Credit funds compete with banks
Demand for alternative debt capital is influenced, among other things, by the increased equity requirements for banks under Basel III. In many cases, these make it more difficult for credit institutions to grant loans, thus opening up the field for alternative forms of financing. Small to medium-sized companies in particular are increasingly facing more restrictive lending practices on the part of banks and are therefore reliant on alternative forms of financing. However, such financing should not be seen as a mere substitute for bank financing. Rather, from the borrower’s perspective, they offer a more differentiated product with certain advantages over traditional forms of financing. In this way, alternative forms of financing can be individually adapted to corporate needs and are characterized by a high degree of flexibility in terms of term, remuneration, repayment and possible uses.
Covenants can also be tailored to meet the needs of the company. In particular, the unitranche has been established as a form of financing in Germany for several years. In certain financing constellations, it can be seen as a permanent alternative to traditional bank and mezzanine financing. Other conceivable alternative forms of financing range from subordinated loans and mezzanine to HoldCo PIKs. From this perspective, we expect more intense competition in SME financing in the medium term. In the future, loan funds such as those offered by Muzinich will open up new regions that were previously dominated by traditional bank loans.
In principle, fundamental differences can first be identified between the U.S. and European credit markets, which can be deduced from their historical development. Unlike the European market, the disintermediation of regulated U.S. banks by non-banks began over 20 years ago. Here in Germany, this trend only took off noticeably after the financial crisis subsided. Even though European borrowers have a similar range of financing alternatives available to them as U.S. companies, the U.S. is several years ahead of the European market in terms of size and standardization.
Compared to Europe, the U.S. has a poorly developed banking market, accounting for only 10 percent of lending. In Europe, this figure is a good 80 percent. Accordingly, in the still young European alternative financing market, competition for investment opportunities for capital from alternative sources is greater. Banks in Europe are more aggressive when it comes to defending market share. Unlike the USA, Europe is not a single market. Each European country has its own culture, legal systems and economic strengths and weaknesses, which means that the range of actions for a lender in Germany, Italy, Spain or France also differs. There is no standardized approach. We therefore consider a local presence in the European markets to be essential in order to be successful in the small to medium market segment. Muzinich has local teams in six European cities and will open more locations as part of our Pan-European Fund.
Alternative capital providers are generally independent of specific industry sectors and less driven by allocation considerations than is sometimes the case with banks. Sectors that are more difficult for banks from a risk perspective, such as retail or automotive, can be assessed more independently by alternative capital providers. In addition, there are also companies in situations of transition that may have a negative impact on credit risk. Borrowers who are thus exposed to rather restrictive bank lending from a risk perspective are dependent on tapping alternative forms of financing in order to be able to continue investing in corporate growth. Loan funds like those at Muzinich can help with the necessary fundraising. Moreover, alternative debt capital is not about displacing banks as major players in the financial market, but rather about opening up new flexible sources of financing with the advantage of risk sharing.