Asset Management

Cultural Shifts Driving Alternative Lending Growth

Jackie Bennion, Deputy Editor, 14 October 2021

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20 years ago
The description harks back to the role occupied by high street banks 20 years ago.

“Yes, basically. Depending on which report you read, the decline in traditional bank lending has left a £50 billion funding gap in the UK. It is a opportunity on two fronts for non-bank lenders such as ourselves to step into that gap, and critically make sure firms are being served by someone.”

The shortfall comes as the Bank of England has warned that UK SMEs are heading into record debt territory. Last week the bank reported that a third of UK businesses are holding debt 10 times greater than their cash holdings, and many have taken on borrowing for the first time because of the pandemic.

It singled out the ballooning leveraged-loan market for concern. “There are signs of continued loosening in underwriting standards and increased risk taking in some investment banking businesses,” the BoE warned.

Several other Triple Point vehicles target supporting UK businesses and funnelling private investment into social infrastructure, including straight equity in venture capital trusts (VCTs) and the enterprise investment scheme (EIS) as well as social housing REITs and a digital infrastructure fund.

Assets under management at the firm, which defines itself as purpose driven, have tripled over the last three years to just under £3 billion.

Few would dispute the success of the EIS, but some argue that advisors have too easily shied away from the scheme and other tax-efficient vehicles as only fit for wealthier clients.

Andrew Aldridge, partner at tax-efficient investment specialist Deepbridge Capital, is one of them. “With the pension LTA and tapered annual allowances now affecting many more clients than just ‘the wealthy,’ there is a genuine need to consider other tax-efficient structures for a broader range of clients,” he said.

As EIS funds are accepting investments as little as £10,000, Aldridge says advisors can provide clients with tax-free growth away from pensions "without having to commit unwieldy amounts."  He points to the other benefits of EIS-qualifying investments, including 30 per cent income tax relief, capital gains tax deferral, and inheritance tax exemption after two years.

Rose at Triple Point says the firm's funding model is largely governed by whatever stage the company is at. “If a company comes in at an early stage looking for funding, and they are not sure what they are looking for, they will more likely fit in an equity model because the rules around credit mean the company probably won’t hit certain borrowing metrics for leasing and lending,” he explained.

“Also, they are probably not at the stage in their journey where they require that kind of credit.”

Loans made to UK businesses by the firm typically run between £2 million and £5 million.

“Larger than that and you’ll find some of the more traditional banks coming in and providing debt lines for businesses in the £10 million plus range. Underneath  and you are probably looking at the P2P platforms and angels that would be providing debt on a smaller scale,” Rose explained.

Investors into these vehicles are usually on fairly defined time horizons for IHT planning, and are often mature, sometimes vulnerable investors “where their risk appetite is definitely risk-off.” Some of their chief concerns will be around liquidity, certainly around estate planning, he said.

Another investor might be someone about to retire having sold a family business and seeking to reinvest proceeds into another trading entity. “In that case, part of our estate planning service will be ensuring the money remains IHT-free while they deal with their yield options,” he said.

The business relief which investors gain from leasing and lending has not tended to attract family office money, because the tax efficiencies depend on an individual holding the shares and not a separate collective structure such as a family office, Rose said.

But as profit with purpose gains momentum in the alternative lending space, the firm says it is having more conversations with family offices about ways in which they can access it.

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