How the rise of private credit can help grow businesses
Driven by contraction in the traditional Big Four banks, non-bank lenders and credit funds have fast been gathering momentum in Australia, particularly in the mid-market, writes Tom Hogarth from BDO.
While this trend is nothing new – it’s been growing since the GFC in 2008 ¬ the recent pandemic has further personified private credit as a valuable funding source for growing businesses.
Australia-focused private debt Assets Under Management (AUM) more than tripled to $1.9b between 2020 and 2021, and continued to grow by 10 per cent between December 2021 and September 2022 to stand at $2.1bn.
With private credit sitting around 12 per cent of local lending globally, at just 2 per cent Australia is positioned for significant growth.
This year alone has seen a significant rise in corporate debt opportunities in the mid-market lending with private credit and has been driven by the following factors:
- ESG policy – ESG considerations are significantly impacting debt financing in Australia, with retraction from commercial banks in certain sectors due to integration of ESG metrics in credit analysis. This trend is reshaping how businesses access capital and can make it difficult for borrowers and lenders alike in sectors with exposure to ESG risks (mining, oil & gas, gaming etc).
- Recessionary mindset for lenders – The current state of the economy is impacting lending confidence across multiple sectors and has resulted in hesitancy from commercial banks in lending to businesses reliant on discretionary spending (impacting businesses in sectors such as retail, tourism and hospitality). Even more generally, tighter lending conditions have resulted in challenges for mid-market companies to borrow from traditional banks.
- Borrowers facing distress or special situations – Businesses heavily impacted by the pandemic may be carrying legacy accrued ATO debt or aged creditor balances, financial covenant breaches with banks, and cash / working capital constraints. Borrowers facing financial stress or distress may struggle to obtain finance from commercial banks or refinance with their existing lender, requiring a more flexible capital solution to transition out of their position. This solution can be provided by private credit.
If you encounter any of the above issues with your existing lender, private credit might be the right fit for your business.
There are four key benefits of private credit.
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1. Increased access to capital
The pool of alternative capital providers has grown significantly in Australia, all offering unique solutions across different segments of the market whether it be a particular industry/sector or providing funding support at a specific stage of the businesses lifecycle (i.e. start up stage or growth stage).
With greater alternative capital providers comes greater optionality for businesses when it comes to financing solutions. This opens doors for growing businesses that may face challenges in obtaining financing from commercial banks.
Non-bank lenders and credit funds offer a more flexible approach to lending, considering factors beyond strict credit scores and criteria.
Generating a range of alternative debt structures is paramount to successfully pursuing growth opportunities or supporting a turnaround including:
• Expanding operations
• Investing in R&D projects
• Capital expenditure activities
• Acquisitions
2. Flexibility
Domestic and overseas lenders outside the commercial banks in Australia can provide more flexible funding while offering competitive rates.
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Unlike regular loans, private credit providers have the flexibility to structure financing arrangements that align with the specific requirements and growth strategies of the businesses they support.
This flexibility extends to amortisation and repayment profile, key covenants, interest rates and collateral options (such as intellectual property, future cash flows or unencumbered assets).
This is critical to the delivery of a successful business growth strategy.
3. Agility
In certain situations, businesses require fast capital to fund short-term working capital constraints or to take advantage of time-sensitive opportunities to support business growth.
The less restrictive and flexible nature of private credit allows non-bank lenders and credit funds to generate faster debt solutions for borrowers by applying learnings from prior transactions (sector and business specific) to allow for quicker assessments, generation of indicative terms, due diligence and approvals.
4. Strategic partnerships
Private credit providers often take a strategic relationship-based approach to lending with the aim to develop long-term partnerships with businesses, aligning their success with that of their borrowers.
These lenders often bring industry expertise and insights, strong access to networks, and deep understanding of the sectors they operate in, providing value beyond financing.
The key to a successful partnership with any lender includes alignment of key goals and objectives, early and transparent communication and quality financial reporting.
How can BDO help?
The large number of alternative capital providers in private credit can make it difficult for businesses raising capital to navigate without a trusted advisor.
BDO offers comprehensive Debt Advisory services, and an experienced team with a deep understanding of the private credit market and extensive relationships across Australia and New Zealand, particularly in the mid-market.
These longstanding lender relationships ensure we partner our clients with the best lender to suit their needs from a strategic partnership perspective, supported by a proven track record in the respective industry and the relevant experience to deliver through to completion.
Tom Hogarth, Director, Debt and Special Situations Advisory
