Bridging Finance: Funding the Future

By David Craik 15th May 2023

Private Equity Houses and Investment Banks are keen to invest in and lend cash to the bridging sector. What do you need to do to get these funders to start knocking at your door? Due diligence experts Quadrin Group say they can help.

Bridging lenders continue to be the apple of many private equity investors and bank funders eyes despite recent property market volatility.

“We have seen progressive interest in the bridging lending space from PE and banks either in the form of equity or loans.

It has been the flavour of the year for the last few years, “says Konstantine Pastras, or Gus as he is more commonly known, of due diligence experts the Quadrin Group.

“That’s largely because bridging lenders offer a secured loan. They tend to be a lot safer than unsecured loans or investment opportunities like those you will find in areas such as fintech lending.

They are also paying better spreads in the current environment. There is a lot of appetite out there from institutional capital as a result.”

He adds that PE and banks, particularly investment banks, like the speed and flexibility of bridge lending.

“Bridge loans can often be secured quicker than traditional financing and are beneficial to borrowers that need to move swiftly to secure investment opportunities,” he says.

“They also like the short-term nature of bridging. Its loans have a typical maturity profile of under 24 months, and offer a high yield compared to other forms of secured credit.

This is also bolstered by the loans being secured by real estate. They also like the lack of covenants as bridge loans typically involve less paperwork and documentation than traditional loans, making an application process easier.

Bridge lending also provides and attracts investment opportunities in the UK market and typically provides an attractive attachment point vis-à-vis traditional residential loans.”

Gus adds that margin spread is another key factor in favour of the bridging lending sector.

Although banks are generally more risk averse, preferring products like mortgages and BTL loans, as margins in both of these have compressed, they have started looking at specialised products to bridge the gap.

“Private equity firms, on the other hand, have always been active in specialised lending, and are consistently chasing higher yields spreads,” he says.

Another positive factor is the strength of the UK property market. “It has generally been a stable asset class in Europe,” explains Gus.

“It is a very safe country to do secured lending in with a very liquid market. These loans can be sold on to be leveraged by a fund or a lender.

We also find that the loan to values and underwriting criteria are also reasonably robust. We haven’t seen big losses in the bridging space. It is very attractive.”

That’s despite unfavourable rates at present in the market, Gus adds. “They may be expensive, but they are not that much more than they were 10 or 15 years ago.

We’ve been here before. Rates are normalising and there is still a market to serve,” he says.

“You never know inflation could drop quite considerably over the next 12 to 18 months. Although my crystal ball, like many others at the moment, is quite foggy!

Nevertheless, I think this is still going to be a good credit quality asset class to be invested in.

Private equity funds have to deploy capital somewhere so as long as prudent lending prevails then all things should be ok in the bridging lending marketplace.”

Gus says PE and banks are an excellent fit for bridge lenders, large or small, looking to attract equity or funding to expand their businesses.

“We’ve seen opportunities where mainly middle-market PE houses are taking minority stakes in bridging lenders as well as securing growth capital from banks.

Although, we are yet to see much desire for majority stakes,” he says. “It’s money to improve their systems, hire the right people and ensure they have enough cashflow.

For some of the smaller bridge lenders it’s that extra cash to get out there and be more competitive.

External capital can come in quite handy for that. PE funding can also be a steppingstone for lenders to increase their volumes and secure bigger bank facilities from investment banks.”

So how can lenders best attract funding from these ever-eager banks and PE firms? Gus says it is about product volume – having a large family of products, stability of the business and having a robust operational platform can also be a key differentiator.

“Some of the things PE companies and banks are looking for are how robust the underwriting systems are and whether the IT systems are secure,” he explains.

Quadrin can help ensure lenders are in the best shape possible for when third party funders come calling.

Gus says lenders are increasingly using third party due diligence firms to demonstrate their competence and to provide support.

Quadrin has reviewed numerous lending businesses and possesses the broadest network of relationships with banks and private equity investors in the market.

Unlike its contemporaries, it claims, its team members are all alumni of these institutions, meaning it has insight on best practices.

“Any of these organisations which come in to do a review on a lender will look favourably upon you if you have already done some form of due diligence,” Gus says.

“We are appealing to lenders looking to make that next step into investment bank funding or a PE fund to call us and talk through what is needed.

We help lenders get ready. We check their underwriting service, credit management, management of the business, how staff are being trained and generally the customer experience.

We go in and interrogate their systems and underwriting policies and processes. We ensure that what you say at an executive management meeting is exactly what goes on in the business on a day-to-day basis.”

At the end of the process Quadrin creates a report and presents it to the lender’s executive committee.

“They can share that with investors if they wish,” states Gus. “Again, we are there to answer your questions around due diligence and what institutional funders will look for when they walk through the door.

Last year we had 10 different proposals for bridge lenders from PE and banks. Some worked, some did not but what is certain is that the bridging space is quite hot for us at the moment.

We want to become more familiar with the bridging lending community and introduce ourselves to those that don’t know us.

We welcome the opportunity to speak with lenders and see how we can best assist them in their period of transition.”