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Clifford Chance Global M&A Toolkit

Wednesday 26 November 2014

European M&A: On the road to recovery?

Shadow banking

Overview

One of the reasons that so few survey respondents identified access to capital as an obstacle to their M&A activity may be the increasingly broad range of financing options available in the market.

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In addition to capital market instruments, including a buoyant high yield bond market that is driving M&A activity, there are significant options in the so-called ‘shadow banking’ market – which comprises non-bank lenders providing alternative financing sources for borrowers. Active borrowers in this area include infrastructure players, whose long-term funding needs will be more challenging for banks to meet in the context of Basel III, and the real estate sector which faces similar issues. SMEs are also feeling a squeeze on liquidity – facing adverse credit selection and limited access to capital markets.

Alternative financing offers attractive opportunities for non-bank lenders – pension funds and insurance companies are looking to find the tenure and yield that match their liabilities. Credit funds and money market funds are also active, the former employing many of the structuring techniques and mechanics traditionally used by PE funds and hedge funds, combined with certain securitisation techniques.

We are seeing an increased number of clients establishing funds or allocating resources to this area and there is evidence that alternative financing activity is providing much needed liquidity to the market. As such, it is having a positive impact on the real economy and is fuelling M&A and strategic growth. While a significant amount of alternative financing has been in the secondary market, we are now seeing players such as pension funds, insurers and asset managers being involved as part of the initial club deal or on the primary syndication. The experience and confidence that they gain should help this trend to continue.

Regulation of the sector is a challenge. While the term ‘shadow banking’ can have some negative connotations, many of the activities it encompasses are in fact regulated. Clients need to be guided through the evolving regulatory environment.We also help with tax efficient structuring and fund terms. Although there are certain obstacles to overcome, this is a valuable source of liquidity and yield to tap into.

We anticipate continued growth for this market, not least because the broad range of options available allows participants the scope to structure a transaction that best suits their particular requirements.

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