To undertake an acquisition, most corporates or private equity firms require access to debt funding. Whilst debt is not a necessity, it will be utilised on the majority of transactions and as a consequence debt availability and deal activity are intrinsically linked.

According to the British Business Bank, lending to the SME sector is currently circa £15bn of loans a quarter which is up on FY17.

Deal activity and debt availability

Globally and in the UK, financial liquidity remains strong growing at 2% per annum with credit availability expanding rapidly in Europe (7%) and Japan (10%).  Many UK lenders are continuing to incentivise their sales teams/ bank managers to deploy capital. As a consequence, deal activity and debt availability in the UK remains buoyant, indicating a strong level of confidence in the UK economy despite the uncertainty that lies ahead amid ongoing Brexit negotiations.

The impact of Brexit on funding

Few commentators predicted on the announcement of the referendum result that this would lead to one of the most buoyant times in UK M&A history. The uncertainty was a catalyst that crystallised shareholders decisions to sell, but importantly access to capital remained strong and so purchasers could raise the funds to acquire.

Brexit undoubtedly remains a factor that is at the forefront of the M&A industry and despite Brexit headwinds debt remains comparatively cheap against historical levels and liquidity remains strong. It is difficult to see this changing by October 19, when the next deadline looms (save for another economic downturn).

This is partly as there now exists a number of alternative funders that entered the UK market after the financial crash in 2008 to compete with the high street banks who significantly reduced lending. These companies have raised funds that they need to deploy over the coming years or they will have to return the money to investors.  As such, it looks improbable that Brexit will significantly reduce the availability of debt funds in the UK and therefore hamper M&A activity.

Securing funding

It remains a good time to raise debt finance, but this is not without its challenges. Traditional high street lenders are indicating that strong credit committee control will be required during the run-up to the extended Brexit deadline, meaning more scrutiny on the robustness of business models.

Smith Cooper Corporate Finance is an award winning team that knows the key debt funders that operate in the SME market. We are able to support clients with fundraising, whether it be debt or equity, at whatever stage of their business life cycle they are. If you wish to discuss the article further please contact Darren on Darren.hodson@smithcooper.co.uk