It’s a whole different ball game - How funding structures have changed in recent years

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It’s a whole different ball game - How funding structures have changed in recent years

Remember the glory days of 2007? Top multiples were being paid for good businesses and the banks were falling over themselves to support leveraged buy-outs and acquisitions at margins we would die for today. Developing businesses could fund their growth at manageable interest rates and invest in their long term future with some degree of confidence.

What a difference a banking crisis makes! From that day in September 2007 when the banks suddenly realised they couldn't trust each others' balance sheets, the world of corporate finance changed. No longer could we sustain the "me too" culture, with investors piling into niche markets just because others had done so before them.

Nor could the banks afford to buy funds in to continue their own apparently incessant growth rates.

So where are we now? Well there's no doubt that the banks are open for business and keen to lend to successful enterprises, especially if they have cash already. And the private equity market still has enormous amounts of funds that they're keen to use to support good propositions, and at more realistic return rates than in the past. In both cases however, size matters, and the majority of corporate bankers and PE funds have a threshold beneath which they're reluctant to venture, simply because of the comparative costs and risks involved in looking at smaller deals.

As a result, even the larger mid-corporates are looking at more expensive finance, with layers of asset based lending secured on plant or debtors, overdrafts at higher margins, terms loans with quicker repayment schedules and even more expensive mezzanine finance and facility fees, with only limited availability of equity from a small number of sympathetic houses. This means that finance for organic growth or for growth by acquisition is not only much harder to come by, but more expensive to service, and more complicated to manage. Doing so and running a business in this environment needs a new attitude to cash, and new skills to ensure that covenants are complied with and the risk of default is avoided at all cost.

Russell Bell
, Senior Partner and Head of Corporate Finance - 

Published: 9 Dec 2010

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