By Matthew Potter, Partner at Pollen Street Capital
[This article first appeared in CCR Magazine]
Non-bank lending is an integral part of the lending landscape, providing financing to millions, including those that are underserved by high street banks. We saw a seismic shift in the industry post-2008, with a change in the focus of traditional banks leaving a gap in the market that has since been filled by non-bank lenders.
At Pollen Street Capital, we recognise the importance of these businesses and have focused our strategy on this growing market through providing finance, typically on a senior basis, to high-quality non-bank lenders.
What is driving non-bank lending growth?
Increased capital requirements, cost pressures and legacy technology are all driving banks to narrow their focus. This is leaving a space open for non-bank lenders.
There are also a number of longer-term factors changing the lending market, which in turn have impacted the sector’s growth:
The majority of traditional lenders have chosen to simplify their processes following the crash of 2008, focusing on lending in areas that can use a standardised process, such as retail mortgages
Progression of data and technology has enabled more agile businesses to offer innovative customer propositions, in a more efficient and convenient way and often at a reduced cost
The lending market has seen an increase in seasoned underwriters and originators setting up specialised lending platforms, giving customers access to a team of experts who maintain longstanding relationships, execute and close quickly, and thus benefit from repeat business
Why is specialisation so valuable in the lending sector?
Non-bank lenders are specialists in specific end markets, making them critical to the credit economy – lending to millions of consumers and businesses and catering to those underserved by high street banks.
Specialist markets demand specific knowledge, expertise, technology systems, and processes that can be completely tailored, resulting in a high-quality lending proposition. These businesses typically perform strongly and often do not rely on scale to be successful.
At Pollen Street Capital, we’ve seen particular growth in, and demand for, specialist markets including working capital finance, specialist real estate, motor finance and point of sale finance.
How Pollen Street Capital addresses this opportunity: Lending to non-bank lenders
The already large market is growing, opening further investment opportunities.
At Pollen Street Capital we’ve focused on accessing these opportunities, lending directly to non-bank lenders. Due to the fragmented nature of the market, most of our investments are sourced internally and negotiated bilaterally, with the lenders often preferring to partner with a finance provider that has deep expertise and industry knowledge.
It’s our expertise in this market that has driven us to develop a differentiated investment strategy. Our asset-based credit strategy provides finance to the non-banks, predominantly on a senior basis, secured directly against their loan portfolio. Due to the granular level of the underlying loan portfolios, they typically generate highly predictable cashflows supporting our loan repayments and providing significant downside protection.
Fundamentally, our approach combines the structuring and credit disciplines of Asset-Based Finance “ABF” with those of direct lending. The loans are fully covenanted at asset performance and corporate level and are structurally super-senior to the majority of the business’ operational expenses.
Reducing volatility and losses at times of extreme stress
The nature of the senior strategy combined with the resilient asset class means the risk of volatility and losses at times of heightened financial stress is considerably lower.
This was exemplified during the Covid-19 pandemic. Our team worked closely with our partners to ensure they continued to provide the best possible support to their clients, as well as gathering as much data and insight as possible from our credit positions.
The information we were able to gather has given us a clear picture of the efficacy of our investment approach. Across our senior secured portfolio, there were no defaults on our facilities, and cash collections were higher in 2020 than 2019 despite the stressed environment.
The robust performance can also be attributed to our intensive portfolio management approach. This proved invaluable throughout the uncertainty of the Covid pandemic as we helped guide our borrowers, ensuring the right underwriting and risk approach was adopted and supporting their businesses in unprecedented times by sharing our expertise and best practice from around the portfolio.
Fundamentally the approach continued to generate strong, consistent returns despite the extreme stress.
Growth, opportunity, support
At Pollen Street Capital, we’ve seen first-hand the importance of deep sector expertise to navigate the non-bank lending market, by building a network of long-term industry relationships enabling a diverse and differentiated deal flow.
Non-bank lending offers a profound opportunity to deliver consistent returns with strong downside protection, while also driving a positive impact in society. The specialised and agile nature of the sector means it will continue to evolve, bringing new and exciting opportunities to the floor.
We’re also passionate about the potential for positive impact through the lending we provide to non-bank lenders. This impact can be in areas as diverse as driving financial inclusion, regional economic development, green transport, energy efficiency in homes and more.
Overall, it’s clear that the non-bank lending sector is large but also continuing to grow, both in size but also in importance to what is a thriving, healthy and well-functioning economy by supporting businesses from a variety of sectors on a deeper level.