In Focus Commercial Credit
The importance of non-bank lending
The non-bank lending sector has rapidly become a more significant part of the market, so what are its prospects?
Matthew Potter Partner, Pollen Street Capital
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. 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 a 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: l 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. l 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. l 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.
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
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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. We have seen particular growth in, and
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demand for, specialist markets including working capital finance, specialist real estate, motor finance and point of sale finance.
Addressing this opportunity The already large market is growing, opening further investment opportunities. We have 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 bi-laterally, with the lenders often preferring to partner with a finance provider that has deep expertise and industry knowledge. It is 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.
August 2021
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