Debt providers are developing personalities! How to ‘Swipe right’ on your ideal lending partner.

As an Accountant, I appreciate that commenting publicly on other’s personalities is a risky business! However, with daily reminders that AI is going to take over Financial Services, it is helpful to be reminded that corporate lending was once primarily a trust-based industry, so anything that moves us away from the ‘computer says no’ approach must be a good thing?

A few recent conversations (with Private Debt Funds in this instance) have taken me by surprise, where feedback on a lending proposal has incorporated ‘personal’ opinions on the validity of the business, that I just couldn’t agree with! Now this is not new, and it is of course fine to disagree with me (unless you happen to be one of my kids, or BT customer services!). For example, it is common within a Bank’s internal processes to receive ‘unusual’ early-stage feedback (as a Banker I once received an initial decline from a credit team on the basis that a property “cannot be built on a hill”). However, in these situations there generally ensues appropriate debate (and generally a few more experienced team members get involved!) and we end up with a ‘consensus’ position that reflects the established institutional view, which for a mainstream bank has been ‘honed’ over many years and forms the bedrock of their lending decisioning.

What stood out to me in the conversation above however, was that the feedback being offered was directly from a decision maker at the fund; empowered to use their considerable experience and expertise to underwrite good business. The justification for the opinion was based on personal experience that had impacted their career, and on understanding this it is difficult to argue against such a decision. In my position as an Advisor a key part of my role is an ability to help my clients find a debt solution that I am confident can be delivered by the lending markets. Bringing the personalities and personal experiences of the individuals at each lender we work with into the mix, is naturally going to make finding the right lender a lot more difficult!

On the other hand, a wider range of opinions is not a bad thing, and for Advisors who are having these conversations with lending teams on a daily basis, our role is expanding to include ‘lender fit’ on a much more granular and personal level. Also, for years certain sectors have complained of banks not properly understanding their sector (because they are restricted by the Institutional position previously mentioned). To this end, we have certainly seen challenger and non-bank lenders looking to minimise policy, and rather focus and relay on the experience and ability of their lending personnel to come to a commercial decision.

This experience got me thinking about the development of the lending markets as they continue to fragment, with Private Debt capital increasingly replacing the mainstream lenders within the leveraged M&A and Growth Capital markets.

Much has been highlighted around the benefits that Private Debt brings to the lending markets (and I very much agree and welcome these):

-?????????Faster outcomes due to shorter decision lines

-?????????Clearer communication of outcomes where teams are close to and understand a funds focus and what it can deliver.

-?????????Higher levels of individual responsibility / ownership & investment within deal teams providing borrowers with much more confidence around delivery.

-?????????Expertise is focussed. At the basic level the teams solely work with debt (rather than cross selling other bank products), and generally stick within their sector and structuring expertise.

-?????????More flexibility to support borrower needs due to fewer formal policies

Less has been said about the difficulties borrowers could find going to this market directly. ?As the dominant banks give way to a larger volume of smaller and more personality driven institutions (at the mid to lower-mid market at least), areas of potential challenge are:

-?????????Limited perspectives within a lending team (a smaller pool of ‘wise old heads’ to call upon)

-?????????Confirmation bias can develop in smaller teams, exacerbated by a hiring culture of recruiting like minded individuals. This leads to the potential to overly focus on specific ‘key issues’, that can draw focus away from other areas more relevant to a specific lending case.

-?????????Concentrated decision making will naturally lead to focussed and potentially less balanced decisions. This may be confusing to clients where feedback is led by personal opinion/experience, rather than data led policy built up over time.

-?????????Resource downtime- Illness and leavers will have a material impact on the ability of a small teams to deliver on a timely basis; also, there is potential to ‘overtrade’ when markets are busy.

Now, my personal view on the development of the Private debt markets is that it is a great thing for the UK Corporate and Sponsor market. ?Deals are getting done efficiently, and with terms that make sense to a specific transaction. Also, with more debt funds being raised to address specific sector niches and market needs (Tech focussed funds and more recently Distressed Credit funds are particularly noteworthy), the likelihood that the ideal lending partner is out there, is increasing for borrowers.

The challenge that remains (and increases with every new fund) is that of actually locating that ideal partner. Already a familiar issue for M&A Advisors in the Private Equity Sponsor markets (the personality of a Sponsor partner is right at the top of the list for good companies seeking Equity investment), debt is still treated largely as a commodity by borrowers. I really believe this is in the process of changing dramatically, and while it presents a challenge for me personally as I have to accept that not all personalities will follow the traditional ‘lending rules’, there is also an opportunity for the Advisor market to genuinely “find the right lender” for those seeking to raise debt capital in the future.