The team at UK’s MarketFinance notes that investors have continued to commit to funding small businesses in the United Kingdom despite “lingering anxieties” over the COVID-19 pandemic, Brexit and various other factors.
MarketFinance VP Capital Markets, Marion Delille, has taken a look into just why – and how their money is helping lenders like them effectively scale and broaden their finance options for small businesses.
Marion writes in a blog post that 2021 was a “momentous year” for the UK’s small- and medium-sized businesses, the lenders they borrowed from and “the debt investors that support them.”
She added:
“We were all aware of the continuous news flow that made for riveting headlines throughout the year. From policy changes relating to the pandemic and the emergence of new variants, to the threat of rising interest rates, as well as broader uncertainties.”
However, 2021 wasn’t just an “eventful year.” 2021 was also a year “synonymous with opportunity” for MarketFinance.
Last year, the Recovery Loan Scheme (RLS) was introduced by the UK Government in order to assist businesses across the country as they recover and grow following the COVID outbreak.
This scheme was “an opportunity for MarketFinance to continue working with the British Business Bank, following on from our accreditation for the Coronavirus Business Interruption Loan Scheme (CBILS) in 2020.” Building on their continuous track-record in lending to UK SMEs since 2011, MarketFinance became “one of the first fintech lenders to become accredited for RLS in September 2021, allowing us to complement our non-government guaranteed offering with a new product.”
As the Recovery Loan Scheme allowed accredited lenders to benefit from a government guarantee on qualifying loans, it gave UK SMEs “the opportunity to access a broader range of competitive funding options at a time when more stability was required.”
The team reportedly received more than 4,000 applications within the first 3 months of their RLS offering “going live (corresponding to over £700m of demand).” The value that their RLS loans could hold for their rapidly expanding customer base “became obvious quickly.”
The update further noted:
“That said, the scheme was not only applauded by UK SME borrowers, it also received an overwhelmingly positive response from the investor community. For many existing investors (predominantly UK-based), the RLS strengthened their commitment and the funding they were eager to offer to UK SMEs. But more importantly, the scheme was a clear catalyst for new investors to commit time, resources and capital to the UK SME space.”
Throughout 2020-2021, and in particular following their accreditation for CBILS and RLS, their Capital Markets Team was able to “capture this heightened investor appetite for UK SMEs.”
Traditional banking groups, challenger banks, dedicated credit funds, highly diversified asset managers, as well as high net worth individuals, “have all been looking to invest in UK SME lending.”
MarketFinance also “observed an uptick in interest beyond the UK, as investors have become increasingly global in their outlook and how they use their cash.”
As noted in the blog post from MarketFinance:
“These new entrants vary significantly in terms of investment sizes, the nature of their mandates (i.e. what they’re looking to invest in), and/or their the returns they’re looking to make. But all are drawn by the same overarching value proposition that our UK SME lending platform offers:”
The firm added:
“One of the main factors pushing investors towards private debt generally, and UK SMEs more specifically, has been the diversification benefit that this kind of investment can offer in the context of a broader portfolio. Based on MarketFinance’s own track record, and in stark contrast with the volatility that was seen in stock and bond markets over the past two years, this diversification benefit has only been strengthened by COVID. This is especially the case where more agile lenders such as MarketFinance have quickly adjusted their lending and risk policies to stabilize performance.”
They also noted that this leads them “on to the degree of investment flexibility that certain lenders can offer.” The UK is one of the most sophisticated SME lending markets, where players that have been around for some time, like MarketFinance, have “developed a range of products with varying risk, return, term length and sector profiles.”
This breadth and scale uniquely “allows investors to access transactions that meet their specific investment objectives and constraints,” the update noted.
As the alternative lending market for UK SMEs continued to thrive in 2021, its scalability and potential liquidity “have also continued to improve.”
Although private debt allows investors to monetize an ‘illiquidity premium’, more and more investors are “drawn to UK SMEs as they can secure increasingly competitive leverage terms from banking partners, potentially paving the way towards an attractive exit with its many benefits.”
To reap the benefits of scale (and despite a plethora of emerging alternative lenders), sophisticated investors have “continued to prefer more established originators, operating in scalable and resilient market segments.”
The update also mentioned:
“Saving the cardinal investment driver for last – relative value. UK SME lending was considered to offer attractive relative value pre-pandemic, and will maintain its appeal in a post-pandemic environment, the speed and quality of the UK SME guarantee schemes likely cemented the investment thesis for an ever-expanding universe of investors.”
The team at MarketFinance added:
“With the support of this growing community of investors, MarketFinance expanded its UK SME financing solutions in 2021 – helping our customers make the most of the growth opportunities that the year presented. And as we turn our attention to 2022, we look forward to continuing this journey with our funding partners.”