Understanding integrated asset based & cashflow lending

What is it?

At Investec we pioneered an Integrated ABL & Cashflow lending offering (“ABL/CF”) to the UK market, launching it in 2007. Since then, it has become an established and highly successful business within our Direct Lending franchise.

We provide bespoke funding structures to both sponsor-backed and private companies in the UK and Ireland mid-market. With a deep understanding of both asset based and leveraged finance markets, our ability to blend ABL and cashflow lending techniques is a key differentiator. These blended facilities can deliver a cheaper blended cost of capital than mainstream senior debt facilities – and in today’s market, could be a route to higher leverage than otherwise available.

Note: we can also provide pure ABL-only structures, where appropriate.

Where is it relevant?

Integrated ABL/CF can provide a powerful debt structure for funding M&A, refinancing, recapitalisations as well as ongoing working capital, growth and seasonality.

Typically, it is well suited to:

• UK/Ireland headquartered businesses delivering £3m+ EBITDA.
• Key sub-sectors include manufacturing, wholesale distribution, B2B services, engineering, chemicals, print & packaging, textiles, transport & logistics, food & beverage, recruitment.
• Sponsor-backed businesses, where we can provide acquisition finance at the outset for M&A, but also strong appetite to refinance/recap portfolio companies, perhaps where the exit horizon has extended and a more flexible funding structure is needed (avoiding the need for equity cures), or where the sponsor seeks to redeem an element of the capital structure. Increasingly we are completing repeat deals with our sponsor partners.
• Privately-owned businesses, again to provide acquisition finance or to refinance/recap with more appropriate, flexible structure. Our funding structures can often provide more headroom and also have the ability to allow de-risking/cash-out for founder shareholders.

Why now?

Integrated asset based and cashflow lending isn’t new. We’ve worked hard to establish this over 16 years, but now, with higher inflation, higher interest rates, EBITDA performance under pressure and more economic uncertainty, its flexibility and firepower has never been more relevant – and provides a compelling alternative to traditional cashflow lending for the right businesses.

ABL facilities grow with the working capital of a business thus giving certainty of liquidity. 

The ability to provide structured cashflow term lending (typically TLA/B structures over 5-7 years) alongside these ABL revolvers means that the integrated structures become far more relevant and compelling in mainstream M&A and refinancing transactions, crucially at a cheaper blended cost of capital when compared to traditional senior debt – and can provide higher quantum of funding where there is a significant balance sheet asset base.  

While traditional ABL has previously only been able to gain relevance on the periphery of M&A - often the preserve of special situations and turnarounds - there is now a real opportunity for Integrated ABL/CF to make significant further inroads into mainstream private credit, given its ability to provide a lower blended cost of capital alongside potentially higher leverage for both M&A transactions and refinancings. 

Whilst M&A activity has dipped in the last few months, we have found a marked increase in enquiry flow seeking a more bespoke ABL/CF solution for the right shaped deals. We also expect a significant increase in refinancing activity in the PE space over the medium term as sponsors seek more appropriate structures to cater across the full cycle.

Why Investec?

Investec led the way by establishing an Integrated ABL/CF offering 16 years ago – and continue to be leaders in this field. We have been designing and honing our bespoke offering, shaped by experience and dialogue with a growing number of management teams and private equity sponsors. Today, a team of 10 seasoned investment professionals within Investec’s wider Direct Lending team focus on providing this blended offering to mid-market companies in the UK/Ireland. (We also plan to extend our offering into the Benelux market in early 2024, building on our successful existing cashflow lending franchise there).

In response to borrowers’ desire for a relationship approach and efficient simplicity, Investec’s offering is deliberately delivered from a single team, a single credit process and a single set of legal documents (with no need for inter-creditor agreement if we are bi-lateral). The deal team will stay with the borrower throughout the life of the investment, building meaningful partnerships with management teams and sponsors to support them in their growth ambitions.

Our team is highly experienced and empowered to deliver. We believe in quick feedback, problem solving and a front-footed approach to getting deals done.

Unlike some other ABL providers who now have some modest additional cashflow lending capability, our mandate is bold. We are not constrained by shape of mix between ABL and cashflow tranches.

We typically provide bilateral facilities up to £50m+ and can lead-underwrite/arrange for higher quantum – with a proven syndication model.

75%+ of our clients have received significant follow-on funding for acquisitions and growth.

Our integrated structures mean that we are fully invested and aligned with other stakeholders – no risk of arbitrary reductions in ABL lines, particularly given meaningful cashflow lending tranches in our structures.

With a can-do attitude, Investec build long term partnerships, helping to deliver certainty to transactions and support businesses as their funding requirements change over time.