Invoice discounting attracts growing private equity investment

In the dark days of 2009 and 2010, when securing financing for deals was akin to finding reasonably priced assets in the current market, private equity firms were forced to think more creatively about which types of finance they could access to support deals. In many cases, those challenging times saw greater use of more expensive products such as mezzanine, but where it was possible – mainly in the lower-mid- and small-cap markets – asset-based lending and invoice discounting became increasingly popular options.

Today, financing for deals has returned in abundance thanks to the proliferation of private debt funds and the return of the banks, and it appears GPs are increasingly viewing invoice discounters as investment targets rather than financing solutions.

unquote" takes a look back at the five most recent investments to have taken place across Europe in the invoice discounting market.

1. Spring Ventures / IGF Invoice Finance

• April 2016
• London

In mid-April, Spring Ventures invested £20m to facilitate the buy-in management buyout of UK commercial loans provider IGF Invoice Finance from Greater London Enterprise. The deal saw Spring invest an initial £9m to support the deal, with a further £11m to be invested as follow-on capital over the next three years.

The new management team includes CEO John Onslow, who was previously with Centric Commercial Finance (which was sold to Shawbrook in 2014) and Heller Finance (which was purchased by GE in October 2003).

While IGF's name indicates its main lending activity – invoice discounting – the newly installed management team will look to develop the platform to include asset-based lending following the deal.

2. Infinity / Positive Cashflow Finance (PCF)

• March 2016 (final exit)
• Manchester

Last month, Infinity exited its remaining 20% stake in PCF, which saw complete ownership of the company return to its directors. Interestingly, Royal Bank of Scotland Invoice Finance (RBSIF) backed the deal, having previously supported Infinity's sale of a 35% stake in PCF in May 2013, which saw majority control of the company going to management.

Infinity first invested in PCF in 2007, deploying £2m to support the company's establishment. The company has expanded steadily since then and now operates offices in Manchester and Birmingham, employing 30 people.

PCF offers factoring and invoice discounting facilities of between £10,000-1m, with its loan book currently standing at £22m.

3. Northzone / MarketInvoice

• August 2015
• London

Last summer, Northzone took part in a $10m funding round for existing portfolio company MarketInvoice. This round followed Northzone's previous £5m investment in the company in December 2014.

London-based MarketInvoice operates an online platform, which allows businesses to sell outstanding invoices with a view to raising capital.

At the time of writing, the company says it has funded almost £700m of invoices, with around £30m being traded on the platform each month.

MarketInvoice was founded in 2011 and matches investors with businesses looking to raise financing through the sale of outstanding invoices. It requires investors to meet the FCA's definitions of either high-net-worth or sophisticated investors.

4. Dawn Capital, DN Capital / Sonovate

• January 2016
• London

At the start of the year, Dawn Capital and DN Capital led a £20m funding round for specialist contract finance business Sonovate. The transaction comprised a £5m series-A led by the VC duo, supported with £15m of debt supplied by Shawbrook Business Credit.

While invoice discounting itself might appear to be a niche segment of the wider lending market, Sonovate has carved itself an even smaller nook by focusing purely on contract finance specifically for the recruitment market.

Founded in 2012, London-based Sonovate targets recruitment agencies that have previously relied on invoice financing from banks as a means of funding their contractors. The company aims to provide more than just financing by taking on the administration burden linked specifically to recruitment agencies, including processing timesheets, paying contractors and invoicing clients.

With its fresh funding, Sonovate plans to expand into Europe and the US.

5. Centerbridge / Banca Farmafactoring

• April 2015
• Milan

Last year Apax Partners sold its holding in Banca Farmafactoring to Centerbridge Partners, after it was reported the company was considering a listing in September 2014.

Apax picked up Banca Farmafactoring in late 2006 and has since supported its expansion into Spain and Italy.

Founded in 1985, Banca Farmafactoring is an Italian bank providing credit management and non-recourse factoring to companies servicing the Italian and Iberian public sectors. It started life when a group of Italian and multinational pharmaceutical companies and biomedical equipment manufacturers were in need of a sole contact point when dealing with credit management in relation to the national health service. By 2000, the company expanded into the Italian public administration sector, well-known for its tardiness for payments.

Investing in fields that private equity interacts with regularly is not uncommon – CVC owns due diligence and consultancy business AlixPartners; while Silverfleet owns fund administrator Ipes and Electra has Elian in its portfolio. However, what is interesting when it comes to the increasing number of investments in lenders is that the industry still clearly sees the lack of financing options available to small businesses. Furthermore, as private equity has become increasingly comfortable with using alternative lenders, it would appear those GPs that have invested in alternative lenders for small businesses believe this section of borrowers are ready to embrace new forms of lending as well.

Notably, the bulk of invoice discounting deals have taken place in the UK. While London has come forward as a centre for fintech, and while the above examples use new technologies to deliver their services, invoice discounting is not a new form of financing. What this tells us is that the UK offers the most opportunity for investing in alternative lenders, particularly in those aimed at smaller companies. Indeed, according to the Bank of England, the UK SME lending sector is worth £175bn, with £20bn of this related to invoice discounting and asset-based financing.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• Investments
• Financials
• Invoice Discounting
• Top story