Private equity looks to asset-backed loans

Private equity groups in Europe are increasingly turning towards asset-backed loans as they look to fill the financing gap left by retrenching banks.

GE Capital, one of the largest pan-European providers of such loans, is forecasting a wave of asset based lending deals in 2012 after this year saw such financing becoming more attractive to buy-out groups.

The lending arm of US industrial conglomerate General Electric said financing facilities given to private equity backed mid-market companies had shot up to $1.3bn in 2011 from almost zero in the year before.

Stephan Caron, chief commercial officer in the UK, said he expected asset-backed lending to grow even further next year as GE Capital’s current pipeline of deals had already approached the size of this year’s financing facilities.

Private equity groups have recently struggled to find loans to fund takeovers as the sovereign debt crisis in Europe has shrunk bank debt and high yield markets.

This dearth in deal financing has prompted private equity groups to look for alternatives such as dollar-denominated debt, mezzanine loans – a hybrid funding tool that ranks between equity and debt – and asset backed lending. In this form of lending, a company’s receivables, inventory or plant and equipment are used to secure the loan.

It is mostly taken on by small and medium-sized enterprises across Europe to finance their working capital needs.

In this type of lending, the loan-provider monitors the underlying asset’s performance much more closely than in traditional forms of financing.

Turnover in Europe’s accounts receivable finance market, which makes up the bulk of asset-backed lending, grew by 19 per cent to €479bn in the first half of 2011, according to data from the EU Federation of Factoring and Commercial Finance.

In private equity, this form of lending has traditionally been the last resort for buy-out deals that have turned sour. But this has changed with the financial crisis.

“In the past few years we have seen a lot of performing private equity companies turn to asset backed lending as chief financial officers sought to diversify their sources of financing,” Mr Caron said.

One example is a £150m asset-based lending facility that GE Capital provided to Accolade Wines, which operates in the UK and Australia and owns brands such as Hardys and Banrock Station.

The facility was agreed last month to help Champ Private Equity, Accolade’s owner since early 2011, to fund the working capital and capital expenditure needs of the company.

Mr Caron said the looming wall of debt maturities in the private equity sector would trigger further demand.

“We expect a lot more companies to turn to asset-backed lending as they seek to refinance their debt,” he said.

Source: http://www.ft.com/intl/cms/s/0/a3dffb98-3183-11e1-a62a-00144feabdc0.html#axzz1i2eOMioF