Private equity remains in good health due to the successful fundraising across the small through to large-cap houses during 2016.
A significant feature of the continued relevance of private equity in the UK M&A market over the past two years has been the strength of the debt markets and their ability to leverage PE investments to maximise equity returns.
In 2016 we saw the continued rise of alternative lenders across the UK PE industry while the ticket sizes offered by the more established debt funds continues to increase.
There has, more recently, been a proliferation of new entrants across the small to mid-cap space, culminating in more dry powder in the alternative lender space than at any time in the market’s history.
Despite the higher pricing associated with their core unitranche product, alternative lenders have successfully emerged as the preferred funding option for a number of mid-market houses who appreciate the bespoke nature of the debt fund offering including a lack of required amortisation, covenant headroom and flexibility alongside increased hold levels.
The bank market, however, continues to work in partnership with alternative lenders in the traditional super senior/senior secured arrangement that has been the norm for a number of years.
Whilst these market participants continue to work together on a number of transactions, leveraged finance banks remain a very relevant player in their own right, with those institutions that have remained active through the cycle responding resolutely to the challenge of the alternative leaders.
The result of this is that banks have been loosening the traditional sacrosanct terms within the mid-market, including eliminating the Term Loan A for businesses with EDITDA > £10M mirroring the bullet nature of the unitranche offering.
Covenants are also being continually loosened to match the 30%-35% headroom levels seen in the unitranche market whilst absolute leverage appears to be the only fundamental area where the debt funds typically remain more aggressive than the bank market.
Looking forward, private equity will continue to benefit from the excessive liquidity available across the debt markets with our belief that banks will continue to play their role whilst alternative lenders will continue to aggressively take market share.