Private equity groups in Europe are increasingly turning towards asset-backed loans as they look to fill the financing gap left by retrenching banks.
GE Capital, one of the largest pan-European providers of such loans, is forecasting a wave of asset-based lending deals in 2012 after this year saw such financing becoming more attractive to buy-out groups.
The lending arm of US conglomerate General Electric said financing facilities given to private equity backed mid-market companies had shot up to $1.3bn in 2011 from almost zero in the year before.
Stephan Caron, chief commercial officer in the UK, said he expected asset-backed lending to grow further next year as GE Capital’s pipeline of deals had approached the size of this year’s financing facilities.
Private equity groups have struggled to find loans to fund takeovers as the debt crisis in Europe has shrunk bank debt and high yield markets.
This dearth in deal financing has prompted private equity groups to look for alternatives such as dollar-denominated debt, mezzanine loans and asset-backed lending. In this form of lending, a company’s receivables, inventory or plant and equipment are used to secure the loan. It is mostly taken on by small and medium-sized enterprises across Europe for working capital needs. In this type of lending, the provider monitors the underlying asset’s performance more closely than in traditional financing forms.
Turnover in Europe’s accounts receivable finance market, which makes up the bulk of asset-backed lending, grew 19 per cent to €479bn in the first half of 2011, according to data from the EU Federation of Factoring and Commercial Finance. In private equity, this form of lending has traditionally been the last resort for buy-out deals that have turned sour. But this has changed.
“In the past few years we have seen a lot of performing private equity companies turn to asset-backed lending as chief financial officers sought to diversify their sources of financing,” Mr Caron said.
An example is a £150m asset-based lending facility that GE Capital provided to Accolade Wines.
The facility was agreed last month to help Champ Private Equity, Accolade’s owner, to fund the working capital and capital expenditure needs of the company.
Mr Caron said the looming wall of debt maturities in private equity would trigger further demand. “We expect a lot more companies to turn to asset-backed lending as they seek to refinance their debt.”
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