Growth for small bridging lenders 'probably gets harder' as funding improves for larger providers

In a filmed interview with EY's Nick Parkhouse and Stuart Mogg, the pair discussed how a surge of big-name funders could widen the gap between small and large bridging lenders.

Nick Parkhouse is a partner and leads the EY UK financial services corporate finance team and Stuart Mogg is an associate partner and leads the company's UK financial services debt and capital advisory team.

Looking at how funding models have changed over the past two years, Stuart highlighted the emergence of investment banks entering the sector to lend in the wholesale space, such as JP Morgan, Credit Suisse and Morgan Stanley. “That’s an important rubber stamp for this market that it’s institutionalised,” he said. 

When considering the pros and cons of the institutionalisation of the bridging sector, it was pointed out that bigger funders are normally attracted to larger lenders, and therefore the disparity between the terms that the big and small finance providers can offer could broaden. “It probably gets harder to leap from being a small bridging lender to a bigger one as those facilities improve for the latter,” Nick explained.

More institutional funding has also given bridging lenders the ability to grow into adjacent markets and boost the number of products available. “A lot of that is targeted at pushing out the terms,” Nick stated, with typical 12-month bridging loan offerings now being expanded to include three-year bridge-to-let facilities, aimed at keeping the customer for longer.

“While there is some differentiation between different funders in this market, there is also a minimum standard on product,” Stuart added. “I’d like to see more looking into development style products, for example, and giving originators optionality to help them to grow.”

He also noted the mass of structure and bureaucracy around many of these facilities and is passionate about making things easier for lenders by alleviating some of the complexity.

Every week, EY sees a new funder enter the market — and not just the traditional UK/US names. “We are starting to see a lot more European and global institutions look to the UK as an option of deploying capital,” Stuart said.  

He divulged that, since 2019, there has also been a “marked change” in the uptake of forward flow/whole loan sale funding in the bridging market. 

“Now, probably one in three new opportunities we see is of that construct,” he confirmed. 

“We’ve seen a big influx of new money from the asset management/hedge fund community looking to put money to work under a credit strategy and to purchase these loans.

"There are also a number of the challenger banks looking at ways of increasing origination into certain markets and using bridging originators as a way to do that.”

According to the latest annual EY Bridging Market Report, some 31% of the bridging market are considering M&A opportunities. Nick thinks this figure “makes sense” as a number of lenders that have been around since the last financial crash are likely to be thinking about exit or raising capital to grow further. “Anyone looking to sell really needs to focus on, ‘How do I look different to the other bridging lenders? How can people see me as a business with longevity? Am I purely just a price-taker, or do I have a brand in the market that people go for and trust and have a strong repeat client base?’” Nick commented. 

When asked whether they expect specialist/challenger banks to be the purchasers of these bridging lenders in the near future, Nick explained that, during the past few years, these banks weren’t focused on acquisitions and were instead enjoying strong organic growth or expanding their product sets. “We feel like that’s starting to turn slightly,” he confirmed.

Watch the full interview below.

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