Specialist lending merger activity could take off in next year

However, Livingstone Partners believes the Financial Conduct Authority’s (FCA) investigation into the second charge sector could disrupt at least one of those transactions.

It added that second charge lenders were caught unprepared for the Mortgage Credit Directive (MCD) which resulted in a significant dip in volumes at the time.

But following a sustained period of growth following the credit crunch, the advisory firm understands the specialist sector could be ripe for consolidation – and this may include the return of bigger lenders.

Reasons to sell

Livingstone Partners partner Alex John told Specialist Lending Solutions many of the specialist lenders were now at a key stage in their development.

“A lot are getting to a scale now where they are in an interesting situation,” he said.

“The founders may be thinking that they’ve got it up to a certain size but that it may need investment or diversification into different product areas. This might prompt them to consider whether they are the right person to do that.

“In some cases the owners might just want to sell, but in others, markets have become more competitive and funding has become a lot cheaper meaning yields are now lower,” he added.

Return of big banks

One of the key trends of the credit crunch was the retreat of major financial institutions from specialist lending areas, but John believes they could be set to re-enter in the next couple of years.

This process has already begun by providing funding to many specialist lenders through wholesale money markets.

“The banks are perfectly happy to do that – they would rather let someone else do the hard work and underwrite it,” he continued.

“They can still access those specialist markets but at wholesale prices – the risk is much lower and they don’t have the infrastructure requirement.

“At some point they may start to get into those markets directly. They may start to acquire some of the specialist businesses and for example we’re already seeing the consolidation of the challenger banks – such as the deals involving Aldermore and Shawbrook,” he added.

FCA could hit second charge deals

John also highlighted that the second charge sector could be prime for deals to be completed, but noted that the Financial Conduct Authority’s intervention could impact at least one of those on the horizon.

“Second charge lenders got hammered by the MCD because people didn’t have the processes in place so volumes dropped off,” he said.

“But with mortgage rates being lower in general and property markets being sluggish people have been using second charges to refurbish. So that’s seen a lot of activity and growth and we might see one or two transactions in that market. The general view was fairly positive in that sector.”

And he was surprised at how well the bridging sector had fared, particularly given the developments in the buy-to-let sector.

“There’s a lot of commercial bridging activity and some second charge bridging but I’m surprised more to see new lenders coming in.

“I don’t see what room there is for new participants to come in, but they clearly see room,” he added.