Resilient SMEs will be in a fantastic position post-pandemic to expand sector market share through alternative lender-backed funding.
The economic collapse in the UK is now the most severe downturn in 300 years, with activity forecast to plunge by around 30% in the first half of the year, according to the latest grim Bank of England estimates. Inevitably, comparisons are made with the global financial crisis (GFC) 12 years ago. But this time it is different – and in important ways – which provides the basis for a nuanced analysis for the opportunities that will emerge for resilient UK SMEs, and alternative lenders, post-pandemic.
In this article, we will consider the central differences between the GFC and now, and suggest how resilient UK SMEs should prepare themselves for the opportunities which we expect to emerge.
First, this time around, there is an abundance of private capital waiting to invest in resilient SMEs. In the UK, one of the aggravating factors of the GFC was the SME’s over-reliance on just half a dozen clearing banks for corporate financing – and two of the biggest banks needed government bailouts. From a dominating position of 90% in 2008, the market share of those same clearing banks today is significantly lower at 70% – and falling – as challenger banks and alternative lenders, including private capital funds, direct lenders, family offices, insurance lenders, hedge funds and peer-to-peer lending platforms, have stepped in to establish a much more diversified UK lending market. For example, in the UK property sector, the market share for non-bank lenders (such as debt funds and other private capital lenders) was non-existent back in 2008. This has risen to almost 19% of the estimated £274bn total UK market in 2019, according to The Cass Commercial Real Estate Lending Survey, while new lending has grown at a faster rate – at around 25%. This property sector trend is mirrored across much wider UK industries.
Second, banks are much better capitalised today than during the GFC, when they were forced to reset interest costs to a level, which allowed companies to service debt from remaining cash flows with little or no capital available for investment resulting in a zombie status for many UK SME borrowers. Today, the environment is very different. Better capitalised banks are in a position to potentially to take more assertive approaches to managing and resetting certain non-core borrower relationships in the post-pandemic environment. While the major clearing banks are working tirelessly to process Coronavirus Business Interruption Loan Schemes (CBILS) applications, the reality is that a proportion of their relationship SME borrowers, regardless of the support given, will become unstainable. According to the Centre for Economics and Business Research, more than half a million UK businesses have been pushed to the brink of insolvency, including an estimated 257,000 UK businesses that will not be able to survive another month of the lockdown conditions. In some cases, banks, with stronger capital reserves than during the GFC, may opt to signal to SME management teams that a deal can be done around a relationship exit. At the same time, this presents an opportunity to begin entirely new borrower-lender relationships with alternative lenders.
SMEs to embrace alternative lenders post-pandemic
We see several factors accelerating the trend towards SMEs migrating further towards alternative lenders post Covid-19. In the last decade, banking regulations, related to capital adequacy and stress test scenarios, have been in a continual state of flux. Also, banks have frequently reacted internally to trends that have promoted new policies around the types of sectors and company profiles to target. When the current pandemic is over, further internal policy shifts could well emerge.
However, this is not to say the clearing banks are not open for new business – they most certainly are and will remain open. But the picture is nuanced. For many opportunistic-minded SMEs able and wanting to capitalise on post-pandemic opportunities, the time-value of money will direct many towards new, or extended, relationships or transact on an opportunistic basis with alternative lenders where speed of response combined with significant dry powder are prevalent. We see this as likely in specific scenarios.
For example, as traditional banks deal with the impact of Covid-19 around their balance sheets, it is likely that they will have to pause routine event financing discussions, such as buyout, succession and growth financing as well as routine recapitalisations, to redirect resources to processing a backlog of government-backed CBILS applications. But resilient SMEs who have weathered the pandemic best in their sector will be in a position to consider potential acquisition opportunities to increase market share and will need capital to execute that strategy. These kinds of financings can take around two to three months to complete. We see alternative lenders able and willing to talk now.
Resilient SMEs will be in a fantastic position post-pandemic to expand sector market share through alternative lender-backed funding. And, in turn, alternative lenders – without legacy loan books and unencumbered by CBILS applications, can execute rapid credit decisions at often higher leverage ratios. However, the obvious trade-off is a higher cost of capital, which must be closely weighed up by SME management. For some, it may just be worth the higher cost of debt, but this is a decision which requires careful due diligence. Through our network of nationwide offices, BTG Advisory has excellent visibility of the emerging sector opportunities and the alternative lender marketplace, and has extensive experience in forensic due diligence to support M&A and acquisition financing requests. Please do get in touch to see how we can help.
Share this post