OPINION: Mezzanine finance good for growth
In contrast, trends in the US show non-traditional lenders investing more and closing bigger deals than the banks. And although it’s beyond doubt that there is still money to be had in the local market, most business owners simply don’t know where to find it.
Mezzanine debt is the middle layer of capital that falls between secured senior debt and equity. This type of capital is usually not secured by a first charge over assets and is lent based on a company’s ability to repay the debt purely from cash flow. So, the primary security holder would be the base finance secured against assets and personal securities - most often from the banks.
Mezzanine finance is particularly attractive to established and growing companies, as business owners don’t have to part with equity to secure the deal. The terms tend to be more flexible, and the funders will often assign a dedicated person to work with companies that have borrowed money.
While South African banks are among the finest in the world, our traditional institutions are by nature (and by regulatory requirement) fairly conservative in their lending practices.
What’s more, our alternative lending sector is not as mature as that of Australia, the UK or the US, where there are qualified intermediaries between the banks and the clients. The role of independent finance broker is common and respected in many international markets. This is sadly not the case in the local markets, as banks have their own sales teams. An unfortunate consequence is that banks will often not think to refer clients who may not have met their strict criteria, but who may be appealing to a non-traditional lender, impinging deal flow and stunting economic growth.
To put it into context, according to the Statista Digital Market Outlook, in 2018 the global alternative credit market had a transaction value of $197.6billion (R2.74trillion). Comparing the three major regions - the US, China and Europe - the size of the Chinese alternative lending market is described as “remarkable” - with a volume of $178.9bn, with China accounting for 91percent of the global market in 2018.
That said, there is a lot going for local businesses trying to access growth finance. With well over 100 alternative lenders available, business leaders are in a great position to find a lender that understands their business and can offer a deal to suit their growth strategy.
Accessing suitable alternative/mezzanine funding can significantly boost a company looking to grow, but which does not want to dilute shareholding through an equity deal.
While South Africa may still be in its infancy when it comes to alternative lending, and our economy may be little lacklustre at the moment, there is every reason for established companies to seize opportunities when they see them - knowing that if the deal is right, the finance can be found.
Gary Palmer is the chief executive at Paragon Lending Solutions.