels for direct lending slowed by almost 40% in 2016 compared to the previous year, at US$23bn, even as levels returned to growth in Q4.

Floris Hovingh, Head of Alternative Capital Solutions at Deloitte, adds: “Fundraising typically follows a 2-3 year cycle of deployment. As most of the larger managers raised their first fund in 2013 and their second in 2015, we would expect a number of them to return around 2018-2019. This creates more volatile yearly fund raising numbers during the growth stages of the direct lending product.

“Increasing numbers of lower senior risk or return funds which can compete more actively with bank structures will push these products across Europe where borrowers are often more price sensitive. At the same time, continued pressures on banks from the ECB will mean more scrutiny around unsustainable mid-market lending practises by local banks – providing an additional boost for the non-bank lenders.”

Ends 

Notes to editors
Deloitte’s Alternative Lender Deal Tracker compiles data and information on a confidential basis from 55 subscribing leading alternative lenders. The tracker covers a total of 925 transactions dating from the fourth quarter of 2012. These are primary mid-market direct lending deals across Europe. On a quarterly basis, full data is provided to all subscribers and a summary report provided to market participants, highlighting key market trends and developments.

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