Financial Institutions M&A sector trends: Specialty finance/marketplace Lending — H1 2020 and outlook for H2 2020

Panacea or plague—-what will the true impact of accreditation for government-backed COVID-19 loan schemes be?

Overview

CURRENT MARKET

WE ARE SEEING

• Niche lenders successfully attract capital— particularly SME (e.g., a55, AlphaCredit, Liberis and Swishfund) and working capital lenders (e.g., Financia & Go and Previse)
• Established Public-to-Privates opt for partnerships to weather the COVID-19 pandemic (e.g., Funding Circle's and Zopa's partnerships with Starling)
• Investors raise capital for future investment (e.g., HPS Investment Partners' US$1.5 billion EAVF II fund)

KEY DRIVERS/ CHALLENGES

• Wide universe of backers:
  • Trade consolidators—seeking share-of-wallet (e.g., Creditgate24's acquisition of Advanon and Foresight's acquisition of a majority stake in Signature Property Finance)
  • Financial sponsors—opportunity to conquer underserviced markets
  • Global FIs—seeking diversification through complementary bolt-ons (e.g., L&G's acquisition of 20% of Household Capital)
• Governments tip their hats to speciality finance— accreditation for specialty finance providers to distribute government-backed COVID-19 relief loans (e.g., British Business Bank—accredited specialty finance providers for the UK's CBLIS and the Bounce Back Loan Scheme)

TRENDS TO WATCH

• COVID-19 accelerates decision on market longevity for marketplace lenders:
  • Will accreditation for government-backed loan schemes hand marketplace lenders a new lease on life? (e.g., Funding Circle for the UK's CBLIS scheme)
  • Will dependence on secondary markets for capital destroy investor confidence in the long-term?
  • Will central banks buy government-backed scheme loans from marketplace lenders? If so, at what price?
• Consolidation amongst "challenger" lenders

OUR M&A FORECAST

M&A is likely to remain relatively flat in the shortterm as the true impact of COVID-19 governmentbacked loan schemes is assessed by specialty finance businesses, financial sponsors and public market investors alike

Publicly reported deals & situations

Growing buyer/ investor/partner interest

Market highlight:

The UK Government launched a first-of-its-kind £250 million co-investment matching scheme, the Future Fund. Promising UK start-ups, many of which are specialty finance businesses, are able to relieve COVID-19 strain by securing up to £5 million in government loans, as long as the amount is matched by private sector investors. These loans can then be repaid, or converted into equity at a discount at the next funding round or after 3 years

Private equity / venture capital:

• SoftBank (Supply chain finance): US$500 million equity investment in Credit Suisse's supply chain finance funds (June 2020)
• KKR (Insurance financing): Equity investment in Kilter Finance (April 2020)

Payments giants:

• Square (P2P): Acquisition of Verse (June 2020)

FI:

• UniCredit (Supply chain finance): Supply chain finance JV with Taulia (June 2020)
• Legal and General (Retirement finance): Acquisition of 20% of Household Capital (March 2020)

Trade consolidators:

• Alliance Funding (Beverage finance): Acquisition of Pinnacle Capital Partners and Specialty Coffee Finance (June 2020)
• Creditgate24 (Crowdfunding): Acquisition of Advanon (May 2020)
• Finora Capital (Leasing): Acquisition of Inbank Liising (February 2020)
• Foresight (Property finance): Acquisition of majority stake in Signature Property Finance (January 2020)

Speciality finance businesses scaling up

• AskRobin (Marketplace lending): Successful US$1.7 million Seed funding round, led by Change Ventures (May 2020)
• a55 (SME lending): Successful US$5 million Series A funding round, led by Santander InnoVentures (May 2020)
• Flagstone (Cash deposit marketplace): Successful £12 million Venture funding round, led by Omes Ventures (May 2020)
• Lendify (SME lending): Successful €13.6 million rights issue (April 2020)
• Previse (Invoice financing): Successful US$11 million Venture funding round, led by Reefknot Investments and Mastercard (April 2020)
• Household Capital (Retirement finance): Successful US$16.6 million Series B funding round (March 2020)
• Demica (Working capital finance): Successful US$30 million Series C funding round, led by Simcah Management (January 2020)
• Financia & Go (Invoice financing): Launch by Santander (January 2020)
• AlphaCredit (SME Lending): Successful US$125 million Series B funding round, led by SoftBank (January 2020)
• Liberis (SME Lending): Successful US$42 million funding round, led by FTV Capital (January 2020)
• Swishfund (SME lending): Successful €15 million Series A funding round, led by Slingshot Ventures and Shoe Investments (January 2020)

Partnering to Starling brave the crisis

• Funding Circle (UK): £300 million Coronavirus Business Interruption Loan Scheme strategic partnership with Starling (May 2020)
• Zopa (UK): Consumer loan origination JV with (February 2020)

Readying for the push

• HPS Investment Partners: Launch of US$1.5 billion EAVF II, which target the specialty finance sector (April 2020)

Government/ regulatory support Coronavirus Business

• Interruption Loan Scheme (UK): 20 asset finance providers and 18 invoice finance providers accredited by British Business Bank (June 2020)
• Bounce Back Loan Scheme (UK): Three non-bank lenders accredited by British Business Bank (June 2020)

Click here to download Financial services M&A experiences shortness of breath in H1 2020 (PDF)

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