A European survey reveals that non-bank or "alternative" finance is growing among European companies but the sector remains fragmented and ripe for more integration.

European companies continue to embrace alternative finance - sometimes dubbed “shadow banking” - as conventional bank funding remains tight, with about a third of their funding coming from this source, a study published by law firm Allen & Overy has found.

But although there has been growth the market for such alternative finance is fragmented and mainly domestic, suggesting there is potential for an industry-wide effort to unify standards and make use of disparate pools of capital across Europe, the survey said.

While three quarters (76 per cent) of borrowers are aware of the pan-European corporate private placement market guide or standardised documentation, only a quarter have actually made use of them. From an investor perspective, standardisation has been embraced more readily with use of the guide or documentation much higher than that of the corporates (54 per cent).

The ascent of alternative finance, a term covering areas as diverse as private structured credit, peer-to-peer lending, crowd-funding, venture capital and forms of private debt, has expanded since the 2008 financial crisis as tighter capital rules, among other forces, have prompted banks to cut back on their traditional lending. Family offices, private banks and discretionary wealth managers have been among those targeted to invest in these area; alternative finance is also important for wealth management in helping create business owners and high net worth clients in future.
 
The Allen & Overy survey, of over 360 respondents split evenly between senior finance executives at corporates and senior decision makers at investors across Europe and undertaken by YouGov, revealed that while bank lending remains the largest source of funding for European corporates, accounting for on average 48 per cent of all funding, almost half of corporates (48 per cent) expect their use of alternative finance to increase over the next five years. This exceeds corporates’ expectations of increases in the use of bank lending or capital markets (both 31 per cent).

“We feel the market is approaching a tipping point. It’s clear this part of the funding mix is here to stay, and all the components needed to create a thriving market are in place; standardised documentation and a guide to best practice for private placements have provided a foundation to help make this market more uniform,” Ben Fox, partner at the law firm, said.

“No one could expect all deals to use this format just 10 months after launch. But it’s evident that more needs to be done to educate players about these structures in order to achieve a deeper pool of capital across Europe for everyone’s benefit. Banks, with their deep-rooted relationships and huge distribution networks, and indeed law firms have a crucial role to play in bringing market participants up to speed.”