In the wake of House of Fraser’s fall into administration this month, its suppliers have been left with a sizable hole to fill following the restructuring of the department store’s debt. This is one example of a recent glut of household-name retailers failing due to changing market conditions, while the collapse of Carillion earlier this year proved that giant companies still fall over a single weekend. These events prompted the team at Altimapa to discuss the difficulties faced by small companies when unforeseen external factors negatively affect their business.
Events such as these ripple through business communities, their wake often proving more damaging than the collapse itself. Suppliers and customers of distressed companies – particularly those who themselves rely heavily on a few suppliers or clients - often find themselves in difficulty, left frantically seeking to close not only a liquidity gap but the gap in revenue too, with little warning. Supporting this, a recent article by Hiscox quoting Bloomberg, suggests reliance on large customers as the 4th highest reason SMEs go bust – top is lack of cash.
Special situations lending and the private debt market (AKA direct lending and alternative debt)
One silver lining following the financial crisis a decade past has been the mainstream emergence of the alternative debt market. This development filled the gap left by banks when they withdrew much of their lending to small and medium sized enterprises (SMEs). This withdrawal created space for dynamic, flexible and fast-moving lenders. Funded by professional, institutional investors they offer debt to SMEs across many sectors and stages of development.
The private debt, or ‘direct lending’ market consists of a huge number of lenders – in the high hundreds - each with a specific mandate. Several of these lenders specialise in supporting well-managed companies experiencing short-term difficulties.
In Altimapa Capital’s experience, the solutions offered by these specialists vary widely in make-up and terms, depending on each circumstance. They range from equity to debt focussed, and are tailored to each company’s case. These funders move quickly, often from first meeting to drawdown in a number of weeks, or faster if needs be. Investors can be part of a short-term solution but often partner with a business to help them grow over time. While most would prefer to sit as the senior lender with first lien on assets in case of default, some will consider a subordinated facility in exchange for increased rates of interest. They bring to the table expertise in dealing with all parties involved in stressed situations and often provide an invaluable calming influence, giving anxious stakeholders confidence while new agreements are negotiated and relationships reshaped.
Path to growth
Above all, these private debt funds look for well-managed, profitable businesses in which to invest. If these businesses are suffering liquidity issues from an exceptional event but are otherwise healthy, an opportunity for return is presented, while offering the stressed company a lifeline and path back to growth.
While it is rarely possible to predict your business’ exposure to the next Carillion or House of Fraser, it is possible and indeed sensible to understand the burgeoning private debt market and its participants, not only for access to growth capital in the good times, but to give you a head-start in the hunt for liquidity if the clouds roll in…