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Institutional non-bank lending and the role of debt funds

Author: Kraemer-Eis, H. with contributions from Battazzi, F.; Remi Charrier, R.; Natoli, M.; Squilloni, M.
Date: October 2014

Against the background of the need for alternative or additional financing channels for SMEs, this paper analyses the market segment of Debt Funds. Often, the need for alternative financing mechanism and the increase of non-bank lending / bank-disintermediation is voiced – the text provides recent examples of and reasoning for this.

The concept of Debt Funds is presented and the split between Diversified Funds and Selective Funds is introduced. The main chapter gives a range of examples for Debt Funds and related initiatives to enhance the (SME-) financing via non-bank sources, private initiatives as well as publicly supported initiatives – covering the two groups, mentioned before. Moreover, this chapter presents the emerging market segment of the so-called SME bonds (which forms itself the basis for SME bond funds (as well classified as Debt Funds), with examples from Germany, Italy, France, Spain, and the UK. The chapter “Debt Funds on the road” presents some statistics based on various databases (and explains their limited explanatory power).

The dynamic in this market segment shows that its importance is growing and increasing volumes in non-bank lending appear to be a trend (see also Preqin, 2014). So far, only the minority of existing Debt Funds focus on EIF’s core final beneficiaries - SMEs and mid-caps. Most of them are targeting the bigger category of companies (bigger mid-caps to large caps) and/or mezzanine instruments. Moreover, initiatives take place so far only in a limited number of countries. Against this background, and the fact that there is a need to strengthen alternative financing channels as well as that there are manifold calls from market participants and policy makers to support alternative financings for SMEs / mid-caps to fill the bank financing gap, the participation of EIF in developing such an emerging market for the smaller segment of companies - learning from its past experience with non-granular portfolio guarantee transactions - appears to be straightforward.

In this context and in particular in the framework of the EIB Group Risk Enhancement Mandate (EREM), EIF intends to implement financing tools for SME focussed Debt Funds in Europe in order to support the development of this market segment. The mandate is explained towards the end of the paper, before the concluding remarks inter alia summarise important pro’s and con’s of Debt Funds that have to be considered concerning an involvement in these activities.

In general, available information about this market segment - due to its fragmentation and opacity it is even ambitious to speak about A or ONE market segment - is very scarce and THE Debt Fund does not exist - there are no generally accepted definitions and the range of structures, that could potentially be called Debt Funds, is wide. Hence, it is the aim of this paper to shed more light on important topics around the growing area of Debt Funds and institutional non-bank lending in Europe.

Geography: Europe

Type of study: International organisation

Relevant for: LP, GP All, Fund of funds, Associate

Source: n.25 of EIF's Working Paper Series