Private Debt: A Financing Option for Ambitious SMEs

Harrie Thorrington, Analyst at Gambit Corporate Finance LLP explores in detail financing options for ambitious SMEs and looks into the private debt market.

According to government statistics, small and medium-sized enterprises (SMEs) account for 99.9% of the business population in the UK. The UK is dependent on SMEs for economic growth, so a dynamic funding framework for the segment is paramount. Alternative lending has rapidly grown since the 2008 financial crisis, providing an increasingly diverse range of funding options for SMEs. There are a broad variety of alternative lending opportunities for SMEs, but private debt funds have risen to particular prominence.

‘Private credit’ or ‘private debt’ refers to debt instruments which are not financed via banks or traded on an open, public market. The private debt market is now the third-largest asset class in private capital, behind only private equity and real estate, with 200 funds closing in 2020, raising an aggregate $118bn in the process. Private credit transactions tend to primarily fund business growth through merger and acquisitions, as well as financing development projects and providing working capital. Private debt investment is sourced from long-term funds, willing to finance the dynamic credit risk of SMEs and mid-market firms, in exchange for higher returns. As a result, private credit funds are flexible, open-minded, and eager to introduce new financing options to SMEs and mid-market businesses.

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