2018 has been a challenging but rewarding year for Altimapa and many of its clients. While we’ve seen a decrease in the overall number of small and medium-sized enterprises (SMEs) exploring funding opportunities, we have worked with many businesses taking advantage of uncertainty in the economic landscape by setting in motion bold plans for growth.
Many of Altimapa’s clients have been new to private debt, which shows an encouraging, albeit slow, change in mentality from SME borrowers across Europe. While our American corporate counterparts have made private debt a major part of their funding arsenal for over 20 years, in Europe it is still relatively unknown and underutilised. This goes some way to explaining why such a large surplus of un-deployed capital exists in European private debt market (€287bn). This points to there still being some way to go in raising commercial awareness of this non-bank alternative source of finance.
Owner-Operated Business Consolidation
We have seen a high degree of consolidation in businesses with owner-operated assets, from logistics to the care sector. Ambitious market consolidators, often with sector-specific advisory boards, have been keen to access more leverage (higher debt-to-earnings ratios) to improve their buying power and speed of growth. They tend to have a 5yr+ acquisition plan, starting small, streamlining local businesses, before moving on to larger targets as their access to funding increases with portfolio size. Private debt funds find acquisitions and ‘buy and build’ strategies most compelling when a clear case is made to deliver and maximise synergies within the group.
Private Equity
Partnering with private equity (PE) investors was a strong theme for us in 2018 and we expect that to continue into the new year. Traditional funders often find it difficult to finance either acquisitions or debt-for-equity exits. In contrast, private debt players find such opportunities attractive precisely because of the reduced competition from banks. Along with this theme, we are currently working on our 3rd project with a2e Industries, a specialist SME equity investor, to refinance a number of companies in their portfolio.
Cashflow Lending to Asset-Light Companies
Another trend we’ve seen in 2018 is an increase in demand for capital from asset-light businesses. Poorly served by traditional lending channels due to their lack of collateral, these companies are often unaware of their access to alternative finance. Cashflow lending – where funds lend based on historical cashflows – gives asset-light companies a route to borrow a multiple of up to 3-4 times their EBITDA figure. As an example, Altimapa worked this year with the market leading training and special needs education provider, Progress To Excellence Group, to secure the necessary capital to buy back control of the company from their lead investor and to support a pipeline of acquisitions.
Looking Forward to 2019
As we peer into the Altimapa crystal ball, we expect to see more of the above; consolidation, cashflow lending and private debt supporting its better-known private equity cousin. We hope that the wider SME market will become emboldened by its braver members who continue to grow through this uncertain period, typified in Europe by Brexit. Though some sectors will be better able to weather uncertain conditions, our team’s experience has shown that the quality and ambition of the management team is the major driver in attracting private debt lenders.
With a series of events and partnerships with regional advisors planned, we hope to make contact with many more SMEs across Europe and the UK in 2019. Guiding small and mid-sized companies through the private debt fundraising process to the best-suited financing solutions will remain our goal for the foreseeable future. We look forward to working with you in 2019.
The team at Altimapa Capital wishes you a happy and successful New Year.