I have read with interest the recent articles by specialist lenders on their own funding lines. It is background that far too few lawyers (and advisers in general) seem to question and yet it remains fundamental to providing sound advice to a client. After all, we are recommending a fiduciary and financial relationship that will last long beyond our involvement.
In traditional lending, one might already have picked up how much cash the treasury departments are carrying. You might know (because rates are being pulled) that the lender is overexposed or vice versa.
But with such little volume amongst the bridging lenders (when compared to historic lending levels) it is worth spending that little more time understanding the different funding vehicles being used and how that impacts on appetite, capacity to lend and capacity to push competition.
Certain lenders, themselves, are financial products. West One or Tiuta are, or have been, funded by an unregulated collective investment scheme, or UCIS. These, or other platform style fund structures like unit trusts or expert funds (there are plenty of them: I have negotiated bespoke structures offshore for fractional asset classes for example) are reassuring in so far as they have a high cost of ownership and a high cost to establish.
Yet, as the result of being a financial product (conducting and advising investment into these are regulated activities even if the wrapper isn’t always) there are latent restrictions. An interesting exercise is to look at the offering memorandum or prospectus which leads to a lender: it could, for example, state plainly that no properties in Scotland would ever be lent against. It could state what the minimum yield should be on any loan made. All of a sudden a last press release becomes a little clearer.
And, of course, being funded by a UCIS doesn’t necessarily mean there is an endless pot of cash. UCIS’s are often only as good as the third party marketers or IFA groups that are willing to distribute: one property fund client of mine took 18 months to raise 500,000. Perhaps their model just wasn’t attractive but it is important to recognise that a UCIS needs ongoing work to raise cash: especially if the redemptions aren’t happening as could occur in a trying market.
Other lenders (including one that I expect to launch in the next 6 months) are wholly privately backed. One invested high net worth or one consortium can maketh the man and, believe me, competition is keen to find and woo these people. But even a sugar daddy (or mummy) can create difficulty: is the investment secured long term or can it be withdrawn? Has the investor bought into the published business model or is this a fanciful investment to be toyed with? Has the investor a presence on the board (not such a bad thing!)
And it goes on… crowd funding is now an interesting development with companies like The Funding Circle applying for new government grants to build its business. But again: look through the headlines: what pressure’s exist on the funder’s funder that assure you, you are placing business in the right place?