Partner Article

As the economy grows, how can mid-sized firms find finance for expansion?

James Pearce, Head of Direct Lending, M&G Investments looks ahead .

The UK economy is showing signs of real growth and as mergers and acquisition (M&A) activity is at its highest level since 2007, it is natural for companies to start investing for future growth.

As this begins to filter through to mid-sized companies, management teams and boards of directors’ thoughts will naturally turn to how expansion can be financed, particularly those in unlisted companies.

Mid-sized companies will typically be faced with two choices in order to finance expansion; relatively short term amortising bank loans or very expensive (and often hard to come by) equity financing.

The downside for family and owner managed businesses with equity financing is the lessening of control, while the short-term and amortising nature of bank loans can reduce flexibility in the business for capital expenditure.

This creates an interesting opportunity for direct lenders, such as M&G, with the ability to offer financing which is similar in nature to a bank loan. Enabling companies to borrow for a longer maturity than a typical bank loan (up to 10 years), provides certainty of funding over this period as well as easing cashflow pressure in the nearer term, so that businesses can continue to invest.

For Holidaybreak’s deal earlier this month, we provided a longer dated non-amortising tranche alongside amortising bank debt. Adding a non-bank lender to a syndicate alongside existing banks is a simple process for a company as the same documentation is replicated.

Not only does it result in freed-up cashflow for expanding the business but it is often the beginning of a new long-term financing relationship.

This was posted in Bdaily's Members' News section by Simon Malia .