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Nonbank lending picks up in Europe as mid-sized companies look for flexibility

Mid-market companies in Europe are increasingly looking to alternative lenders because they offer faster and more flexible access to capital than banks, according to Deloitte.

A sample of 60 nonbank lenders tracked by Deloitte made 95 deals in the third quarter of 2017, an increase of 34% on the same period in 2016, according to Deloitte's Alternative Lender Deal Tracker. Despite political uncertainty, economic growth in the eurozone has been strong, and this has fueled demand for debt from expanding companies, the report said.

Direct lending — corporate debt provision in which nonbanks make loans without a middleman such as a broker or private equity firm — is growing in popularity among mid-sized companies that would otherwise struggle to find "quick, flexible and reasonable" access to capital needed to fund growth, according to the report. In the past, the only option aside from bank debt would have been the gradual raising of equity, which would have a dilutive effect.

"As optimism has grown, mid-market businesses have looked away from traditional bank loans and seen the flexible, reliable and significant advantages of using alternative sources of capital," Fenton Burgin, head of U.K. debt advisory at Deloitte, said in a statement.

The predominant use of direct lending in the third quarter was for leveraged buyouts, with telecoms, media and technology firms particularly active, according to the report.

Despite weak economic growth and an unpredictable political situation, the U.K. has been the largest direct lending market in the region, growing by 35% year over year in the 12 months to the end of the third quarter. Over the past 20 months, the U.K. accounted for 39% of all direct lending deals by the companies in Deloitte's sample, followed by France (26%).

Institutional debt funds lending to European companies have been highly active in fundraising in the first three quarters of 2017, raising a combined total of €12.5 billion. The two largest direct lending fundraisings to close during the year-to-date have been the €4.3 billion Alcentra Clareant European Direct Lending Funds II and the €3.5 billion Hayfin Direct Lending Strategy II.