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SMEs Increasingly Turn To Private Debt Investors To Support Business Growth

Private debt has become a valuable source of finance for smaller businesses across the UK since the 2008 economic crisis, reveals British Business Bank, with £18.4billion of lending in 2018 and 2019.

Private debt, direct lending and private credit refers to loans made by non-bank lenders to companies. With banks retreating from making loans to SMEs, the private debt market has flourished.

It is often the only or most viable funding solution for smaller businesses and mid-cap firms with bespoke needs and a desire for greater flexibility in terms of financing structure.

More than £1billion of growth finance – through 563 deals – was provided to UK firms scaling up in 2018 and 2019, reveals a new report from British Business Bank.

Published with support from the British Private Equity and Venture Capital Association (BVCA), the UK Private Debt Research Report addresses the role private debt plays in the UK economy, as well as how it can help the economy recover from the pandemic downturn. The report features data for 55 funds, managed by 37 UK fund managers and 934 individual deals from 2018 and 2019.

Catherine Lewis La Torre, CEO of British Business Bank, said: “In a relatively short period of time, private debt has established a position as a viable type of funding for the UK’s smaller businesses at different stages of development. As the focus shifts from stabilisation to economic recovery, supporting business growth will be a fundamental driver of a thriving post-Covid-19 UK economy.

“Ensuring that businesses can access the funding best suited to their needs will be vitally important in the coming years and private debt has an important role to play.”

Regional differences

Data from the report reveals that four in five deals (82 per cent) and 65 per cent (£5.9billion) of private debt investment value was into companies outside of London. Meanwhile, the North West has seen more private debt deals than any other UK region in the period since the 2008 economic crisis.

Growth capital transactions are more prevalent outside of London, where 69 per cent (of all deals completed) were classified as growth, compared to 39 per cent in the capital.

Sectoral differences

Businesses in the manufacturing sector represent the largest number of deals by volume (19 per cent), followed by businesses in the information and communication (16 per cent), and professional, scientific & technical activities (13 per cent) sectors.

Businesses in the administrative and support service activities sector received the most private debt capital in terms of deal value, with a higher proportion of capital than deals due to larger than average deal sizes.

According to British Business Bank, private debt now has an important role to play in supporting business growth post pandemic. It advises that increasing awareness of the asset class is critical to ensure more UK firms are aware of how private debt can support them in their pursuit of growth.

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