Funding the gap in SME-sized investments

Restricted bank lending to SMEs is opening up opportunities for Trafalgar Capital Advisors, but only where creditor laws are suitable, says Bob Press, chief investment officer.

Trafalgar Capital Advisors is focused on providing SMEs credit through specialised debt financing, such as collateralised bridge loans, mezzanine finance strips and short-term receivable and asset-backed loans.

Activity is aimed at the US, UK and parts of western Europe. It also offers investors access to its investment strategy through the TCA Global Credit Master fund.

This has been an area of growth in recent times as lending from banks has remained well below levels seen before the global financial crisis.

The correlation is not uniform, however, according to Bob Press, chief investment officer.

For example, despite the credit squeeze seen some six to 12 months ago, there was no similar increase in funding sought from the likes of TCA.

“There was a feeling of ‘I survived the crisis’, therefore why raise your head above parapet [by borrowing],” he says.

That said, the companies he meets do see a need to grow their businesses, which requires working capital to meet the order flow increases experienced.

There is also some growing M&A activity, Press says.

The big problem facing SMEs in growing their capital has been collecting money from their own customers, while themselves being pressed harder than ever to pay their own creditors.

Far fewer people are paying in 30 days, Press says. And the biggest companies are the biggest offenders [against SMEs] in this sense, having stretched out their payments to as many as 90 days or more during the crisis, but since the recovery not reverting to paying in the fewer days that they did before.

As Press puts it, if the big company “hits the button on 50,000 vendors, that’s a lot of cash”, referring to the ability of a single big company to penalise a large number of SMEs simultaneously on payment.

He adds that this situation is good for the likes of TCA, creating more opportunities to find deals.

One is in the way companies formerly defined by their market value as ‘big’ have slipped through the crisis to becoming SMEs themselves, thereby falling into the potential pool of customers for TCA.

The benefit is that for the same return profile as a smaller company, the formerly big company offers a lower risk profile, Press says.

There is no single sector highlighted as offering more opportunities than others. It is a “case by case” approach to investments, he adds.

TCA is seeking 12% to 14% return off what is a relatively expensive form of competition to the banks.

But it is cheaper than, say, factoring for the SMEs concerned, according to Press.

The investment case depends on numerous factors, such as environment, capital constraints and internal management, which determine the growth possibilities.

It is also important for TCA to feel it has the internal capabilities to ­maximise the benefit of entering into any deal, Press adds.

Still, the quality and quantity of potential investments are increasing.

Legal constraints

However, beyond the opportunities, TCA is limiting its activities to countries where it feels creditor rights rules are sufficiently robust.

Thus, its focus is on Anglo-Saxon jurisdictions, such as the US, UK, Canada, Australia, and certain western European ones, such as Germany, Sweden, Switzerland and the Netherlands.

This also affects the location of the investors in the fund: the core are from these same territories.

Press says TCA is not comfortable with creditor rights laws in southern European jurisdictions, and simply will not do business there. It also excludes business in any of the BRICs or other emerging markets.

Any investment will always start from looking at the downside risks: chiefly, if the laws do not protect creditors, there is no firm legal basis for investing.

Macro issues also affect its view, such as the ending of QE2 in the US.

Press says that while survivors of the financial crisis are now seeking their spots, it is also true that the world has spent trillions of dollars to get out of a financial hole without much certainty of the effects and where this leaves SMEs.

“We’re in a business where paranoia is a big line,” he says.

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