Post credit crisis we have seen the emergence and growth of an alternative finance market, driven by innovation, government support and supportive investors.
Although maturing, the UK’s alternative funders tend to operate on the periphery of mainstream funding with the UK lending market still being dominated by mainstream institutions. This is reflected in the low levels of UK alternative finance lending as compared to a mature alternative lending market such as the US.
As reflected in our long standing cultural ties with the US we anticipate the UK market will gradually replicate aspects of the US market, with alternative finance becoming increasingly mainstream within the UK. The key driver to alternative finance becoming mainstream will be accessing funding at a cheaper cost of capital.
This trend is now being evidenced within the UK with major institutional investors announcing significant investments into major UK platforms. This institutional investment and the lowering of lending costs is making alternative lenders increasingly competitive, thereby allowing them to challenge the dominance of mainstream lenders.
Accessing this capital is key to the continued development of the alternative finance sector, providing long term sustainable funding allowing alternative finance to become increasingly competitive and hence mainstream.
However, accessing institutional capital is not simplistic. Institutional investors, although keen on the returns offered by the sector, are nervous about investing outside their normal investment criteria. Consequently, when seeking institutional investment it is important that alternative funders understand the requirements of these investors to ensure they have the best chance of accessing this funding.
In many cases alternative lenders have been set up by entrepreneurial founders, funders understand this, however there is an expectation that this will be complimented by some “grey hair” and senior hires
who are proven operators.
Accessing institutional funding will significantly increase liquidity, funders need to clearly understand a platform’s ability to deploy this capital and the associated costs and risks. A clear strategy and plan to support growth ambitions is expected by funders. The Field of Dreams mantra of “if we build it they will come” does not
Institutional investors will naturally expect to see considerable growth in the lender as a result of a funding line being provided. If the existing systems and processes in place are unable to handle that growth and increased workload in a capable manner, or be enlarged to accommodate that growth, the institutional lender will
not provide a funding line to the lender.
Institutional funders will typically look to measure the underlying loan performance as against sector norms. They will focus on KPI’s notably; defaults, admin costs
& cost of acquisition.
The importance of compliance cannot be understated. An immature approach, lack of understanding of compliance or a track record of compliance breaches will rapidly undermine any fund raising process.
Institutional funders require assurance that in the event of a non-performance by a lender or in a worst case scenario fail that they can secure and control their investment funds. Consequently, a key focus will be the standby arrangements for a platform. Funders will expect to see an established standby servicer in place with a clear accelerated invocation plan in place. Ensuring adequate standby arrangements are in place provides significant reassurance to investors.
Working closely with an advisor to package a proposition for funders ensures that issues can be addressed in advance of any pitches to investors. In addition, working closely with proven advisors provides reassurance to investors.
There is also an expectation amongst institutional funds that appropriate advisors are in place to provide audit, legal, compliance and standby services.
This is an exciting time for alternative finance as it becomes increasingly mainstream, however alternative funders have to be aware of the requirements of institutional funding to ensure they have the best opportunity of securing this funding.
Damian is an advisory specialist forming part of RSM’s broad Financial Service Practice. They work closely with many financial services organisations and alternative finance providers, assisting with fund raising and the implementation of associated services, notably the standby service. In addition to the standby service, RSM provide audit, tax and consulting services to the financial services sector and we work closely with our clients to help them overcome the issues and challenges they are facing in the challenging economic environment.