Reed Smith and Livingstone Partners hosted a roundtable lunch for private equity funds, private funds and banks to discuss the state of the leveraged finance market, with the Lord Mayor of London attending as keynote speaker.
There were a number of themes that emerged from the discussions. The private debt funds had made substantial progress in the market during 2013 and it is clear that they have a competitive advantage through the absence of regulatory capital constraints. Furthermore, the private debt market is expanding with new entrants joining the market and new funds being raised. The banks remain under substantial pressure to lend to SMEs, but with repayments and refinancings reducing their loan book they need to lend aggressively just to stand still and maintain the size of their loan book. The market is therefore awash with liquidity from both banks and funds, which is leading to a return to some aggressively levered transaction structures and borrower-friendly terms as market participants compete to win mandates. This is, in turn, feeding through into high multiples being offered by private equity funds on competitive bid processes for good businesses, particularly given the generally low M&A volumes and re-opening of public markets seen in the first half of 2014. The key challenge for private equity funds is therefore to maintain price discipline.
These developments in relation to liquidity are being felt most keenly in the mid to upper mid-market as that is where many private debt funds focus their attention. However, at the lower mid-market there is still a high level of competition between the traditional banks. The private debt funds have established a firm footing in the UK and French market, with more limited unitranche financings seen in Germany and other key European markets. The heightened competition between providers of debt finance in the private equity sector may, over time, lead to more debt being made available to sponsor-less corporates as the private debt funds look for opportunities to deploy capital.
The Lord Mayor mentioned the key role the industry plays for growing businesses, saying: “I hugely enjoyed today’s discussion – especially on the important role of private equity in funding and growing business, and SMEs in particular, and the different sources of funding that are becoming available.”
Ben Davis, leveraged finance partner at Reed Smith said: “The private debt funds have been setting the pace in the leveraged finance mid-market over the past 12 months and the unitranche product has become mainstream. In the UK, banks are responding aggressively, but it is still home-advantage to the alternative lenders.”
Perry Yam, head of private equity for EME at Reed Smith said: “We were delighted to host such an esteemed audience; it seems quite clear that the increased availability of debt by both banks and private debt funds will assist in the continued recovery in the market. We expect to see a flurry of deal activity during the remainder of this calendar year ahead of the speculated increase in interest rates and the general election next year. The team at Reed Smith looks forward to helping our clients in the PE sector in concluding these investments.”
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