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A private credit lender has said growing complexity in mid-market business lending is leaving the door open for commercial brokers ready to take on the sophistication of these clients and deals.
Global Credit Investments, a mid-market private credit business handling deals in the $5 million to $50 million range, has found that banks are retreating from lending to businesses in this market segment.
A recent survey of 50 intermediaries conducted by GCI found access to debt capital was the biggest challenge facing these mid-market businesses, ahead of the problem of managing rising costs.
Of the intermediaries surveyed, which included commercial brokers, 50% reported a significant reduction in bank appetite for lending to these clients, while 83% expected demand for private credit to grow.
A whopping 37% of respondents said 51% to 75% of their clients were unable to secure financing through traditional banks, while 34% said between 26% and 50% were missing out on this bank credit.
Half of all the intermediaries surveyed said the banks’ appetite for these deals was decreasing, while the same amount said the current level of private credit competition for these transactions was growing.
Gavin Solsky (pictured above), co-founder and managing director of GCI, said banks did not love lending to mid-market businesses, because there was more risk involved in these finance deals.
“The numbers are getting bigger in terms of ticket sizes and businesses are getting more complex, and sometimes there is not the same maturity there in terms of management systems and process,” Solsky said.
Often, Solsky said banks wanted to do business with existing customers, rather than assessing new deals from new-to-bank customers, or were less willing to lend to businesses with shorter track records.
However, the reduced appetite from the banks was causing more private credit providers to step in, armed with capital from investors, such as GCI’s high-net-worth individuals and family offices.
Private credit growth was creating a market populated by “more and varied sources of capital”, which suited intermediaries and brokers able to negotiate the market’s deal complexity to place these deals.
Solsky said brokers were helping businesses who might have limited experience with private credit, which could involve everything from “some data and analysis”, to explaining security or legal arrangements.
“The good news is there are more funding options. The bad news is there is more complexity. The role of the intermediary with the right expertise has become ever more important,” Solsky said.
When asked how the demand for debt advisory services would evolve in the next 12 to 14 months, 83.3% of intermediaries surveyed by GCI said it would increase, while 13.9% said it would remain stable.
Brokers positioned to do well in the mid-market usually act more as consultants or trusted advisers to their business clients, Solsky said, and are able to win clients because they “really know their stuff”.
“The really good brokers are the ones who say to us, ‘I know what you like, this is in your wheelhouse’.
“They tell us, ‘I have an opportunity, here’s why I think you’ll like it, and here are the hairs on it’, and they are then able to help structure something to overcome these issues,” he said.
However, brokers competing in the mid-market will be up against a continuum of intermediaries including investment banks at the top end, to business consultants and advisers and other commercial brokers.
In some cases, Solsky said mid-market business customers would instruct and consult with multiple brokers to see where they could source the best possible finance deal for their business situation.
Solsky added that speed and access to capital had become more important than cost of capital in the current market, at a time when a bank lending process could take a business “months and months”.
“In the mid-market things are very dynamic and getting capital when you need it is more important than the cost of capital,” he said.
In July, GCI appointed Ben Skilbeck, who has almost 30 years of experience in financial markets and investment banking, as CEO.
