Specialist lenders look for capital solutions as loan books grow and M&A expectations rise
More than 90% of specialist lenders are looking to renew, amend or increase their debt facilities within the next two years as demand to finance growing loan books booms, according to the Interpath Specialist Lender Survey. Meanwhile, more than half of those lenders are considering a full or partial exit within the next five years amidst calls for market consolidation and as shareholders look to realise their investments.
The survey by international advisory firm Interpath, which was conducted in collaboration with J.P. Morgan, canvassed the views of more than 100 specialist lenders in a survey running to February 2025. These specialist lenders have a combined loan book of £54.9bn, making this the largest survey conducted of the sector in the UK to date.
According to the findings, the vast majority (92%) of respondents said that they were looking to renew, amend, or increase their debt facilities over the next 12-24 months as lenders look to fund growing loan books, find solutions for capital events and diversify their funding partners.
However, equity remains key and in much shorter supply. More than a quarter of contributors to the study (26%) said they didn’t have sufficient equity funding for the same period. These conditions will present an opportunity for further consolidation and creative capital solutions in the sector.
Stuart Mogg, managing director and head of Financial Services Capital and Debt Advisory at Interpath, said: “The specialist lending sector has achieved remarkable success in recent years fuelled by the growth of capital solutions. As loan books grow, there is a rush to secure capital that can fuel that business amidst an increasingly competitive market. Lenders are capitalising on lower margins, reduced fees, and greater flexibility, as well as offers from some funders for additional financing for non-performing loans, which makes an attractive proposition that enhances liquidity and risk management for lenders.
“The substantial demand to refinance and take on new facilities, as well as the need for equity, also reflects the importance of maintaining a flexible and resilient capital structure through a diverse capital stack. As history has proven, those that have planned and executed financing for the long term have tended to win in their respective sectors.”
Evolution of funding models
Founder led businesses remain a dominant force in the specialist lending sector and are present in the capital stack of 80% of the lenders surveyed, reflecting the entrepreneurial nature of the sector.
However, more than half (58.6%) of specialist lenders surveyed said that they are considering an exit through an M&A process within five years, including more than one in ten (12.1%) within the next two years. This means that, while institutional and private equity investors appear 25% and 20%, respectively, in lenders’ capital stacks, they are likely to play an increasingly important role in freeing up founder, management team and HNW money and help drive market consolidation.
Nick Parkhouse, managing director and head of Financial Services Deal Advisory at Interpath, said: “The findings of our survey paint a picture of a sector in transition. Founders, management teams, and high net worth individuals are deeply entrenched in the funding structures of specialist lenders, representing the strong alignment between leadership and capital in order to drive growth. However, there is a clear signal that M&A activity will start ramping up in the coming years and we have already started to see green shoots appear with an increase in interest from buyers. Institutional investors and private equity will have an important role in funding models as consolidation rises the agenda in what is a fragmented market.”
Macro-economic stress felt by sector, but competition pressures mount
While the outlook for the sector is positive, challenges remain. Nearly two thirds (63%) of respondents identified macro-economic stress as one of their top three challenges that they faced in 2024 and for the year ahead. However, while 30% of those surveyed said it was the single biggest threat last year, that figure has dropped to 23% when asked about 2025. Instead, increased competition has emerged as the greatest challenge, selected as the most pressing challenge by a quarter (25%) of sector leaders.
Stuart Mogg added: “Clearly competition is on the minds of industry leaders, and it is starting to eclipse the ongoing concerns over economic turbulence. This underlines the importance of building resilient and robust capital structures that also have flexibility baked in. Lenders need to have the capacity to pivot in their capital strategies, such as using public markets when they are open and economical to do so. However, this can’t be the only capital source and businesses in the sector need to be ready to embrace new ideas and structures when presented.’’
Rob Tanna-Smith, managing drector and co-head of Northern Europe ABS at J.P. Morgan said: “One of the themes evident in the data is that strong and trusted institutional funding relationships remain key to Specialist Lenders, ensuring smoother negotiations, flexibility in amendments to the facility, and long-term collaboration. In our view, this signals that the specialist lenders and institutional funders who have invested in forging strong long-term relationships will be well-positioned to outperform others who take a more transactional approach during times of increased market turbulence and uncertainty.”
Ben Tucker, securitised products group sales at J.P. Morgan, said: “The specialist lending sector is at a pivotal moment, with both challenges and opportunities on the immediate horizon. As lenders navigate the complexities of macro-economic pressures and increased competition, the importance of strategic partnerships and innovative capital solutions cannot be overstated. With over a quarter of lenders needing to raise equity and nearly all respondents looking to raise or refinance debt in the next 2 years, capital providers are poised for a bustling period ahead. Flexible funding, both at a senior and junior level, will be critical for the sector, and this comes through nurturing longer term partnerships designed not only to withstand challenging times but also to flourish during periods of growth and prosperity.”