In the current climate it seems that most borrowers are unconcerned about where a lender’s money comes from; after all, money from a bank is just as shiny as money from a hedge fund, is it not?...
Recently, Bridging and Commercial received news which questioned the validity of this statement, as it came to light that the source of some lenders’ funds could be directly affecting their ‘drive to lend’, and is in some cases placing undue pressure on underwriters to push money through the door without the proper due diligence.
Ray Cohen, compliance expert and MD of Jackson Cohen, explained that there are many different types of funding lines and that each source of funding could affect the price of ‘inactivity’ for the lender.
“Some companies have funding lines which will require them to pay a certain inactivity fee for not lending. In most cases, though, the lending company has not borrowed the entire sum up front and therefore the fee for inactivity is relatively low, accounting for the fact that the bank or private investor could in theory redeem a bank’s basic interest rates while they hold the money,” he said.
“In other cases, a lender may borrow money from a bank, hedge fund, or other investor as a lump sum. In these cases, it is the bridger who holds the money and who must therefore pay higher interest rates to the source, regardless of whether the money is utilised or not. It is in these cases that the bridger may feel an increased pressure to lend, in order to make enough money to cover the fees.”
For many onlookers, the fact that a company is urging its employees to lend enthusiastically may not seem to be such a bad thing. But sadly, as proven by the latest housing crash, the desperation to lend often leads the lender to make rash decisions.
Christian Faes, Managing Director at Montello, explained that in practice, lenders who are funded through hedge funds are not permitted to make overly risky loans, as the hedge funds tend to have very sophisticated investors, who will enforce tight constraints on what can and can’t be done with the funding.
Andrew McMahon, Accounts and Treasury Manager at Blue Gate Capital, an investment management company who funds Manchester-based Bridgebank Capital, said: “If we were to lend to a bridging company, we would effectively be giving them a loan. We would specify certain criteria for how the funds can be used, such as the maximum LTVs that can be lent. “
But according to an industry expert, who did not wish to be named, the restrictions placed upon lenders, such as maximum LTVs, could easily give rise to instances whereby property is valued far above its market value, giving the impression that the loan is less risky than it actually is.
Theoretically, he said, this would allow the lender to fund 100 per cent of deals, and to avoid using any of their own funds, placing them in an extremely precarious position if the borrower defaults.
Christian Faes was not aware of any such practices taking place, but added: “The main negative aspects of this type of funding are that it can be quite 'fickle' capital.
“Whilst there are the returns being received, the hedge fund may stay invested or the line of credit available, however if they change their outlook on the market or want to use the funding for something else, then the bridging company may be left without funding.”
James Bloom, CEO of Regentsmead, added that as well as being unstable, the lender may find that a hedge fund is an expensive form of capital.
“This is a volatile and expensive way of obtaining funding in some cases and when bridging is no longer flavour of the month for hedge funds they may quickly withdraw from the market. This is not a stable way of raising funding and companies which use their own funds are far better placed to offer continuity to their brokers and their borrowers.”
Christian Faes added: “The positive side of using hedge funds would be that funding is scarce at the moment, so it can be a much-needed capital source in the current market.”
In an effort to find out more details on the positive aspects of using hedge funds, we contacted Bridgebank Capital, to ask about their experiences with hedge funding. Unfortunately though, they declined to comment.
By Katie-Jill Rowland
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