Across Europe, there has been a pressing need for private debt to compensate for restrictions on bank lending following the global financial crisis. No country has risen to this challenge more impressively than the UK, which, according to Deloitte’s Alternative Lender Deal Tracker, has accounted for 30-40 percent of the total European direct lending market in recent years.
Unsurprisingly, ever since the UK’s Referendum on EU membership in June 2016 (hard to believe the vote is not far off its second anniversary), this large investor exposure to the UK has been under scrutiny. Researching coverage of the UK market, which will result in a number of features shortly to be found on our website and in our monthly magazine, we had the opportunity to obtain the views of GPs and LPs on whether it’s a cause for concern.
Most of our interviewees seemed sanguine about prospects. The well-publicised issues at some retailers such as Toys ‘R Us and Maplin have brought problems in consumer-facing industries into sharp focus. This could, of course, be a good thing for distressed and special situations investors. Those still focused on the growth opportunity – or at least on ‘weathering the storm’ successfully – are steering their ships towards the relatively safe harbours of essential service provision such as healthcare and energy.
Moreover, the view from LPs is that, should there be a little less focus on the UK, this will only be a good thing in terms of portfolio diversification. Many are said to be encouraging managers to widen their geographic remits, not least to capitalise on increasing economic strength in the Eurozone. In Deloitte’s Q3 2017 Tracker, it was notable that Spain – not long ago a market to avoid – saw alternative lending activity increasing 50 percent versus a year earlier as its economic rebound continued. France and Germany, meanwhile – which move the needle more than Spain – are also seeing private lending activity take root.
But while there are few signs of Brexit – or any other political dramas – having a major impact on most of the UK private debt market, there is a corner of the universe where those involved are seeking to draw attention to a major problem. “In the micro-business space, you find a contraction of lending, which is contrary to all other parts of the lending market,” Christoph Rieche, chief executive officer and co-founder of fintech lending platform Iwoca, told PDI.
“I think the problem has got worse [since Iwoca was founded in 2011] and that’s despite a lot of government initiatives,” says Rieche. Targeting businesses with turnover of less than €2 million, Rieche has become acquainted with a part of the market where retreating bank finance has not yet been effectively replaced by anything else. “There is a huge opportunity for us to grow, but it’s troubling to see our customer base not being served better,” he says.
As noted in PDI and elsewhere, the rise of fintech lending has been a notable evolution in the private debt arena in recent years. However, it still has a long way to go to compensate for the loss of many small businesses’ traditional banking relationships. Without the finance to grow effectively, the UK economy’s ‘growth engine’ may be in danger of stalling. Long term, that could be a much bigger disaster than the short-term perambulations around Brexit.
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