Alternative finance has already become a significant contributor to the funding mix for European corporates – having risen to rival bank lending in the past five years, research published by Allen & Overy shows.
The survey of over 200 senior finance executives at medium and large, non-financial corporates across Europe by YouGov revealed that while bank lending remains the single largest source of funding for European corporates, accounting for, on average, 43 per cent of all funding – alternative finance has risen to 41 per cent on average. Use of capital markets has declined slightly to 16 per cent.
This is a trend that is set to continue with nearly half (47 per cent) of respondents revealing they expect their use of alternative finance to increase over the next five years, compared to just 13 per cent who expect it to decrease – the rest anticipate it will remain the same. This compares with 31 per cent of finance chiefs predicting their use of bank lending will decrease over the next five years and 28 per cent expecting it to increase. For capital markets a net 10 per cent expect to see an increase in the use of this source of funding (24 per cent increase v 14 per cent decrease).
Philip Smith, a partner in Allen & Overy’s Finance practice, says: “This research confirms that alternative funding, far from being a newcomer, has already moved into the mainstream. If alternative finance now accounts for 41 per cent of European companies’ debt, but the value of loans in Europe this year is set to exceed that of 2008 while, according to the ECB, new lending from banks themselves is down by 42 per cent over the same period, it would seem to indicate that banks are continuing to arrange the deals, but the money is just coming from an increasing variety of sources.”
One source that is expected to play an increasingly important role is the European private placement market. With 80 per cent of respondents agreeing that it is important to have viable alternative sources of funding available to businesses in Europe, 66 per cent believe an effective and efficient pan-European private placement market would provide an important alternative source of funding for their business. A further 66 per cent agree that a pan-European private placement market is likely to happen.
According to the research, the most important factors in making a pan-European private placement market attractive to both investors and issuers are, in order, transparency and predictability of transaction costs; a clear and predictable execution process and timeline; denominated in their currency (euro/sterling); and standardised documents.
Corporates still see an important role for banks with 53 per cent saying they would like the market to be intermediated by banks compared to just 33 per cent who would prefer to go direct to investors – a further 15 per cent are unsure.
Its scope should also be as broad as possible with 67 per cent of respondents saying they would prefer the market to be pan-European rather than purely domestic and country by country (20 per cent).
