The comment follows research which found that over a 12-month period, more than £5bn of merger and acquisition (M&A) activity took place in the UK specialist finance sector.
The research from M&A firm Livingstone found that non-bank specialist lenders dominated the activity by volume, accounting for 19 out of 34 deals.
Why would specialist finance lenders want to merge?
Johan Groothaert, director at Fiduciam, explained that specialist lenders might look to merge for several reasons.
“…Some lenders who have strong balance sheets may find acquisition an easier way to grow rather than trying to do it organically.
“There will certainly be quite a few opportunities in 2019 and we have positioned ourselves to be ready to make an acquisition when it would make sense.”
Nonetheless, Johan did highlight limitations to specialist lenders merging and acquiring competitors.
“A specialist lender that is embedded in a larger financial group loses its flexibility and funding diversification.
“Another driver for M&A activity is that some specialist lenders still have important cash burn rates, as they grow very rapidly, requiring equity injections by venture capital firms.
“However, we do not believe this is a sustainable long-term model.
“Maintaining a high-quality loan book is more important than rapid growth.”
Marios Hajiroussos, director at London Credit, added: “More specialist finance lenders may merge in 2019 in order to achieve greater efficiency through volume and scale, sharing substantial capital investments, such as costly software and electronic platforms, expanding and complementing their credit products’ universe and expertise, merging geographical and client category focus, and complementing capital-raising capabilities with loan origination resources.”
Chris Oatway, director at LDNfinance, also felt merging could bring benefits to those looking to spread geographically.
“With specialist funding becoming so diverse and lenders spreading their geographical appetite across the UK, potential M&As will allow London-based lenders to grow quickly in the popular regions of the North, such as Manchester, Leeds and Liverpool.
“Without local knowledge and contacts in these areas, this can prove very challenging, so M&As can give firms a quick route to market in these locations.
“M&As also allow new skillsets to be acquired in different specialisms by acquiring a team to complement and enhance the existing representatives.
- £5bn of M&A activity recorded in UK specialist finance sector
- 141 fintech M&A transactions reported in H1 2018
- GapCap and Invocap to consolidate their invoice finance businesses
“To achieve this through organic growth can be time consuming and with the current pace of growth in the specialist finance sector, this could lead to firms being left behind by more aggressive competitors.”
Could we see more specialist finance mergers in 2019?
Johan said that since the financial crisis, a large number of specialist lenders had been set up and not all of them would reach critical scale.
“This means that some may be better off merging with larger specialist lenders.
“We could also see asset managers, family offices and other institutional parties acquiring specialist lenders.”
Jonathan Sealey, CEO at Hope Capital, was sure that M&A activity would rise both in 2019 and beyond.
“While there are a lot of new lenders joining the market, it is hard to get market share without scale and the easiest way to get scale is by either buying or merging with other well-established, well-financed and well-run lenders.”
Adam Tyler, executive chairman at the Financial Intermediary & Broker Association, felt that trying to ascertain whether merger activity would increase in 2019 would be guesswork at the best of times, and with the current political uncertainty, even more so.
“However, we might very well see increasing consolidation, particularly if the Brexit negotiations are not successfully resolved.
“Continued deadlock or a no-deal Brexit, could make funders jumpy, and if housing and remortgage activity continued to drop, it might be very difficult to sustain the number of specialist lenders currently operating without consolidation.”
Colin Sanders, CEO at Tuscan Capital, said it was good to hear that investor confidence levels were high.
“Interestingly, the growth and RoE [return on equity] numbers quoted in the research accord broadly with our own lending experience during 2018.
“I can also personally attest to the continuing appetite to engage among erudite would-be investors.
“So far, as the bridging market in particular is concerned, I don’t believe this will necessarily translate into consolidation among existing short-term lenders (where loan books run off pretty quickly).
“In this part of the market, it’s more likely to encourage further new entrants rather than M&A activity.”
However, Colin did see acquisitions or mergers on the cards in the longer-term mortgage and BTL sectors.
“Here, there is a scramble for growth in markets which aren’t materially expanding.
“I can, therefore, envisage potential acquisitions being weighed-up by aggressive hedge funds or ambitious institutional players keen to gain market share.”