The ever increasing presence of debt funds in the UK mid-market is continuing to steal market share from traditional banks.
Private Equity funds are continuing to become more comfortable working with debt funds. They are increasingly seeing the value of working directly with key credit decision makers that are commercial and not constrained by bureaucratic credit processes associated with traditional lenders. This, alongside the ability to develop more flexible lending packages with a partner that has considerably more dry powder, is continuing to increase demand for debt fund capital.
While demand drivers are strong, the amount of capital available in the debt market continues to increase which is fuelling competition between debt funds. This has led to an ongoing squeeze on pricing, with some funds now able to offer close to senior margins, and ever loosening terms. Traditional lenders are simply less able to compete with this.
With these market dynamics it is hard to see a situation where traditional banks are able to retain market share in the long run beyond providing lower risk super senior RCFs and other services, such as transaction banking that debt funds are not set up to provide.
In the European mid-market, and particularly in the UK, the very active presence of debt funds means there is a record amount of money available to back buyout deals. Banks and other more cautious lenders therefore have little or no opportunity to push back on pricing or other terms.