An evolving demand for alternative forms of financing, particularly for SMEs, has been one of the legacies of the financial crisis, but such demand was growing even prior to the crisis. Tightening of access to bank loans, especially for small and medium-sized enterprises (SMEs), coupled with the attraction of more flexible borrowing terms of direct lending funds are likely to increase demand in Europe's private debt markets as companies look for alternative financing. In recent times, crowd funding, as an example of non-institutional lending has gained a particular appeal due to its organic nature and ease of participation. However, another form of non-bank lending, perhaps with less glamorous appeal than crowdfunding, has been steadily gaining ground, that of non- bank institutions – debt funds.
Debt funds may be private equity funds raising funds for credit business, former mezzanine lender or distressed lenders. The appeal, particularly for SMEs of debt fund lending, is the ability of debt funds to fill in gaps left by bank lending – for example, so called “event financing situations” that might include rapid decision making (e.g. to finance a competitive auction bid), high loan amounts (requiring various banks to share the risk) and particular repayment conditions (e.g. amortization-free bullet loans). Other examples of such “gaps” left by bank lending may include re-financings in distress and leveraged buyout financings.
Some jurisdictions in Europe have already established rules to enable lending by private debt funds. For example, in June 2014, the Italian government adopted Law Decree No. 91 designed to increase the availability of non-debt bank financing to Italian companies, entities that are now allowed to carry out lending in Italy include Italian insurance companies and Italian securitization vehicles. And on 12 May 2015, the German Federal Financial Supervisory Authority made an announcement (the “Debt Fund Announcement”) pursuant to which German alternative investment funds (AIFs) will be allowed to originate, restructure or prolong loans. The Debt Fund Announcement comes prior to a corresponding legislative amendment of the German Capital Investment Code, however the change in administrative practice by the German Federal Financial Supervisory Authority is to have immediate effect. Although the Debt Fund Announcement refers to German AIFs, it is not clear what the final legislative intention with respect to EU AIFs will be, as arguably, EU AIFs should be entitled to equal treatment. On a broader level, the European Commission’s planned Capital Markets Union (CMU) project is aiming, by 2019, to create deeper and more integrated capital markets in the 28 member states of the EU, that will diversify financing sources (promoting non-bank finance), strengthen cross border capital flows and improving access to finance for businesses, particularly SMEs. The CMU, hence, can help SMEs gain improved access to financing, including risk capital, at reasonable costs, as they will be able to tap into more diverse sources of funding from investors within and outside the EU.
The CMU, hence, can help SMEs gain improved access to financing, including risk capital, at reasonable costs, as they will be able to tap into more diverse sources of funding from investors within and outside the EU. The legislative landscape across Europe with respect to debt funds as a source of alternative financing should be interesting to observe as appetite for such funding continues to increase.