Despite the doom-and-gloom investment sentiment, history has shown that there is still opportunity in downside markets. The key is to know how to access finance and where to find the growing businesses.
The net effect of the recent downgrades is extreme uncertainty in the market. Investors and businesses don’t like uncertainty and, as a result we have a common theme of people are sitting on their hands. This is bad news, because the worst thing that can happen to an economy, is for transactions to stall.
Gary Palmer, CEO of Paragon
Since the downgrades, we have had many big deals put on ice. One client was about to conclude a significant deal, subject only to due diligence. Since the downgrade he’s said he is unsure of what’s happening in the local market and so he’s decided to back out of the transaction. The same thing happened on a big dual property transaction. The fact is, that neither investor was willing to expose themselves to more risk, and have adopted a wait-and-see attitude.
What’s more, people aren’t sure about interest rates, and government spending cuts will impact the liquidity in the market. We have also heard that government is holding onto VAT funds, delaying claim payments. This environment affects all lenders and people are battening down the hatches to wait for the storm to blow over.
Many businesses are entering survival mode. We shouldn’t forget that we were experiencing a very conservative investment market even before the downgrade. We have one example where a retail business went from a very healthy growth of 40% between 2013 and 2015/6 now reporting a year-on-year loss of 83% in 2016/7.
For the big institutions, the appetite to lend is obviously lower. One of the banks said that no credit deals were approved on the day of the credit downgrade, which is unheard of in a healthy market.
From a property perspective we should also be mindful that even before the downgrade it was difficult to shift property in most areas, with just a few isolated pockets of exception, including Cape Town.
When you’re in the medium-term property-backed lending game, everything hinges on your exit transaction. Previously, the exit was fairly secure, now investors are worried about how easily they will be able to move properties, should things go south.
Looking back to allow us to look forward
It’s important to look back and see what we have learned from past. The people who made the most money are the ones who kept their powder dry and were brave enough to take the plunge when they saw a great opportunity. If we look at the balance sheets of the investors who, in 2009 and 2010, were bold in their decisions, understood the property market, understood companies and what the real opportunities were, their balance sheets have doubled in value.
We are heading into a similar cycle and we are already seeing some of our most astute investors lining up their access to finance to take advantage of some of the fireside opportunities.
Alternative funding offers some relief for companies
Fortunately, alternative financiers are not governed by the actions of big banks, they don’t have to follow the very stringent regulations or the conservative lending requirements of the banks.
While they are obviously very focused on risk and making sure that they are not overexposed, they are still open to lending opportunities, which the banks may not be interested in.
In fact, historically, when the banks pull back, this is when alternative lenders do well.
Looking back, before 2008, if you had to ask what a client was looking for in a funder it used to be the cost of the funds. Now it’s about service and looking at the speed to close a transaction. Clients want to work with an institution which can make decisions quickly, they want to deal directly with a decision maker who is able to make the call without referring back to a team which may take weeks or months to get back to them.
Second on the list of what today’s clients are looking for is based on optimising their cash flow. Borrowers are looking for interest only facilities where they don’t have to immediately start paying back the capital, and are also looking for a working capital facility. Finally they will assess the loan to value and then only rates.
This priority shift will naturally come at a slight premium, but it’s been our experience that borrowers are happy to pay that premium knowing they can deal with one person, get an answer immediately and have the flexibility to better manage their cash flow.
While the market is not in great shape at the moment, businesses and investors can still realise growth. Companies which are showing good growth will attract the attention and money of investors who still need their capital to work for them. The key is to work with a company who is able to pinpoint the partnership opportunities and ensure transactions are still flowing.
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