Since the Covid-19 crisis hit, the case for alternative finance has become increasingly compelling.
Banks’ credit criteria continue to get even tighter, with increased regulations and capital adequacy ratios restricting their lending capabilities.
Although, unlike in 2008, they have liquidity, they don’t have much appetite to lend. Hence the near ‘lockdown on lending’ during the pandemic, with most banks focusing on serving existing loan books.
Many are also in the throes of restructurings (HSBC recently announced plans to cut 15% of its global workforce). Plus their obligation to administer the coronavirus business interruption loan scheme is likely to be a huge distraction that will suck up their resources.
Compare and contrast with the alternative lending market, which was born out of the global financial crisis, when the heavy regulatory changes imposed on banks allowed alternative lenders to fill an ever-widening funding gap, and has been building its market share since ever since.
Could the pandemic signal its next purple patch?
The core appeal is often a specialist focus in niche markets and a more flexible approach.
Property loans, for example, are by their nature diverse and risk factors such as uncertain exit dates and values make banks’ blanket approach look weak by comparison.
Alternative lenders have wasted no time seizing the opportunity. At ASK Partners, we have completed seven deals totalling £100m since lockdown was imposed.
This is not a reflection of our risk appetite, merely down to our ability to react swiftly to market demand. Flexibility in our capital base and funding models puts us in a better position than the banks, which have restrictive criteria and a metric-driven approach.
We have not seen a fall in investor appetite either. This, again, is an area where the banks are struggling to deliver. As yields on cash, or near cash, drop to zero, and stock market volatility increases, investors are increasingly looking to debt markets to put their cash to work.
Alternative lenders’ appeal is often a specialist focus in niche markets and a flexible approach
As has been seen before in a major crisis, big banks are tending to freeze, become inwardly focused and withdraw from the market, pressing pause on their lending. As a result, their better people migrate to other houses with more of a ‘can do’ attitude and less red tape – yet another bonus for smaller lenders.
This is undoubtedly a potential turning point for the alternative lending market and a true test of its ability to react to a challenging and ever-changing environment.
The sector could have an important role to play in our economic recovery.
In a niche sector such as real estate where unique dynamics are at play, working with specialists can add significant value. And for investors, the appeal of secured lending against real estate assets with excellent risk-adjusted returns is hard to beat.
The Covid crisis has made everybody reflect on how they live, work, shop and where they put their money. This offers alternative lenders the chance to be a catalyst for recovery again.
Daniel Austin is chief executive of ASK Partners