Ultra-wealthy investors are looking to increase their exposure to small company debt across the UK and continental Europe as traditional lenders continue to deleverage, according to Stonehage.
Stonehage, which manages the business and lifestyle assets of over 1,000 wealthy families, is targeting loans to companies through prospective partner funds, which specialise in European SME investment, with a particular focus on countries such as Germany and the UK.
According to Stonehage, it is considering allocations to European SME debt of up to five per cent per client portfolio. Stonehage is targeting annual returns as high as 15 per cent for these investments.
Stonehage says that the level of risk relative to returns is very good and points out that there is a greater risk of losing capital invested in equities than in small company debt. Even in the event of a default, legal systems in countries such as the UK and Germany tend to offer good protection to creditors.
A recent report by the European Central Bank found that European SMEs have become dependent on loans for their external financing, with 30 per cent using bank loans and 40 per cent using bank credit lines or overdraft facilities in the last year.The survey indicates, however, that overall lending to the non-financial private sector remains weak – it concludes that approximately one third of SMEs did not get the finance they had planned for in 2012.
John Veale, chief investment officer at Stonehage, says: “There are a huge number of SMEs in Europe that require funding but are unable to get the finance they need. Clearly equities are the predominant growth asset at the moment, but there are opportunities for private investors to bridge that funding gap, and achieve a good return relative to risk.
“The premiums in relation to risk taken are attractive and the risk of capital loss is generally much lower than equities. The dearth of credit from traditional lending sources means that there is a good selection of low-risk deals to be had.
“The security afforded to creditors in the UK and Germany is robust, and we only partner with fund managers who undertake rigorous due diligence and invest alongside our clients with their own capital.”
Rather than standard corporate bonds, the loans will primarily be used to facilitate buyouts.
Veale says: “Financing buyouts is difficult in the current market, but these transactions are a very important means by which businesses can restructure, and are often vital to ensuring that these businesses continue to survive and grow.”
