Business Matters: Finding Opportunity in Adversity – The Financing Environment for SMEs | Blogs

Mathew Deering, partner at TDC, says it’s no surprise business investment is slowing amid the current turmoil of soaring inflation, sky-high energy prices and low consumer confidence . Companies face an array of challenges and in response, many lenders and investors are likely to ration their capital towards larger, more stable companies in defensive industry sectors.

Many commentators point to lower activity levels in 2022 compared to the “post-pandemic rebound” of 2021. Deal valuations also appear to be slowing, with earnings multiples of private equity deals seeing some decline after years of sustained dynamism. In addition, there is evidence that debt markets have tightened, with many lenders opting to “do nothing” under current conditions, or preferring to focus on larger transactions where credit risk is perceived as being weaker.

Despite this climate of uncertainty, at TDC we intend to ‘stick to the knit’ – our core business is to provide structured debt finance to the UK base of lower middle market companies, to support transactions such as private equity-backed buyouts, mergers and acquisitions activity and the creation of shareholder value. Having deployed nearly £180m across 23 transactions over the past 18 months, we have put our capital to work and intend to continue to do so. Generally, our loans are non-repayable and highly flexible, often giving businesses more breathing room to conserve cash to support growth rather than facing heavy debt repayments.

There are a few key reasons why we have the confidence to continue investing, despite some of the dark storm clouds gathering over the economy.

First, we see many examples of leadership teams that have successfully led their companies through the chaos of the pandemic and emerged “skinny, mean, and hungry for a fight.” These companies are often experiencing strong organic growth and have attractive opportunities to pursue buy-and-build acquisitions in industry sectors recovering from the pandemic. While we expect to be more cautious about consumer-facing businesses, we are seeing a steady stream of growing businesses in sectors such as technology, digital transformation, human capital and healthcare . Companies in these sectors are always looking for capital to support their growth ambitions and take advantage of emerging opportunities.

Second, unlike the financial crash of 2008, there remains strong liquidity in the market. Private equity and debt funds have raised significant capital before and throughout the pandemic period and this “dry powder” should continue to make its way into the market. Our pipeline of private equity sponsored deals remained strong throughout 2022, we successfully closed three partnership deals with private equity backers in the last three months and saw eight successful exits over the past 18 months as companies have been acquired or capital raised in our portfolio – all evidence that the capital is there for the right companies with compelling growth stories.

Finally – what else are we here for? We think you can’t say you’re supporting UK middle market businesses, if you only do so when times are good and all economic indicators are positive. Businesses need capital markets to function efficiently to enable them to meet the challenges and seize the opportunities of the times.

Earlier this year, we raised a £50m impact fund to support growth and job regeneration in the North. We are also actively preparing for the establishment of a major new fund in the coming weeks, with a focus on supporting more private equity-backed deals, bringing the total funds raised since our inception to £1 billion. In a market where secure and deliverable financing is likely to be in high demand by companies and their corporate finance advisors, we believe these new capital resources should put us in a strong position to help companies seize the opportunities that come with adversity.

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