In the latest StartUp Studio Insight blog, RSM share their insight into debt, funding and the tech industry.
RSM is a leading provider of audit, tax and consulting services to middle market leaders, globally.
Equity or debt funding? Media and tech business have access to both. But the magic of a well-funded business is in balancing the two.
Walking that line means taking on as much debt as you can manage – because it’s cheap and easy to access – but not so much that it burdens and risks the business. These forces are in constant flux. And an intriguing shift in the past 12 months may change funding in the sector.
Over the past five years there’s been an influx of private debt funds to the UK. Their arrival has seen debt funding creeping into former equity investor territory.
As the two have overlapped, the attractions of debt have begun to lure businesses to include it as part of their equity strategy.
The American influence
A decade ago, the European debt market was dominated by banks. In the American market, banks were typically focussed on capital funding. Other bodies, such as private providers, catered for debt services.
This American-style set up is now influencing its European counterparts. Up until 2020, banks’ dominance in the debt funding space was slowly declining as new private debt funds began competing for the same business. The standing joke in the industry was that a new debt fund arrived in the UK every week. However, that trend now seems to be levelling off.
No longer a bankers’ market
Since the coronavirus hit the UK, new debt funders have been shy to enter the market. Banks meanwhile, have been retrenching. And whereas banks had been improving their terms to compete with the debt funds, post-coronavirus market banks are more cautious.
This leaves debt funds with an open market.
One reason banks are pulling back is because of the Government’s Coronavirus Business Interruption Loan Scheme. The cash for the government-backed CBILS has come straight off the banks’ balance sheet. This has meant that many banks are essentially ‘full’ and are unable to lend as much money as they would like. Debt funders are moving in to fill the space, and the market is flourishing.
The debt lenders we speak to are extremely busy and only limited by their manpower in getting deals done. It is not clear why the market is quite so busy. Both banks and funds had been concerned that the pandemic would put the market at a standstill.
Xanthe Judge, Associate Director for RSM said: ‘It is positive starting to see the world move forward once again. In the South West we are seeing the emergence and growth of many entrepreneurial tech businesses, who are utilising different funding sources. 2020 saw 601 new Tech incorporations following on from 612 in 2019. The region continues to be buoyant with lots of exciting success stories and ideas’.
Is tech and media covid proof?
The tech and media sectors have stood out as they continue to innovate and develop, even in a slow economy. The sector is seen as somewhat ‘covid-proof’; a kind of pivot point for the uptick in activity. As businesses and communities increasingly rely on video conferencing and online interactions, tech is crucial. And frequent lockdowns have led to a renaissance in the computer gaming sector. Many have turned their heads – and hands – to the past time for entertainment.
It is unclear whether these trends will continue. But for now, debt in the media and tech industry is in a sweet spot.
To learn more about RSM and how they can help your business reach its full potential, go to rsmuk.com
Find out more about the Tech South West StartUp Studio at techsouthwest.co.uk/startupstudio