Private equity firm to offer senior debt
Article Date: Jan 15 2009
Andrew Cavaghan, Octopus Investments
With even profitable businesses struggling to get a bank loan, asset management firm Octopus has launched a product to plug the gap.
‘In the past three months, there’s been a significant increase in interest [in our debt funding], both from private equity sponsors of deals and companies approaching us direct,’ says Andrew Cavaghan, a director at Octopus Investments. ‘And the quality of the opportunities has been much higher than usual.’
For a finance provider like Octopus, the credit crunch cuts both ways. It may lessen exit prospects as likely acquirers go to the wall, or make life harder for portfolio companies in certain markets. But it also provides opportunities to finance companies that would normally be able to raise cheap bank debt.
That opportunity has led to what Cavaghan refers to as Octopus’s ‘breathing space’ product. It’s a five-year loan that works in a similar way to a bank loan with one crucial difference: you only pay interest, rather than having to make annual repayments – hence the breathing space concept.
‘We’ve raised £45 million already, of which £40 million is in cash ready to go,’ says Cavaghan. ‘That’s what sets us apart from banks, which are quite capital-constrained at the moment.’
Interest rates are similar to high-street banks, though of course you’re likely to end up paying more over the term of the loan, since there’s a higher risk involved for the lender. Exact terms and conditions are negotiated on a case-by-case basis and Octopus is willing to consider lending alongside other investors or banks.
Cavaghan argues that as a lender, Octopus offers more flexibility than a bank. If the worst happens, ‘we have more options than a bank would have, including taking an equity stake in the business’. He adds, ‘We as individuals come from an equity rather than a debt background, so we would tend to be more understanding of the risks that growing businesses face.’
Though the breathing space product may be offered to businesses which apply direct, Cavaghan sees a big opportunity for Octopus in supporting other private equity houses which may be struggling to finance their deals.
‘Anecdotally, there are [private equity] transactions in mid-process that are just stalling because banks aren’t making up their minds, or are taking too long to make up their minds,’ he states. Accordingly, Octopus has already approached buy-out houses with news of its new offering.
‘Some private equity houses don’t like to invest alongside others, because that’s our heritage, but the majority have been responsive,’ he says. ‘The more of this kind of thing you do, the more people can see you are making sensible decisions.’
