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Why alternative lenders have become mainstream for M&A funding


The annual M&A Review published by Experian is eagerly awaited by the business finance community as a source for understanding overall national, regional and sectoral M&A activity, but also for comparing how firms are performing against their peers. League tables ranking the volume of deals handled by legal advisers, financial advisers, debt providers and capital providers provide useful insight on the activity of the main participants in the UK M&A market.

What is not apparent from reading individual annual reports is how some trends move over time. A key trend that has been developing over several years, but has accelerated recently, is the increased use of non-bank lenders for funding M&A transaction.

Leading the way for alternative lenders is ThinCats, who in 2022 were ranked as the most used debt provider for M&A transactions. This is the first time that a lender other than a “big 4” bank has topped the table, so represents a significant changing of the guard. To give some historical context, as recently as 2019 the top 4 slots were occupied by the “big 4” banks with ThinCats ranked at no 10.


SO WHY ARE ADVISERS TO THESE M&A TRANSACTIONS INCREASINGLY RECOMMENDING SPECIALIST LENDERS


Speed – funding can be within 4-6 weeks of an initial enquiry depending on the quality of information available

Flexibility – `funders assess every business on its own merits meaning we create bespoke funding solutions including flexible repayment and covenant structures aligned to our borrowers’ business plans

Sector expertise – funders have specialist skills such as in healthcare, technology, manufacturing, leisure and in funding PE-backed businesses, which aligns well with the areas experiencing the highest levels of activity as detailed in the Experian M&A report 2022.

Personal service delivered as one team locally – origination, credit and transaction management teams work closely together meaning that long-term relationships are developed with regional business and finance communities.

Behave like investors rather than one-off lendersAs up to 75% of funding can be cash flow lending, funders need to have confidence in the future performance of the businesses that they support. This not only involves a deep dive into the financials, but also a thorough assessment of the management team’s capabilities and commitment. Funders in this space typically lend from their own balance sheets, they want the businesses funded to succeed. They seek to become long-term partners with the aim of providing further follow-on funding to support the growth of the borrowers.


More generally, I believe that corporate advisers and PE sponsors have a much better understanding of the capabilities of alternative lenders compared to just a few years ago. This is leading the sector to grow as the funders provide a great alternative to the traditional routes.


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