Acquisition finance: alternative thinking

An overriding feature of the 2013 buyout market was the rise of alternative lenders. According to DC Advisory, in the UK last year 46% of leveraged buyouts contained some form of non-bank debt, compared with just 17% in 2011.

Although the figures show a significant increase in private equity firms using non-bank debt in deals, there remains an air of caution around the new kids on the block – understandably so, as many of these credit funds were originally created to target distressed companies and gain control through the backdoor.

Terms and fees
A key consideration for GPs when selecting which provider to use will of course be the terms and fees of the facility. It is no secret that alternative lenders are more expensive, but the higher price tag enables bigger cheques. Says DC Advisory's managing director Jonathan Trower: "The higher fees margins for alternative lenders are the result of less amortisation, greater covenant flexibility and the bigger tickets – credit funds are typically looking to deploy more capital so they've got to trade something for that."

Traditional banks typically carry lower fees but cannot lend as much as alternative providers, with maximum loans usually in the £20-25m range. However, banks can provide the full package; on top of the senior loan they can offer ancillary products including revolving facilities, hedges against forex and interest rates, credit cards and overdrafts. According to Ian Sale, a managing director of Lloyds Bank Commercial Banking's acquisition finance team: "Unitranche lenders can only generally provide the core term funding, so banks are still needed to accommodate the other elements, such as the day-to-day banking, revolving credit facilities, hedging and ancillary services."

Sale also points out that when a bank is quoting on a transaction it will quote the entire package – this explains the higher overall fees. However, according to Trower, a key reason for the surge in alternative lending in 2013 can be attributed to more competitive pricing, which could signal even cheaper unitranche facilities on the horizon.

Deliverability and flexibility
Another major concern for GPs is deliverability; that the loan discussed is what is delivered on the day of the deal. Dougal Bennett, partner of Dunedin, says: "Over the last few years it has been the case that what is actually delivered on the day is slightly different to what was discussed. Banks have let private equity down at the 11th hour."

Indeed, the bureaucracy of the banks has only increased following the financial downturn, with over-zealous credit committees intercepting upcoming deals and more often than not, fiddling the agreed terms to suit their risk-adverse agenda. "Banks have longer reporting lines whereas alternative lenders have shorter lines and typically, the people originating the deal have greater discretion as long as it is within a broad format," explains Trower.

Shorter lines of reporting mean that unitranche providers are more likely to deploy sensible and more efficient due diligence. "The feedback we've had from private equity firms is that we're more responsive, speedy and we deliver," says Anthony Fobel, partner and head of private lending at BlueBay Asset Management. "We tailor our due diligence to be more efficient, it's not just box-ticking, there are no shortcuts but we are able to cut out pointless exercises."

In contrast, banks operate on rigid structures because of deeply ingrained standards, which have been made more rigorous thanks to post-crash regulation.

Look out for the second instalment on Monday, which will discuss the importance of relationships and alternative lenders' limited track record.

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• UK / Ireland
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• DC Advisory Partners
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