Navigating Market Shifts and Lender Hesitations: A Global Perspective from Sonia Peterson, Head of FIG Europe
As one of the leading global lenders in growth capital, Liquidity Group is frequently asked for its perspective on the current market environment—particularly as the public capital markets begin to thaw after being nearly frozen for the past several years, mainly due to shifts in the global interest rate landscape.
Sonia Peterson, Head of the Financial Institutions Group (FIG) for Europe, is often asked how Liquidity is approaching the market as the landscape shifts. According to Sonia, the answer is nuanced and varies by market, though common themes are evident globally. She provides further analysis of these trends and insights below.
Fundamentals by Region
Europe
As equity markets begin to gradually reopen, we are tending to see businesses we like become that much more investable. While equity markets were closed, we found growth stage companies do the active internal work to move near to breakeven profitability, but this can naturally affect cash positions, which can become tight as a result of this overarching exercise. Fast forward to today, as equity markets begin to open and these businesses are much more mature, we see some solid opportunities to support them.
Within that, the tighter financing environment in the last few years created attractive acquisition opportunities that we were able to support. As multiples remained compressed and VC funding was hard to come by for slower-growing. Still, at/near profitability businesses, this kicked off a significant number of financially accretive acquisition opportunities, where the acquirer was able to unlock new geographies, buyers, or other synergies for the target, all helping to propel topline growth and commensurate funding.
APAC
The overall tone continues to be led by the public capital markets, which are still largely frozen. On a more regional basis, China’s continued slowdown affects the overall mood in North and South East Asia. However, we are seeing shifts in India, where the exit environment is now thawing.
Within South East Asia, it’s a tale of two cities for VCs, who are both 1) actively focused on helping their chosen winners find stability and cost efficiencies in their core businesses, all to reach profitability soon, and 2) looking opportunistically for ‘survivors’ as the withdrawal of capital now starts to shake out competition in given markets. These scenarios are both optimistic from a lending perspective, and we are incrementally positive on the prospective fundamentals of these potential portfolio companies.
India is slightly different because exit activity has been robust, leading some companies to switch domiciles back to Indian holds in anticipation of a more home-market-sponsored IPO. As veterans in lending, we see pluses and minuses to funding businesses in India, so we tend to approach these situations with slightly more caution these days.
North America
After the chill in funding, we are now starting to see the growth stage equity market come back online, with more priced Series C+ deals being done with good sponsors. Valuations are now more reasonable than before, so we are still seeing an appetite to raise as much debt capital as possible to avoid dilution. With generally stronger balance sheets and more resilient business models, this is a decent environment where we can be supportive.
Is the lending environment becoming more irrational?
Here again, the environment is entirely dependent on the region. Europe tends to lead with conservatism, where funds moved to tighten their standards and place a greater focus on runway over the last 18 months. While we are seeing a few newer players enter the market, whether that be US funds or European banks becoming more active for pre-IPO companies, we wouldn’t characterize the market as being far off-balance at this point.
Looking at Asia, while the quality of companies to lend remains good, the supply of capital has grown, where we do see 1) banks strategically targeting companies and offering tight pricing in hopes of gaining a broader banking relationship, 2) traditional VCs launching private credit strategies to keep LPs interested, and 3) PE firms looking to enter the space potentially. As such, we remain incrementally more cautious regarding pricing in the region.
In the US, we see a bifurcation in pricing, with the top SaaS names receiving aggressive pricing from the typical bank players. Overall, terms remain relatively reasonable, though increasingly, we are seeing more private credit-style structures being introduced at slightly earlier stages than before (such as PIK).
Conclusion
In conclusion, the global lending environment is gradually evolving as public capital markets thaw, though regional nuances remain. Europe presents solid opportunities with more investable companies emerging, while APAC shows varied dynamics across different markets, from cautious optimism in India to selective support in Southeast Asia. The US lending landscape is generally rational, though within itself, it is bifurcated. As leading growth capital lenders, we remain mindful of these trends and continue to approach opportunities with a measured balance of caution and optimism.
