From Emerging Trend to Developed Solution: the Global Rise of Alternative Financing
With rapidly growing economies, increasingly sophisticated
technology and growing political and business power in areas such as Asia, the
Middle East and Africa, the lines between ‘emerging’ and ‘developed’ regions are
becoming increasingly blurred. This applies especially to the corporate funding
landscape, where the so-called ‘emerging markets’ are at the forefront of
innovative new trends.
The emerging markets were undoubtedly hit
harder by the post-2008 constraints on global bank lending. The attack was
two-fold; with global banks not only prioritising core business – which largely
does not include smaller emerging market corporates – but also prioritising
domestic market companies.
As a result corporates have been forced to
find a viable alternative to global bank funding, turning instead towards both
regional banks and alternative financiers. The current financial landscape in
the emerging markets is more diverse, and offers corporates a wide range of
solutions that can often be more suited to their precise needs. Despite
turbulent times, these companies have found liquidity and expertise and have
continued to grow despite the banking environment. The developed markets are now
financial crisis was undoubtedly a wake-up call in highlighting the need for
tighter regulatory control and also the pitfalls of being overly reliant on
global banks as funders and solutions providers.
Of course, some
would argue that the reaction – particularly with respect to the regulation of
banks – has been too extreme. The restrictions imposed by regulatory proposals
on global bank lending now mean that even reliable corporates have limited
access to funding. Basel III, in particular, requires banks to keep a certain
amount of capital on their balance sheets. Consequently, the more capital there
is on their balance sheets, the less there is to lend to corporates. What’s
more, Basel III also makes trade finance instruments more expensive for banks –
a proposal that has been relaxed in Europe but, notably, not worldwide.
The constraints to global bank lending have had an impact in all
markets, but it could be said that the emerging markets have been most severely
hit. The fact that banks have been forced to choose more carefully which
corporates to fund has resulted in them favouring core business; little of which
comes from smaller emerging market corporates. What’s more, the pressure to
prioritise domestic markets – particularly on European banks bailed out by the
taxpayer – meant that even larger emerging market corporates were, and still
are, often overlooked.
the emerging markets have faced a conundrum: funding has diminished just as
opportunities for growth have increased. With rapid economic growth –
particularly in China (albeit slowing) and India – and an expanding consumer
market as incentives, corporates in these regions have been eager to develop and
are hungry for funding.
Despite being dominated by global banks, the
financial landscape has had other players since long before the global financial
crisis. These have chiefly been regional banks and alternative financiers, who
are increasingly stepping up to bridge the gap. Regional banks have a historic
domestic presence and in-depth local knowledge, which means they have a full
understanding of the regulatory, economic and political environment in which a
company might operate. They also have an understanding of the cultural and
religious practices of a region, which can significantly impact business
Alternative financiers offer flexibility and speed,
while being less restricted than banks with respect to where and how they
operate. Combined with sophisticated resources and expertise, it means that they
are able to provide bespoke funding solutions that are suited precisely to the
needs of the corporate.
What’s more, the new financial landscape is
not competitive, but rather ‘collaborative’. Banks and alternative financiers
are entirely different financiers, each offering distinct solutions. Rather than
compete, they often collaborate to combine their strengths to originate and
structure business. As such, corporates not only benefit from increased choice
in the new financial landscape, but are also able to access solutions that
reflect the diversity of players.
Learning from the Emerging
Increasingly, developed market corporates have started
looking towards the financial landscape of the emerging markets, and have
decided that they too want access to in-depth local knowledge, speed and
flexibility. Regional banks have been fairly slow at expanding internationally,
often held back by regulation and a lack of resources or infrastructure.
Alternative financiers, on the other hand, have recognised this growing appetite
for diversified funding solutions and are flocking towards the developed
markets. As an example, Falcon Group has recognised the opportunities available
in these regions and expanded operations to North America, Europe and the UK.
The increased appetite for alternative financing and regional bank
lending in the developed markets marks the next stage in the recovery from the
global financial crisis. Not only does a diversified financial landscape offer
corporates benefits they cannot gain solely from a global bank but it also,
importantly, offers them security. Increasing funding sources and combining
expertise not only prevents companies from placing all their faith in one
counterparty, but also helps create stronger solutions and ultimately a stronger
company- imperative when operating against a turbulent economic background.