Debt funds are taking away part of the corporate finance market from banks. Indeed, we have seen a significant change in the financial world in recent years. Today, debt funds are increasingly essential for companies. They represent an alternative or complementary means of financing to bank debt. Debt funds are investment funds managed by asset managers. In this article we will see why debt funds are growing.
The principle of debt funds is new for companies. The Sapin II law of 2016 establishes the foundations that regulate the use of debt funds.
It constitutes an alternative financing offer for companies or a proposal that complements banking solutions.
This fund is an investment fund that takes the decision to finance the company in the form of debt (loan or bond). In this case, the investment fund may replace a private equity fund or a bank to provide capital in the form of debt.
This type of financing can be put in place if the company has not been able to obtain sufficient bank loans. Like private equity funds, debt funds will follow an investment policy defining their intervention criteria: geography, sectors of activity, types of companies etc.
Since the end of the Second World War, the majority of debt financing of companies has been through bank credit.
Afterwards, “banking disintermediation” appeared, where banks and multinationals had access to short-term debt securities. Banks retained the financing of medium and long-term investments such as project financing, commodities or acquisitions. They kept the projects that required special expertise in setting up credit.
Today, the implementation of these loans is moving away from the banks and increasingly towards debt funds. The implementation of projects is becoming more and more elaborate. They are managed by experts in risk analysis and the loan agreements are quick. The debt funds are putting together ever more effective dossiers. They are often integrated into large and diversified asset management groups, including Amundi, Eurazeo and Tikehau in France.
The advantage for asset managers is that they can offer a wider range of products to companies and thus develop their growth with a more diversified range of products and risks. In addition, these loans allow for interesting returns (a return of 5 to 8% on the European market according to Financière Arbevel).
The benefit to companies is that they can obtain a loan without being blocked by a bank’s refusal to lend. The contracts are potentially tailor-made and personalised with a flexible repayment term.
Now it is the banks that are suffering from this law as they are losing their monopoly. Moreover, they are fighting back by creating their own debt funds (Goldman Sachs, HSBC, Barclays or BNPP for example).
For some years now, experts in monetary economics have been talking about a potential division of the financial organisation. According to them, in the near future there could be a more marked segmentation between the world of credits and financing and the world of money. Thus, corporate loans would be set up by expert institutions as funds. They would have a direct path to private savings. And on the other hand, the banking institutions would be able to divide up the management of the money.
Today you can’t get a loan for a sufficient amount from a banking institution? We can help you. At Chetwode, we are specialists in asset financing. We work with debt funds. We will be happy to assist you in setting up a financing solution for your business.
You can click here to find out more about our asset finance business.
