Popularity to grow in aftermath of banking royal commission.
The viability of private funding as an alternative to traditional lending is a topic we've discussed in 'Worrells – On The Pulse' before ( click here) and in the aftermath of the banking royal commission, its popularity will continue to grow.
Earlier this year, this market hit a new all-time high, reaching $65 billion or 7 percent of the Australian business lending and bond markets1, making the private funding industry real competition to the big banks. We've seen evidence of this empirically with several of our current administrations having a private equity firm as a creditor.
With the increase in restrictions for big bank funding, we've heard that private investors are actively seeking ways to grow their capacity for funding involvement by either developing their internal capabilities or engaging external credit fund managers. And investment is not only from local firms. Recently, Head of Capital and Debt Advisory at EY, Sebastian Paphitis said that there is international interest, particularly from Asia and US regions, in participating in Australian Private Debt Market with investors exploring opportunities for involvement.
All this activity in the next few years is thought to create a plethora of funding options for Australian businesses and is expected to see a reduction in the Australian bank's business lending portfolios.
Some areas of funding that have experienced an increase in activity include:
- Private equity sponsored and leveraged acquisition financing: provides cash flow and asset-based debt for private equity-backed transactions. Leveraged acquisition financing is funding for companies that have a relatively high level of debt to finance acquisitions of companies (or parts of companies) by an existing internal management team, an external management team or a third party.
- Real estate backed financing: with many major banks tightening their investment parameters in the property development and construction sector, and thereby reducing their portfolios, private equity is filling the gap. These firms have progressed from just offering mezzanine financing (second tier, high-risk funding traditionally used for remaining debt after traditional lenders) to financing the total amount required.
- Special situations and distressed debt: Credit funds and global funds are tailoring finance solutions that intend to give investors higher returns.
With so many options now available, it is important that your clients research the options to select the best lending solution to add to their existing funding structures. Each type has advantages that must be weighed up against their disadvantages, for example flexibility versus high cost. To learn more about the private funding market and how you and your clients can access it, please contact your local Worrells partner.
1Source: Ernst & Young Research 2018
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