Private debt provision for the SME and lower mid-market in the UK was worth more than £18 billion ($24.9 billion; €20.5 billion) in 2018 and 2019, according to new research from the British Business Bank and the British Venture Capital Association.
Publishing its first report on private debt in the UK, BBB said private debt in the country has grown rapidly and will play a key role in helping smaller businesses recover from the effects of the covid-19 pandemic.
BBB analysed primary deal data from 55 funds across 37 managers with deals worth £9 billion in 2018 and £9.4 billion in 2019. By comparison, bank lending to SMEs in 2019 amounted to £57 billion.
It recorded 498 deals in 2018 and 518 in 2019. The majority of deals in 2019 were also non-sponsored transactions, with 345 having no financial sponsor. Across both 2018 and 2019 the majority of deals recorded by BBB were growth deals, with 563 transactions. There were 124 buyout financings, 99 refinancings and 48 acquisition financings.
The report said private debt offers a number of benefits to SME borrowers including greater choice of funding options, closer relationships with lenders and larger facilities. The average ticket size loaned by small-cap private debt funds in BBB’s portfolio was £6.5 million, compared with £167,000 from standard banks and just £77,000 from P2P lending platforms.
It also found that 82 percent of private debt deals take place outside of London, though London did account for 35 percent of the capital invested.
Catherine Lewis La Torre, CEO of BBB, said: “In a relatively short period of time, private debt has established a position as a viable type of funding for the UK’s smaller businesses at different stages of development. As the focus shifts from stabilisation to economic recovery, supporting business growth will be a fundamental driver of a thriving post-covid-19 UK economy. Ensuring that businesses can access the funding best suited to their needs will be vitally important in the coming years and private debt has an important role to play.”
BBB managing director and leader of the research Alice Hu Wagner told PDI that BBB will continue to report on the development of private debt in the UK and hopes it will raise awareness among the investor community.
Hu Wagner’s research found that the fundraising environment for private debt has significantly worsened since the eruption of the covid-19 pandemic. Before the pandemic, 34 of the fund managers surveyed said the environment for fundraising was good or very good, but this dropped to just two post-covid. Meanwhile, the number of managers saying the environment for fundraising was poor increased from one to 16.
“Fundraising is falling across all asset classes and new managers are finding it hard to get up and running,” she said. “We don’t want this asset to be dependent on the public sector long term and so we hope this report will encourage other investors to become aware that this is an attractive asset class.