3 questions to smart minds
Photo: Jan Henrik Reichenbach

Credit funds compete with banks

For this 3 questions to Jan Henrik Reichenbach

Muzi­nich & Co.
Photo: Jan Henrik Reichenbach
2. May 2017

In order to fully exploit their deve­lo­p­ment and inno­va­tion poten­tial, medium-sized compa­nies often require finan­cial resour­ces in the form of equity capi­tal. Howe­ver, since access to the capi­tal market is not possi­ble for small and medium-sized enter­pri­ses due to their size and the equity streng­thening requi­red by banks can thus often only be reali­zed intern­ally, there is an increased demand for alter­na­tive finan­cing instru­ments. What are the opti­ons here?

For this 3 ques­ti­ons to Head of DACH Private Debt at Muzi­nich & Co..

1. How do you assess the need for alter­na­tive debt capi­tal in Germany?

Demand for alter­na­tive debt capi­tal is influen­ced, among other things, by the increased equity requi­re­ments for banks under Basel III. In many cases, these make it more diffi­cult for credit insti­tu­ti­ons to grant loans, thus opening up the field for alter­na­tive forms of finan­cing. Small to medium-sized compa­nies in parti­cu­lar are incre­asingly facing more rest­ric­tive lending prac­ti­ces on the part of banks and are ther­e­fore reli­ant on alter­na­tive forms of finan­cing. Howe­ver, such finan­cing should not be seen as a mere substi­tute for bank finan­cing. Rather, from the borrower’s perspec­tive, they offer a more diffe­ren­tia­ted product with certain advan­ta­ges over tradi­tio­nal forms of finan­cing. In this way, alter­na­tive forms of finan­cing can be indi­vi­du­ally adapted to corpo­rate needs and are charac­te­ri­zed by a high degree of flexi­bi­lity in terms of term, remu­ne­ra­tion, repay­ment and possi­ble uses.

Covenants can also be tail­o­red to meet the needs of the company. In parti­cu­lar, the unitran­che has been estab­lished as a form of finan­cing in Germany for seve­ral years. In certain finan­cing constel­la­ti­ons, it can be seen as a perma­nent alter­na­tive to tradi­tio­nal bank and mezza­nine finan­cing. Other conceiva­ble alter­na­tive forms of finan­cing range from subor­di­na­ted loans and mezza­nine to HoldCo PIKs. From this perspec­tive, we expect more intense compe­ti­tion in SME finan­cing in the medium term. In the future, loan funds such as those offe­red by Muzi­nich will open up new regi­ons that were previously domi­na­ted by tradi­tio­nal bank loans.

2. How does the German alter­na­tive debt busi­ness differ from the rest of Europe or the U.S.?

In prin­ci­ple, funda­men­tal diffe­ren­ces can first be iden­ti­fied between the U.S. and Euro­pean credit markets, which can be dedu­ced from their histo­ri­cal deve­lo­p­ment. Unlike the Euro­pean market, the disin­ter­me­dia­tion of regu­la­ted U.S. banks by non-banks began over 20 years ago. Here in Germany, this trend only took off noti­ce­ably after the finan­cial crisis subs­i­ded. Even though Euro­pean borro­wers have a simi­lar range of finan­cing alter­na­ti­ves available to them as U.S. compa­nies, the U.S. is seve­ral years ahead of the Euro­pean market in terms of size and standardization.

Compared to Europe, the U.S. has a poorly deve­lo­ped banking market, accoun­ting for only 10 percent of lending. In Europe, this figure is a good 80 percent. Accor­din­gly, in the still young Euro­pean alter­na­tive finan­cing market, compe­ti­tion for invest­ment oppor­tu­ni­ties for capi­tal from alter­na­tive sources is grea­ter. Banks in Europe are more aggres­sive when it comes to defen­ding market share. Unlike the USA, Europe is not a single market. Each Euro­pean coun­try has its own culture, legal systems and econo­mic strengths and weak­ne­s­ses, which means that the range of actions for a lender in Germany, Italy, Spain or France also differs. There is no stan­dar­di­zed approach. We ther­e­fore consider a local presence in the Euro­pean markets to be essen­tial in order to be successful in the small to medium market segment. Muzi­nich has local teams in six Euro­pean cities and will open more loca­ti­ons as part of our Pan-Euro­pean Fund.

3. Are there certain indus­try sectors that prefer alter­na­tive capi­tal over other sources of funding?

Alter­na­tive capi­tal provi­ders are gene­rally inde­pen­dent of speci­fic indus­try sectors and less driven by allo­ca­tion conside­ra­ti­ons than is some­ti­mes the case with banks. Sectors that are more diffi­cult for banks from a risk perspec­tive, such as retail or auto­mo­tive, can be asses­sed more inde­pendently by alter­na­tive capi­tal provi­ders. In addi­tion, there are also compa­nies in situa­tions of tran­si­tion that may have a nega­tive impact on credit risk. Borro­wers who are thus expo­sed to rather rest­ric­tive bank lending from a risk perspec­tive are depen­dent on tapping alter­na­tive forms of finan­cing in order to be able to conti­nue inves­t­ing in corpo­rate growth. Loan funds like those at Muzi­nich can help with the neces­sary fund­rai­sing. Moreo­ver, alter­na­tive debt capi­tal is not about displa­cing banks as major play­ers in the finan­cial market, but rather about opening up new flexi­ble sources of finan­cing with the advan­tage of risk sharing.

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