Despite the appetite to refinance and take on new debt facilities, 58% of specialist lenders surveyed said they were considering a full or partial exit within the next five years either through a merger or acquisition, survey results from Interpath and JPMorgan reveal.
Within this cohort, according to a review of the views of more than 100 specialist lenders with a combined loan book of £54.9bn, some 12% said they were weighing up an exit within the next two years.
Equity, however, remains key and in much shorter supply.
More than a quarter of contributors to the study said they didn’t have sufficient equity funding for the same period. Interpath said these conditions will present an opportunity for further consolidation and creative capital solutions in the sector.
Founder-led businesses remain a dominant force in the specialist lending sector and are present in the capital stack of 80% of the lenders surveyed, reflecting the entrepreneurial nature of the sector.
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Driving consolidation
Due to the interest in M&A activity, institutional and private equity investors, which currently account for 25% and 20% respectively in lenders’ capital stacks, are likely to play an increasingly important role in freeing up founders, management teams and high-net-worth money, Interpath added. This, it said, would help drive market consolidation.
Stuart Mogg, managing director and head of financial services capital and debt advisory at Interpath, said: “The specialist lending sector has achieved remarkable success in recent years, fuelled by the growth of capital solutions.
“As loan books grow, there is a rush to secure capital that can fuel that business amidst an increasingly competitive market. Lenders are capitalising on lower margins, reduced fees, and greater flexibility, as well as offers from some funders for additional financing for non-performing loans, which makes an attractive proposition that enhances liquidity and risk management for lenders.”
Mogg said the substantial demand to refinance and take on new facilities, as well as the need for equity, reflected the importance of maintaining a flexible and resilient capital structure through a diverse capital stack.
“As history has proven, those that have planned and executed financing for the long term have tended to win in their respective sectors,” Mogg added.
Nick Parkhouse, managing director and head of financial services deal advisory at Interpath, said: “Founders, management teams, and high-net-worth individuals are deeply entrenched in the funding structures of specialist lenders, representing the strong alignment between leadership and capital in order to drive growth. However, there is a clear signal that M&A activity will start ramping up in the coming years and we have already started to see green shoots appear, with an increase in interest from buyers.”
