The term alternative finance refers to anything outside the normal banking circuit, that is, transactions that move private capital and related to the world of Private Debt and Private Equity.
Today we focus on Private Debt, in particular on the reasons for its growth in recent years, on the instruments and on the differences versus Private Equity.
The growth and development of Private Debt instruments
The term "Private Debt" refers to all debt instruments underwritten through extra-banking channels by institutional investors. These instruments, in the recent years, have become central to the financing of dynamic and fast-growing SMEs that today find it increasingly difficult to access traditional credit channels, which often do not meet their needs.
Two factos have reduced bank lending capacity to SMEs, resulting in a strong use of Private Debt instruments:
- The process of banking consolidation that has taken place over the past 25 years - ECB data report that the number of credit institutions in Europe has decreased by almost 30% over the past decade. For SMEs, this means a reduction in the number of player to interface with.
- Tighter banking regulation linked to the 2010 implementation of Basel III and driven by the need to increase the resilience of the entire banking sector following the 2007 financial crisis. One of the main effects of the new regulation is to reduce the amount of funding from banks to SMEs.
Which are the various Private Debt instruments
Private Debt includes all debt instruments issued mostly by small and medium-sized enterprises and underwritten by institutional investors. Several types of instruments can be identified. We can distinguish between:
- Venture Debt: direct financing to unlisted enterprises in the startup stage and marked by high development potential.
- Instant Lending: financing raised through digital lending platforms and generally marked by small size, short term and a quicker application process.
- Direct Lending: medium-to-long term financing provided to SMEs by non-banking institutional players.
- Minibond: medium-to-long term bond under EUR 50M.
Private Debt instruments also include distressed debt related to NPL (Non Performing Loans) and UTP (Unlikely To Pay) loans, and non-direct investment by funds of funds.
The market data
According to data from the latest AIFI report in cooperation with Deloitte, a total of EUR 4.6bn was invested in the Italian Private Debt market during 2021. This amount can be split into:
• EUR 2,214M on venture debt, direct lending and minibond.
• EUR 689M referring to the activity of digital lending platforms.
• EUR 1,474M on distressed debt.
• EUR 189M regarding non-direct investments by funds of funds.
If we only consider venture debt, direct lending, and minibonds, 2021 volumes are up 92% compared to 2020 (around EUR 1,153M). 275 deals were closed (+28% compared to 2020) in favour of 142 companies (+12% compared to 2020).
Focus on Fintech lending
The above data refer to statements by investment funds and market players associated with AIFI.
From the point of view of fintech platforms and players, including Azimut Direct, we have the following sources:
- BeBeez reports that funding to Italian SMEs and startups by Fintech platforms in 2021 reached EUR 3.5bn, strongly up from EUR 2.3bn recorded in 2020.
- ItaliaFintech, the Italian association of the main Fintech players in Italy, reports numbers that are substantially in line with BeBeez, with funding of EUR 3.7bn, an amount more than doubled from the EUR 1.8bn recorded in 2020 and even ten times higher than the EUR 0.4bn recorded in 2019.
Differences between Private Debt and Private Equity
Private Equity is the investing activity in the venture capital of unlisted enterprises by institutional investors. The Private Equity activity is not limited to providing venture capital but also includes other related and instrumental activities for the corporate life, including management support and the sharing of know-how, professional experience, contacts, and other institutional relationships.
The difference between Private Equity and Private Debt is therefore very simple: a Private Equity player invests in venture capital, a Private Debt player, on the other hand, provides debt capital with solutions that are perfectly suited in structure and terms to the needs of the company.
Azimut Direct's point of view
Alternative finance instruments are particularly suitable for SMEs with high growth potential. Through alternative instruments such as Private Debt, SMEs can raise capital for growth without going through those traditional channels, which often fail to provide a service designed on the needs of smaller companies.
Azimut Direct's goal is exactly this: to bridge the gap between SMEs and institutional investors through the placement of alternative finance instruments including direct lending and minibond. Our added value consists in three key elements: speed, focus and market.
All enterprises aim to grow. Our ambition is to make them grow by giving them professional access to the capital markets.
