Fenton Burgin, Corporate Finance Partner and Head of the Debt & Capital Advisory practice in Evelyn Partners’ professional services business, predicts improving debt markets and a strong rebound in mid-market M&A in 2025, with deal volumes up by 15%. We ask him about finance options and how businesses can navigate the right deals.

How did debt funding and M&A activity hold up in 2024?

It was a challenging year. We had geopolitical uncertainty ongoing in Ukraine and the Middle East, an election at home, inflation still above targets and interest rates only just coming off a decade high. M&A activity reflected all that and was subdued until the last quarter of 2024.

Since October, it’s picked up, driven by falling interest rates, record levels of private equity capital and political certainty following the election. With a backlog of deals on hold from last year, lenders can expect a busy first half in 2025. I think we’ll see deal volumes up by about 15%.

What will be the impact on the mid-market and debt financing?

The return of mega deals will soak up some of the liquidity and bandwidth, but a recovering M&A market should mean companies generally see debt market conditions improve.

UK businesses also look good value internationally. The US has record-high equity valuations. Companies there will want to drive shareholder value through acquisitions, and the UK mid-market looks attractive. British businesses should be considering their potential responses to overseas buyers and ensuring their debt structures are efficient.

What are their options for raising funds?

The range of funders has never been greater. Recent years have transformed UK debt finance. Even five years ago, the big banks dominated funding. Today, the mid-market can look to almost 100 direct credit funds providing alternatives to banks. They can raise capital right across the spectrum, from minority equity through to non-bank capital and specialist lenders, including ABL (asset-based lending) against property, plant and machinery, as well as invoice finance providers.

Asset-based loans used to be a last resort. Today, they’re mainstream, with ABL lenders backed by family offices, insurance companies and other institutions. And the lines between ABL and traditional finance are increasingly blurred. Funds that previously only looked at term loans are now dipping into the market, providing asset-based lending alongside long-term, non-amortising, non-bank debt. That’s an exciting prospect for a high-growth business looking for capital.

Does that mean bank funding is a thing of the past?

No. Where it’s available, bank debt is still the cheapest source of capital and opportunities are growing. We’ve seen new capital sources from challenger banks augment the big high-street lenders. A range have been pushing into the mid-market and taking market share from the funds.

That increased competition doesn’t just give more options if you’re looking for finance; it’s also driving some non-bank funders to reduce pricing. However, it does mean that the market is incredibly complex for CFOs looking for funding. Navigating the enormous range of providers and types of funding is a challenge.

Can funders’ appetite for debt last?

It looks promising. Funds have a lot of capital to deploy, and institutional investors are searching for yield. Gilts yield less than 5% pa and UK corporate bonds yield 5%-6%. Private credit is one of the few assets that can generate long-term real return above inflation of over 6% that matches institutions’ long-term liabilities. As a result, a lot of capital is still chasing private credit strategies.

What is true though, is that different companies and sectors will have distinct experiences in the debt markets. There’s a strong appetite for some industries, such as technology, software-as-a-service (SAAS) businesses, pharma, life sciences, healthcare and business services offering high growth but predictable revenue models. They are attracting excellent pricing and terms. There’s strong competition among lenders to secure this type of business.

On the other hand, they’re a lot more cautious about sectors with a heavy reliance on consumer spending, or high numbers of employees impacted by the national insurance and minimum wage changes. Retail, hospitality and leisure businesses face a tougher challenge. There’s a stark difference between favoured and unfavoured sectors.

Are there still opportunities in ESG-based finance, such as green loans, social bonds and sustainability-linked loans?

Yes, it remains a favoured sector. A raft of non-bank funders are looking to deploy impact capital, with environmental, social and governance issues important factors for all lenders. However, lenders are now looking more carefully at the claims made by companies. The distinction in that space will be between those genuinely making an impact and those suspected of greenwashing.

How can companies improve their chances of securing debt facilities?

Whatever sector you’re in, it’s all about preparation. Are your financial projections robust? Do you have comprehensive information that will stand up to external diligence? Is your board aligned with the financing strategy?

We’re seeing companies invest in building relationships early: starting a lender education process before formally approaching the market and ensuring they fully understand the nature of the institutions they intend to approach.

Crucially, you need to know what you want from funding. It’s not all about pricing. If your personal wealth is tied up in the investment, knowing that you have enough headroom on your financial covenants is equally important.

For all companies, if recent years have shown us anything it is that flexibility is crucial in an uncertain world.  Providing an adequate buffer on your financial covenants, ensuring enough headroom through undrawn facilities and making sure your working capital facilities could cope with an unforeseen market event. These are all as important as the absolute cost of finance, because that’s how the board of directors can sleep at night.