How supporting quality mid-sized businesses is enabling further ThinCats investment

Following the recent announcement of ThinCats’ best ever calendar H1 in terms of the value of  funding provided, Mike Hackett, Head of Business Development and Greg Beamish, Head of Credit share their thoughts on what’s happening in the lower mid-market in terms of deal activity, prospects for H2 and the key credit issues to consider given the current economic climate.

Mike Hackett, Head of Business Development

The first six months of 2023 brought a continuation of the strong momentum established by ThinCats in 2022 leading to a record amount of funding during the period. Our focus on cashflow lending to support high growth, mid-sized SMEs continues to gain traction with corporate finance advisers.

Sectors that saw particularly strong demand were B2B businesses in the professional and IT services sectors. This included funding for a number of communications businesses such as marketing agency Flight Story co-founded by Steve Bartlett of Dragon’s Den fame.

Whilst achieving a strong start to the year is encouraging, I’ve never been comfortable trying to protect a 1 goal lead, so we continue to invest in improving our proposition

To this end we have recruited highly experienced talent across the business development team; Matt Vincent joined us in May to head up our Midlands team and  Simon Dixon will join us in the autumn to lead our expanding team in the North West.

Our healthcare team led by Richard Henshaw has delivered almost £200m of funding since its launch in 2020, however, to handle increased demand from mid-sized residential and domiciliary operators, we have recently recruited healthcare funding specialist Satyen Shingadia to increase our national coverage.

In addition, we will shortly be announcing a senior addition to our London & SE team headed by Dave Sherrington. The newly created role will focus on non-sponsor backed transactions.

Our commitment to being physically close to our clients in the UK’s main financial centres has been reinforced with the opening of new offices in Manchester and Birmingham since the start of the year.

We are also investing in widening our product range to include a new facility for earlier stage technology companies that have strong recurring incomes but may not yet be profitable. We are also planning a working capital facility which would work alongside our current term loan for businesses that need additional flexibility. We look forward to announcing more details on these new initiatives later in the year.

As we are continually speaking to the corporate finance community across the UK we are well placed to assess any changes in sentiment and activity.

Our latest adviser snapshot in July showed there has been some softening in sentiment over the last 6 months. Advisers report that the amount of funding activity has fallen on average and their business pipelines for the next 6 months are slightly lower too. When asked about access to funding, 65% of advisers report that banks have less appetite to lend compared to six months ago, although availability of funding from non-bank lenders is unchanged.

In summary, we have had a great start to the year and thank the business finance community for your continuing support. We have substantial amounts of funding to deploy and the appetite to fund many mid-sized businesses that are prospering in the current climate. We also recognise that we must continue to make ThinCats even more relevant to advisers and their clients through further investment in our products and services, which will be a key focus for the second half of 2023.

Greg Beamish, Head of Credit

The impact of lingering high inflation and higher interest rates have naturally played a more important part of our credit assessment compared to 18 months ago, however, we continue to look at prospective borrowers on their individual merits.

So far this year we have funded a high proportion of B2B service businesses that have been better insulated from the squeeze on discretionary consumer spending, however, we have also provided significant follow-on funding to businesses in perceived higher risk sectors such as leisure, so it remains very much horses for courses.   

Whilst transactions are undoubtedly taking longer to complete as stakeholders sensibly require a bit more reassurance through deeper due diligence, we continue to see plenty of opportunities to fund high quality businesses with excellent management

The real quality of a business becomes much more apparent during challenging times or as legendary investor Warren Buffet famously described it “ Only when the tide goes out do you learn who has been swimming naked.”

Whether we are funding buy-and-build strategies or organic expansion, the common theme is that these businesses have been better able to react to opportunities that have emerged.       

Although the cost of borrowing has risen, we do not see signs that this is significantly reducing demand for the types of transactions that we support; if a business can earn a 25% margin from a transaction, the additional borrowing costs can be comfortably absorbed.

In terms of our loan book, we are seeing few signs so far of stress from existing borrowers, which is encouraging. Further encouragement can be taken from the latest UK inflation figure for June of 7.9% – the lowest level for 15 months – perhaps heralding that we are approaching the peak of further interest rate rises.

Overall, we continue to see good opportunities for strong management teams and differentiated businesses and will continue to evaluate each business on its specific qualities while taking account of – but not being driven by – wider macro factors.

Mike and I share the same aim of growing the lending book in a sensible manner, by providing a commercial lens to our investment approach, something that other financial institutions continue to struggle with, particularly with respect to cash flow lending.