Despite a 25% decrease in use of alternative financing since 2014, almost 50% of corporates expect this funding source to become more important in the next five years.

That is the main take-away from a survey on alternative finance conducted by Allen & Overy. It found that the use of alternative financing is expected to increase more than the expected increase in use of bank lending or capital markets. This is despite only 30% of corporate funding coming from alternative sources in 2015, compared to 40% in 2014 – a decrease of 25%. Just 6% of corporates thought they would use less alternative finance in the next five years.

The survey found that most corporates make use of a diverse funding mix, comprising bank lending, alternative finance and capital markets. Only 2% of corporates rely on just one source of funding.

Italy and Benelux were singled out as potential 'boom' markets, with 87% of Italian corporates saying they expect to increase their use of alternative finance in the next five years, while 74% of those in Benelux said the same.

The survey also concluded that education and standardised documentation would be key to building a critical mass for the pan-European private placement market.

It presented the following key insights:

1. Bank lending is top, but it isn’t the only source of funding. Corporates are making use of a diverse funding mix. Bank lending accounts for 48% of all lending, alternative finance is 30% and the capital markets account for 22%. Furthermore, only 2% of corporates get 100% of their funding from one source
2. Nearly half (48%) of corporates expect their use of alternative finance to increase over the next five years (broken down as 46% of big corporates and 51% of medium corporates).
3. Investors are more likely to provide alternative finance to large corporates, with an average of 41% of them allocating funds to large companies, 34% to medium enterprises and 26% to small enterprises. France is the only country where investors offer more alternative finance to small corporates than large and medium.
4. Corporates are most likely to use domestic providers for alternative finance but international providers are part of the mix. Italy is the market with the biggest portion of international providers, with one-fifth of Italian corporates using global providers rather than domestic providers.
5. A wide variety of alternative finance is available, but investors and corporates are product agnostic. The top forms provided by investors are: privately placed direct loan (61%); privately placed direct bond (60%); and privately placed loan intermediated by a bank (58%).
6. Over three-quarters of corporates and investors are aware of the launch of the pan-European corporate private placement market guide and standardised loan and bond transaction documentation. A quarter of corporates have used either the guide or the documentations or both, while and more than half of investors have used either or both.
7. Corporates are most likely to use the following types of alternative finance provider: private debt fund (53%); asset manager (49%); insurance company (45%); hedge fund (45%); and pension fund (43%).

The survey Funding European business: Harnessing Alternatives, by Allen & Overy, assessed the use of alternative finance across six European markets, looking at corporate funding and investor behaviour. It surveyed 368 respondents. both corporates and investors, in France, Germany, Italy, UK, Spain and Benelux.