Direct Lending Investments

Lending to SMEs

UK SMEs are turning away from traditional bank lending to grow their business. After the financial crisis in 2008, high-street lenders began to reduce their exposure to this area of the market. The global pandemic has further accelerated this trend, with a 10% reduction in ‘normal’ lending in 2020.

This has created an excellent opportunity for private wealth and alternative debt providers to step in and cherry-pick the most appealing opportunities. These are typically in companies with a positive trading track record, good management, robust plans and a combination of low gearing and/or asset security to support attractive returns for the level of risk being taken. It is these opportunities our Direct Investment team focus on bringing to our clients.

Our focus and and approach to Direct Lending

We look for high-quality SMEs, with professional management, strong cashflows and a credible exit plan for the debt package we provide. We can offer finance of between £3m - £12m across the debt risk/return spectrum, from senior debt all the way through to mezzanine finance. And, we will always seek to secure equity participation, where possible, in order to target any capital growth. The typical length of a loan is anywhere between 12 months and five years. 

Investments are structured to suit each business and there are no predefined constraints imposed.

We also provide debt to residential property developments, in uni-tranche or mezzanine formats. This is typically at the later stages of development, when value has become embedded, and often will be to enable a developer to generate an early release of anticipated profit from a development.

Access to direct lending investments in established companies is not easily available to private investors, but through Connection Capital you can choose to invest in whichever of our investment opportunities you wish, in multiples of £25,000. 

Risks and considerations of Direct Lending investments

Direct lending can offer attractive yield and risk-adjusted returns, but as with any investment, it is not without uncertainty. Understanding the risks involved is essential to assessing whether this type of investment is suitable for your objectives, liquidity needs and risk appetite.

Capital at risk

There is no guarantee of capital preservation. If a borrower underperforms or defaults, investors may lose some or all of the capital invested.

Default and credit risk

Lending to businesses involves assessing borrower creditworthiness, cashflow and security. Even with due diligence, unexpected trading conditions or management challenges may impair repayment.

Illiquidity

Direct lending positions are illiquid and typically cannot be easily sold or transferred. Investors should expect to hold loans to maturity and should not rely on early exit options.

Income risk

While direct lending is often sought for yield, income is not guaranteed. Interest payments may be delayed, restructured or reduced in the event of borrower distress.

Security risk

Where loans are secured against business assets, property or other collateral, the value and enforceability of that security can fluctuate and may not cover outstanding debt if recovery is required.

Economic and interest rate sensitivity

Macroeconomic shifts such as inflation, interest rate changes or sector-specific downturns can weaken borrower performance and affect loan repayment profiles.

Concentration risk

Investing in a small number of individual loans increases exposure to specific borrowers, sectors or types of security. Diversification can help mitigate, but not eliminate, risk.

Who Direct Lending may be suitable for

Direct lending investments may appeal to investors who:

• Are seeking access to private credit markets and yield-based returns
• Understand that capital and income are not guaranteed
• Are comfortable with multi-year investment horizons and illiquidity
• Have the capacity to accept credit risk and borrower underperformance

As with all private-market investments, independent financial advice is recommended to ensure suitability.