Alt-Lenders See Sunny Skies in Deloitte’s 2015 Forecast

One of the “Big Four” leading auditing firms has released the latest data on the state of alternative lending and its position in the world’s SME funding market. Deloitte’s newest Alternative Lender Deal Tracker was released Tuesday (March 17), the sixth of its kind. According to the report’s research, alternative lending is stronger than ever, especially in the U.K.

The outlook was released at a time in which it is becoming more clear to industry experts that the alternative lending industry is here to stay. What once began as a much-needed alternative for businesses when they were turned down for a loan from traditional banks in the wake of the financial crisis, alternative lending has now evolved into an industry that can coordinate with traditional lenders, attract investors, and remain competitive in the lending market.

Deloitte’s report acknowledges the ability for alternative lending to offer businesses crucial capital in times of need. But the findings also highlight alternative lending as an attractive market for investors, providing an imperative foundation for the industry to remain solid.

Not only has alternative lending remained a solid industry, but it has grown. According to Deloitte, the report analyzes 2014’s fourth quarter, which saw 53 alternative lending deals completed. That figure, the research said, is a 43 percent year-on-year deal flow increase. According to Fenton Burgin, Deloitte partner and head of its U.K. Debt Advisory unit, 2015 is an especially encouraging year for alternative lending, “as the sheer size and diversity of the liquidity targeting the mid-market has resulted in downward pressure on pricing and the emergence of innovative new structures.”

Perhaps one reason why alternative lending is so strong this year is because for many industry players, alternative finance is no longer seen as a direct competitor to traditional banks, but rather a peer. “We’ve seen some banks teaming up with the alternative lenders to provide more flexible structures,” Burgin said. “The bank is the first to get aid out, while alternative lenders take a higher yielding, but higher risk ‘first loss’ position.”

For Burgin, alternative lending can also be another option to bank loans rather than borrowers’ only option. “Whilst most alternative lender funds will charge higher interest rates than the banks, the flexibility borrowers receive enhances equity value in the long-term for shareholders,” he said.

Europe On Top

One of the most striking trends emerging from Deloitte’s latest report is the strength of the European and U.K. alternative lending environment. This should not come as a surprise: research released last February from the University of Cambridge and Ernst & Young highlighted the stellar health of the EU alternative lending market, especially in the U.K.

Deloitte found that alternative lenders recorded nearly 200 deals in the U.K. and Europe, up 43 percent in 2014 from the year prior, and singled out the U.K. market as experiencing particular alternative lending growth. While Ernst & Young’s research found that the value of alternative financing in the U.K. eclipsed deals seen in Europe in 2014, Deloitte’s research found that Europe saw nearly double the alternative financing deals seen in the U.K.

Deloitte’s head of alternative lender coverage Floris Hovingh pointed out several nations strengthening the EU’s market, including France, Germany and southern Europe. Despite this strength, Hovingh warned that EU players may not embrace alternative lending as quickly as they did in the U.K.

Still, Ares Capital Europe’s Michael Dennis told Deloitte that this aversion to alternative lending in Europe could soon diminish. “While borrowers in continental Europe have been a little slower to adopt the flexible financing solutions from alternative lenders than those in the U.K., this trend is starting to change,” he explained, adding that he, too, has seen boosted activity in France and Germany, as well as the Nordic nations. “We are seeing borrowers start to understand the benefits of alternative financing solutions – one-stop financings and certainty of closing to name a few.”

Predictions for 2015 And Beyond

Not only will Europe gradually accelerate its alternative lending adoption, but the market across the globe will see significant expansion, Deloitte predicted. One direct lender that spoke to Deloitte anonymously agreed that 2015 would be a significant year for the industry. “We have the best pipeline of deals since we initiated our direct lending strategy,” he said. “We have never been busier and are inundated with applications.”

This lender’s experience is not unique, experts reported. For alternative lenders, the issue isn’t attracting borrowers, it’s cherry-picking which applications to accept.

CVC Managing Director and portfolio manager Neale Broadhead said that the increasing awareness of alternative lending products for businesses will play a major role in industry growth. “We will benefit as companies learn more about what we can do,” he said. “Our capital can fill a voice across Europe. As banks lend less, we can help businesses grow.”