Private finance limitations

Andrew Screen, GVA Financial Consulting, GVA
Tue 27th March 2012

An obvious solution for developers of schemes facing funding difficulties is to look to private sector funds - including pension funds, opportunistic, private equity and corporate funds - to fill the gap.

This has happened to some extent in the PFI markets on smaller projects and energy-related projects where there is a low level of risk due to the strength of covenant or income once these projects have been completed.

However the low level and narrow scope of funding provided has made little impact on the funding requirement.

It is also difficult for the private sector funds to change and adapt to these new circumstances. Pension funds typically invest in low risk (A-rated) investments and to preserve the confidence in their ability to deliver future pension payments to their investors are unlikely to change to higher risk.

The funding required by developers is either mezzanine or debt funding (to fill the gap created by lower levels of debt funding by the banks) and it is difficult to change existing funds (which are primarily equity) to provide mezzanine and debt.

New funds can be formed, but these take significant time (1-2 years) to set up and have different expertise.

There is however an opportunity for local authorities which can obtain cheap funding from central government (Public Works Loan Board) and can also use their A-rated covenant, to provide the following types of finance:

  • equity;
  • debt;
  • mezzanine;
  • guarantees to projects.

GVA Financial Consulting has advised several local authorities and property developers in accessing these funds and creating structured finance solutions with both public and private sector sources of funds.

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