What is the impact of Brexit on the alternative finance market?

A new report by Magic Circle law firm Allen & Overy suggests some stark implications for investors in, and borrowers of, alternative credit.

More than two-thirds of UK firms have seen the result of the EU referendum hinder their ability to tap alternative sources of funding, according to a survey by the law firm Allen & Overy, which also suggests a large number of alternative credit investors see the process as an opportunity.

It has been more than four months since the UK’s path to an exit from the European Union became the dominant economic and political reality for firms, particularly those based or doing business in the UK.  At this juncture, there is little clarity on the longer-term impact for business and the economy, although, risk levels in the short term – perhaps prompted by this uncertainty - have risen for UK firms looking to borrow money from alternative finance providers, Allen & Overy’s latest research into the alternative finance market suggests.

While this paints a less than rosy picture for companies in need of working capital or looking to fund acquisitions, investors in alternative forms of credit are more upbeat. The report suggests 43 per cent of investors believe Brexit presents investment opportunities for their business, due to anticipated changes in the European banking landscape. Nearly a third, 29 per cent, said it would have no impact at all.

The research, conducted by YouGov surveyed 362 respondents. Half were investors and half were corporate borrowers across six European markets: France, Germany, Italy, Spain, the UK and the Benelux region. Corporate respondents were split evenly between medium and large companies in a variety of sectors while investors came from private debt funds, family offices hedge funds, insurance companies and pension funds.

Investors in countries near, but outside the UK, were more downbeat, with 60 per cent of investors in France and 47 per cent in Benelux saying it would limit their ability to provide funding to businesses in the UK.

“It’s unlikely that the full impact of Brexit will become clear for several years. Experts said the gloomy prognosis in the UK among borrowers and investors reflected a wider sense of unease, among British corporates and London-based financial services providers, as to the UK’s long term place in the world,” said the authors of the report.

Nearly two-thirds of investors are forecasting an increase in provision of funding for medium corporates and 44 per cent predict an increase in provision of funding to small corporates over the next five years, while less than a third are expecting to do so to large firms.

The research also suggested alternative finance is a becoming a vital part of the funding mix for corporates, although with the additional caveat that banks are often playing an ‘intermediary’ role in transactions.

For example, the French banking giant BNP Paribas recently announced a tie-up with eight insurance firms to launch a €500m fund to lend directly to European SMEs, albeit firms that had been found via the bank’s extensive branch network.

Corporates indicated that alternative finance makes up about 33 per cent of their funding mix on average, up from the results in last year’s research of 30 per cent. This compares to 48 per cent for bank lending and 19 per cent for capital markets.

Privately placed loans intermediated by banks have grown more common in use in the past year to become the top format for alternative funding. This format is used by 54 per cent of corporates and 61 per cent of investors, up from 48 per cent and 58 per cent, respectively, in 2015.

The past year also saw corporates more likely than ever before to source alternative finance from providers in other jurisdictions.

Private equity firms and asset managers are the most commonly used alternative finance providers overall, with 49 per cent and 40 per cent of corporates, respectively, accessing funding from these investors