Unlocking Opportunities in the UK

 

The Market Today

The UK ABL market today looks quite a bit more crowded than it once did, even so, as we all emerge once more into the sunlight opportunities are likely to be plentiful. The emergence of the so-called UK challenger banks, some with dedicated ABL arms, is an interesting development, but the UK market continues to be dominated by the old high street banks and therein lies the principal opportunity. This is hardly news. What is different is the likely mindset of potential clients. They are likely to be more impatient of poor service and being told that the good old credit committee only meets once a week. They will be busy re-inventing their own businesses, looking at new routes to market, and will have little patience with any discussion involving a bank’s credit policy. Of course, this started to happen long before the virus cast its dark shadow. As with the financial crisis of ’08, Covid-19 will help accelerate this development and include businesses who had never once considered any alternative to the bank with whom they have banked with forever.

The effects of Covid-19 have forced many portfolio companies to reevaluate how efficient they really are. As with prior economic downturns, businesses have realized where their priorities lie. One simple example of this is the importance businesses now place on collecting their debts Although some needed a crisis to realize this point, however at IGF our portfolio debt turn has improved by several days during the past year.

The benefits of cultivating close relationships has never been clearer. From the beginning of the crisis good lenders reached out to their clients without waiting to be asked. Help included, agreeing to extend recourse periods, giving holiday on term repayments, and, crucially, ensuring that changes in base rate were passed on – even today too many of the independent players in the UK work off of a different base rate number. The above actions helped to support and protect most businesses whilst providing clear evidence of the benefits of being with a supportive lender that looks beyond the short term and seeks to do the right thing. Never was the term, enlightened self- interest, so true.

The various forms of government support in the UK have helped businesses across the UK tremendously. Over time CBILS (Coronavirus Business Interruption Loan Scheme) is likely to stand out as an initiative, put in place at speed, but whose purpose was to ensure that good businesses survived and came out the other side: its successor scheme, the RLS (Recovery Loan Scheme) is just being put in place as I write but, again, its purpose, to ensure that businesses have the firepower to not only survive but to be in a position to grow, is at least laudable.

Against the above, the various government schemes will no doubt also have the unintended consequence of protecting businesses that would have otherwise closed their doors due to ‘natural’ causes. More on that shortly.

 

The Market Tomorrow

For the independent players in the UK – and there are very few truly independent players in the UK ABL market – opportunities are likely to occur in various guises but perhaps most obviously in the following ways:

1. The main bank players will take some time looking after their existing portfolio as well as the fallout from the government schemes that were not such a good idea – the Bounce Back scheme, being 100% guaranteed by the Treasury, will be detrimental to banks and eventually the UK tax player. They will then be slow to react to the demand, the needs, of businesses that are looking to grow organically or to simply take advantage of the fallout from those businesses that will come out of the crisis in poor shape.
2. Many of the recipients of government schemes will quickly find that the challenges of the pre-Covid-19 world have not entirely gone way. Some will find the inevitable has simply been delayed. Others will look at the additional obligations they have taken on and decide that they would be better off starting again, without the spectra of repaying loans that reach out into the next decade. This will inevitably lead to an increase in the distressed market and will be of all shapes and sizes.

 

The above opportunities are not exhaustive by any means but will be plentiful especially in the Lower-middle market. Such businesses are big enough to allow for the time needed to understand the challenges they face, but not so big that one starts to encounter the larger players, including Direct Lenders, that are beginning to proliferate in the UK and indeed over the European continent.

Whatever the opportunity, you need to be able to take advantage of what’s coming. The likely winners will be defined by their ability to move swiftly and stand by their initial commitments, not traits the banks are always known for. To put this into context, when prospects moan to me that they were let down at the last minute by the bank, I am prone to respond by saying the bank didn’t really change their mind, you just hadn’t spoken to the person that makes the decision yet.

The cheaper funding which the larger bank ABL players can provide will be intrinsically tied to rigid credit policies, long-wait times, and ‘conditional’ terms. This is unlikely to be so successful in a world that increasingly moves at speed and where entrepreneurs are nervous of missing out on the next big opportunity. Keeping to what you have promised – including not over-promising – will be at a premium and attract the type of pricing that works for both sides.

To paraphrase Jim Collins, it’s always best to focus your energies on what you can be the best at. For an independent ABL player this should entail many things but must include:

• A strong origination capability – So obvious as not to need mentioning? Maybe, but I am often astonished at the ability of some to attract the required funding without any real idea as to how it can be deployed
• Underwriting through Expertise – As an old mentor of mine liked to say, ‘if you don’t know why the rules exist, you probably won’t like what happens next’
• Risk Management – you cannot retroactively implement a solid risk function; the past year has revealed those who truly understand the risks associated with ABL
• Client Service – Too often overlooked but it is essential to any long-term partnership. An ABL business’ attrition rate will give you a good indication of how well they score in this area

In an uncertain world, it will help that ABL players deal with clients that you can see and touch, with tangible assets that typically have a defined value. Experience will be at a premium, senior leaders who have been through multiple credit cycles will be best placed to act on opportunities in the market while mitigating the downside. Moreover, not panicking when problems do arise has real currency in a market where partners are rightly concerned about what will happen if things don’t go to plan.

The above notwithstanding, the future really does belong to the young. Yes, experience is hard won and invaluable in a crisis but so too is a different perspective. At IGF we have a policy whereby at any given time 10% of our employees are recent graduates (the actual number at present is closer to 15% as we have taken advantage of the talent that has come our way because of the crisis). Not all will work out, some will eventually leave for other opportunities, but in the meantime, both they and we will be the better for their involvement. They are certainly unlikely to be bored over the coming period.

About IGF and the Author

IGF are an independent ABL house – majority owned by Spring Ventures, a family office – providing growth finance to the Lower Middle Market in the UK. Products include Accounts Receivable, Inventory, Plant & Machinery, Real estate, and Unsecured Strips.

Current deal appetite ranges from $1m up to $20m. Business is originated from a range of introducers, including corporate finance, accountants, private equity, and industry brokers.

John is the CEO of IGF. He is a former Chairman of ABFA (The Asset Based Finance Association) and co-founder of Centric Commercial Finance, where he was CEO through to its sale to Shawbrook Bank. Under Shawbrook Bank’s ownership, he was a member of the executive team which ran the bank. Before founding Centric, John was COO of GE Commercial Finance and CRO of NMB-Heller.