Capital Structure Forum: Growth lending ‘will become mainstream’

Lending to developing business at high rates of return is set to become a major part of the private debt landscape.

Growth lending is set to become a mainstream product in the coming years, according to panellists at Private Debt Investor’s Capital Structure Forum in London.

Speakers this morning said the growth lending space, which targets countries that are beyond the venture stage but not yet generating cash for more conventional direct lending, has seen a significant evolution in recent years.

“We’re seeing a flight to this product right now, it will become a mainstream product and you’re going to see a lot more of it in the next few years,” said Spyro Alexopoulos, managing director at Golub Capital.

Golub has been particularly keen on backing the growth of companies in the “software as a service” (SaaS) space where it is able to originate loans providing Libor plus 800-1100 basis points.

“SaaS businesses are very resilient with good revenue models that are easy to understand. We’re a long way from the old style of software sales with licences that could be choppy, now it is a subscription-based revenue model that is highly entrenched,” Alexopoulos explained.

The growth debt space is also benefitting from being relatively uncompetitive, with banks having withdrawn from the market due to regulatory and economic pressures while most private debt fund managers are looking at larger investments in the lower-mid market.

Ross Ahlgren, partner at Kreos Capital, said: “Bank rarely play in our sector. You might find local or regional banks providing overdraft facilities and other banking services but not originating growth loans.”

While banks are less active in the growth capital space, Nicolas Politopoulos, chief operating officer at Australia-based Dinimus Capital said there are growing opportunities to partner with banks to source deals.

“Australian banks have seen that they need to support borrowers to be able to get other banking business and to have a relationship with those firms when they reach maturity,” he explained. “They realise that they need to partner with us to help these companies develop.”