During the pandemic, non-bank lenders dramatically curtailed business and consumer lending amid concerns about borrowers’ ability to make payments on their loans. Though originations have picked up as businesses reopen and the economy improves, the year-long lending hiatus has directly impacted institutional investors’ ability to find debt financing opportunities. Direct lending deals of $50 million and up are now in short supply.
Institutional investors are adjusting their investment focus, deal terms and risk parameters to find opportunity. The low-yield environment has added to the challenges and originators have sold securitizations to institutions at a significant premium to the par value of their portfolios.
As a private credit marketplace that matches institutional investors with loan originators, we are seeing four significant trends in the direct lending space: A shortage of deals, a penchant for institutional investors to take on more risk, increased interest in previously shunned asset classes, and a willingness to invest in smaller deals with high growth potential.
A Dearth of Deals
During the pandemic, non-bank lenders tightened up credit standards for both business borrowers and consumers. At the same time, the massive fiscal and monetary stimuli created excess liquidity in the system. Companies and consumers gained access to unprecedented government assistance, which reduced their need to seek credit financing.
The curtailed lending has reduced non-bank lenders’ need for financing, and the resulting surplus in uninvested institutional capital has led to greater competition for attractive deals. As a result, borrowers have gained significant negotiating leverage in deal negotiations. This is a direct reversal of last year, when many institutional investors stepped to the sidelines, and those remaining in the market were able to dictate terms.
Looking to New Asset Classes
In the current environment, investors have begun to consider creative and innovative sectors that they would have perceived as too risky in previous market cycles.
Asset classes generating interest right now include:
- Small Business Credit. As small businesses continue to recover from the impacts of the pandemic, they have a growing need for short-term cash solutions such as merchant cash advance (MCA) facilities to pay suppliers. In recent months, many new MCA lenders have emerged with more sophisticated underwriting standards, and none of the legacy portfolio lingering issues from COVID shutdowns. This has attracted the interest of institutional investors, who have begun to show interest in providing these lenders with financing.
- Venture Debt. Institutional investors have a growing appetite for revenue-based loans to venture capital-backed companies. We have noted a flood of new structures that allow investors to provide debt financing to companies seeking to boost revenue through activities such as advertising and marketing. Venture debt can benefit shareholders by minimizing dilution of their ownership.
- Automotive Finance. Prior to the pandemic, many institutional investors did not want to consider lending to companies that provide consumer auto loans due to poor underwriting standards for both the collateral and the borrower. A combination of soaring prices for used cars and higher credit standards are now generating interest in this sector.
- Buy Now, Pay Later (BNPL). Investors are seeing value in providing financing to BNPL companies, which partner with merchants to allow their customers to pay for merchandise via installments. In the post-pandemic recovery, the BNPL trend continues to accelerate, spreading worldwide as specialty lenders arise to help merchants drive sales.
- Canadian Middle Market Lending. A recent fraud in Canada related to Bridging Finance has opened up more opportunities for specialized capital providers to step in and fill the gap in mid-market lending as conservative lenders retreat. There are a plethora of creditworthy borrowers seeking financing, and we are seeing active interest in this sector.
Smaller Deals
In addition to greater interest in these asset classes, another notable feature of the marketplace right now is investors’ willingness to consider financing deals under $50 million, when previously their target range was $50 million to $100 million.
With stiff competition and a shortage of opportunities to invest, they are now even considering transactions as small as $10 million to $15 million, as long as they see growth potential. Institutions are seeking ways, through deal terms, of securing the rights to future supply by including volume guarantees and rights of first refusal for future supply.
Pushing Past the Imbalance
In the past two decades, we have never seen an imbalance like this in the private credit space, with billions in institutional dry powder and a low supply of non-bank lenders seeking financing.
Institutional investors in search of attractive deals can use Finitive to identify opportunities with the potential for strong returns. With Finitive’s connection to a vast network of potential borrowers, institutions can register on the platform to source deals that fit their objectives and mandates, and access diligence information to speed the time it takes to convert an idea into an investment.
Non-bank lenders can work with Finitive to make certain they can match their area of focus to investors that will work quickly to fund their needs and help them grow over time. Finitive stands ready to facilitate capital for all stages of a non-bank lender’s growth.
All information provided herein is for informational purposes only and should not be relied upon to make an investment decision and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. Readers are recommended to consult with a financial adviser, attorney, accountant, and any other professional that can help you understand and assess the risks associated with any investment opportunity. Private investments are highly illiquid, speculative and are not suitable for all investors. Investments can lose their entire value. Securities on the Finitive technology platform are offered through North Capital Private Securities Corporation, member FINRA/SIPC.
