The world of non-bank property lending has come a long way. The journey ICG-Longbow has been on since 2006 is testament to how the industry has evolved in that time. Today, non-bank lenders have much more to offer than they did a decade ago and we are no exception. We’ve evolved from simply providing mezzanine finance in the wake of the financial crisis to providing a broad range of debt and equity funding solutions, effectively offering a one-stop shop for our borrowers and partners.
In 2008, we were one of the first to spot the opportunity that the retreat of the banks presented and started the process of raising our first institutional fund. Initially our focus was on filling the financing gap left by the banks, which were no longer willing to provide senior debt at pre-crisis levels with mezzanine debt. We had some notable successes with this strategy. For example, one of the fund’s largest deals was to provide the lead £33m participation in a £45m mezzanine loan for the refinancing of 120 Holborn in 2012. The investment was realised in 2016 following the sale of the building and generated an IRR of more than 20% for our investors.
However, we quickly worked out that mezzanine finance was not the only opportunity available for non-bank lenders. We received a large number of combined financing requests for senior and mezzanine debt. Banks were not only lending at lower leverage levels but were also retreating entirely from providing loans against certain types of assets such as those with value-add or complex business plans. As a result, we started providing whole loans. These form the bulk of our activity in the higher loan-to-value space, having provided more than £2bn of whole loans since 2011.
In addition to whole loans, there was demand for traditional senior debt by itself, especially in the mid-market from private property companies and family trusts. The same is true for residential development funding, where the banks had effectively withdrawn from supporting medium-sized developers. In each case, we were able to support highly experienced borrowers with strong assets by stepping into an area that the banks had declared “non-core” or just too complex.
Relationships are key
Importantly, we offer something a bit different. We develop a close relationship over the life of a loan with our borrowers, who we view as partners, and with whom we seek alignment in realising their property business plan objectives. Across all our strategies we focus on providing a simplified structure and offer a customer-focused service.
We develop a close relationship over the life of a loan with our borrowers, who we view as partners, and with whom we seek alignment in realising their property business plan objectives
A decade on from the crisis, this remains a key point of difference between the banks and non-bank lenders. Quite apart from the fact that banks’ appetite to lend has never fully recovered from the crash, our clients and partners tell us that banks are not able to offer the same level of service that we provide. This is something our clients increasingly appreciate. Whereas in the immediate aftermath of the crash they would view banks as permanent sources of debt and question whether we were really long-term partners, today it is almost the reverse. As the underlying property market evolves, this is true more than ever today, with non-bank lenders leading the way in funding alternative real estate sectors such as hotels, student accommodation or residential private rented sector investments.
Building on our experience in residential development funding, we have moved into equity funding with the launch of our build-to-rent business, initially through the Wise Living joint venture with SDL Group but with further partnerships around the corner. Our build-to-rent strategy is a natural extension for us as it capitalises on our existing experience in the residential sector and involves the same mid-market, partnership focus that we adopt across the business.
Our experience is mirrored elsewhere in the sector, although it is typically firms that are better known as equity investors such as L&G, Blackstone and UBS that have branched into debt. We all have a differentiated focus but have gradually increased the range of products we offer to both borrowers and investors.
Looking ahead, as the market evolves, we will keep responding to the needs of our customers. Our approach is always to start with the market and if we see an opportunity of sufficient scale that offers our investors a distinct and attractive risk-reward profile, then we will build a new strategy around it. One of the next ports of call for us and a lot of our UK-based peers is to move into continental Europe, where the non-bank lending market is not as developed as it is here. As well as responding to a market need, expanding into Europe also offers our investors geographical diversification. We have already taken the first step by launching a pan-European sale-and-leaseback strategy, which combines ICG-Longbow’s property expertise with ICG Plc’s 29-year track record of investing in European corporate credit deals.
Over time, we expect to see non-bank lenders build increasingly global platforms as the market continues to mature. It is likely the market will also see further consolidation as smaller investment managers struggle to remain competitive against the backdrop of ever-increasing regulatory demands and competitive pressures in the industry.
There is no reason why the non-bank lending market cannot continue to grow and become as significant a part of the real estate debt landscape as it is in the US. However, we don’t expect UK-based managers to adopt the more aggressive US model of leveraging funds to enhance returns. Investors in the US have become comfortable with this and are happy with the extra yield it provides, but our view is that it takes away from the defensive attributes of real estate debt.
The continued success of the non-bank lending market depends on us being able to deliver for both our borrowers and our investors. We can only do that if we continue to adapt to the market, remain disciplined in our underwriting and continue to treat borrowers and investors as partners.
- ICG-Longbow is the trading name for the real estate business of Intermediate Capital Group, the FTSE 250 listed asset manager with €35.2bn AUM
- ICG-Longbow was formed in 2006 by current business co-heads Kevin Cooper and Martin Wheeler and has been part of ICG since 2011
- ICG-Longbow AUM £3.6bn
- £2.8bn invested across 114 transactions
- C. £1bn available capital to deploy
As at: 31.12.18
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