If we go back 10-15 years there were two or three main types of financing – bank debt, mezzanine finance or private equity/venture capital. Mezzanine was still relatively new, and the interest costs associated with these were typically 3-4%, 12-16%, or 30%.
A shift towards alternative options
Since the global financial crisis in 2008 there has been a steady increase in the number of financing options available, driven in part by the consistent low interest rate environment since 2009. This has driven retail savers (and to some extent SME’s) to search for better returns than you can get from a traditional bank. The growth in crowd funding and peer to peer lending is in part a result of this.
The raft of new regulations in financial markets which followed the global financial crisis has also put increased pressure on existing market participators whilst at the same time driving innovation and creating new (theoretically more efficient) market entrants, again encouraging alternative forms of finance to flourish.
The disintermediation of traditional financing models, driven by technology
Technology has undoubtedly mediated the development of new and alternative financing options, leading to the creation of online platforms which have allowed the disintermediation of the traditional financing models.
These technology driven models allow peer to peer lenders to operate with lower overheads, and therefore deliver better returns to investors, and whilst the interest rates tend to be higher than traditional banking, this gap has closed somewhat as the market has matured.
Questions have been asked about the rigour associated with peer to peer lending and the process which is undertaken to assess credit worthiness of borrowers. The long-term default rate in relation to P2P lending is a useful KPI in this regard.
Hybrid loan structures and mutual funding
We have also seen the emergence of debt funds and unitranche debt – a flexible form of financing. Unitranche debt combines senior debt and subordinated debt into one hybrid loan, leveraging banks so they’re able to compete better against private debt funds.
This type of debt is typically used in institutional funding deals. It means the borrower can raise greater funding from multiple parties, potentially at a lower overall cost.
Royalty Finance – Alternative funding in action for the BIMBO of MRDB
A recent Smith Cooper deal – the Buy-In-Management-Buy-Out (BIMBO) of MRDB, the UK’s largest wholesale distributor of parts and components for the caravan and motorhome industry – utilised alternative finance to form its funding structure.
Duke Royalty Limited, the UK’s first UK-quoted diversified royalty investment company, provided an innovative debt and equity financing solution for the BIMBO transaction, with NatWest Bank and RBS Invoice Finance providing additional facilities.
Revenue-based financing or royalty-based financing (RBF) is a type of long-term financial capital provided to established private companies that are in need of capital but whose owners wish to maintain equity control of their business, in which investors inject capital into a business in return for a distribution (royalty) calculated by reference to ongoing gross revenues.
In an RBF investment, investors tend not to take an upfront ownership stake in the business, usually taking preference shares or a small equity warrant instead.
Here at Smith Cooper Corporate Finance, our team of specialist advisors are on hand to help you make sense of the different types of finance options available to companies, advise how they’re set to change in the coming year, and how best to access them.