Direct lending is the provision of credit directly to small and middle market companies (SMEs) for growth or acquisitions.
With mainstream banks reducing their supply of loans, new sources of finance have developed. For the smaller loan sizes, peer-to-peer (P2P) and new asset-backed providers have come to play a useful role. Banks have returned to lending markets but the new regulations they operate under, have reduced their relevance to SMEs. The gap that remains has attracted the attention of private institutional lenders.
Private lenders are well suited to carry the ball that banks have so dramatically dropped. They are often able to be more flexible than the banks and have 'locked-up' investments from pension funds and insurance companies, therefore able to invest for the long term and be patient.
Direct lending by private funds in Europe runs at over 1500 transactions annually, according to industry figures. This is just the tip of the iceberg as tracking deals with smaller companies is hard to do accurately.
From The Economist:
Direct lenders raise money from institutional investors ... [offering greater] speed and flexibility.
From the Financial Times:
... [there] has been a surge in non-bank lending by asset managers and private equity groups, which can offer bespoke deals to corporate clients who would usually be too small to tap bond markets.
From The Telegraph:
...figures showed the largest drop in small business [bank] lending since records began in June...
The table below summarises the key features of the loans offered by private lenders in the Altimapa Capital network
|Loan size:||€3 to €200 million|
|Maturity:||Up to 7 year (often non-amortising)|
|Cash interest:||Typically between 5% and 12%, varying with seniority, company and available security|
|Structure:||Varying degrees of customisation available: senior or subordinated, pay-in-kind (rolled-up interest), bridge financing, debt+equity packages, equity features (e.g. warrants) and others|
|Security:||Often secured on the companies' cash flow and/or assets|