Daniel Bailey

Why specialist lenders are attracting buyers as well as borrowers

There are few better bellwethers of the strength of the specialist finance sector than its vibrant consolidation climate.

The past year’s flurry of merger and acquisition activity speaks volumes about the appetite of investors to get a piece of the action. It’s a testament to the growth and attractiveness of lenders who’ve successfully ridden the crest of the wave in the post-financial crisis market.

However significant change can also bring about an unsettling time for brokers, for whom the stakes are higher than ever. The prospect of lenders changing hands – or even just changing names – risks creating confusion.

With further consolidation likely, brokers should choose their lenders carefully by looking for longstanding, consistent and reliable lenders who are likely to be here for generations to come.

M&A evolution

The most striking thing is not just level of M&A activity, but the way it is evolving too.

A decade on from the financial crisis, specialist lenders have successfully shed the alternative finance tag and stepped in to fill the gap left as mainstream lenders lost their willingness and ability to lend to businesses.

Ten years of low interest rates and a relatively benign economic backdrop have seen many specialist lenders post consistently robust growth and build strong reputations, all of which have naturally attracted interest.

High valuations can prove mighty tempting to owners who battled through the tough times to establish trusted – and hence highly saleable – brands.

On the buyer side, the acquisitional spree is being driven by the desire for reliable returns, but also the desire for diversification. It’s striking that buyers can see value in not just the loan books, but also in the branding of their targets.

We see that second element coming to the fore as the profile of the typical acquirer changes.

The early torchbearers for acquisition in the sector tended to be private equity firms, who swooped on a series of successful niche operators.

But in future, we could see more banks seeking to spread their wings in the specialist lending space through acquisitions too.

Challenger banks have made inroads into the commercial mortgage and asset-based lending space, where acquisitions can offer them a shortcut to boost their loan books and grab an increased market share.

Could high street lenders be tempted back even with Basel IV on the horizon? We believe the British Business Bank’s referral scheme has opened many mainstream banks’ eyes to the number and quality of business borrowers that may not be proceedable under conventional bank lending criteria, but which are still more than credit-worthy when seen through the eyes of a specialist lender.

One potential fly in the ointment might be if the default rate among non-bank lenders were to rise. These risks can be controlled using the sort of expert, sector-specific knowledge that specialist lenders are famed for and which enables them to assess their clients’ risk ratings better than one-size-fits-all lenders.

What brokers should watch for

Nevertheless, the strength of the sector and the banks’ potential desire to be part of the action are likely to ensure the current M&A trend continues, and successful asset finance specialists should expect to see no shortage of suitors.

While lender consolidation poses no threat to brokers per se, brokers should nevertheless exercise caution when selecting a lender partner. Given that broker-lender relationships work best when built on long-term trust and stability, then as part of their own due diligence, brokers should make certain that their panel of lenders is likely to stand the test of time.

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