Room151 speaks to Matthew Potter, head of private credit at Pollen Street Capital, to better understand the company’s asset-backed lending strategy, and how its portfolio inclusion can enhance and diversify portfolio outcomes.
The broad private credit market has experienced dramatic growth in the aftermath of the global financial crisis in 2008. Increased bank capital requirements have catalysed a structural shift, in which mainstream lenders retrenched, and retreated from large parts of the lending market.
This ‘void’ has partly been filled by alternative asset managers and currently it is estimated that over £1.8tn of assets exist in the private credit space, up from £700bn in 2020. The growth in the addressable lending market, combined with the higher base rates and returns being achieved by lenders, has led many industry experts to label the current environment ‘the golden age of credit’.
Pollen Street focuses on a particularly under-penetrated segment of the private credit market – asset-backed lending – with an addressable market estimated at £800bn in size in Europe alone.
Firstly, Matthew, what is asset-backed lending (ABL) and why does it present a compelling opportunity for LGPS compared with direct lending?
As an opening comment I would like to say that both strategies are attractive, and there is a compelling case for their inclusion in any credit portfolio. Asset-backed finance is the funding behind the everyday credit that powers our economy and society. We provide funding to support everything from building homes, funding SMEs & corporates, and vehicle financing.
We do this by providing predominantly senior secured loans to non-bank lenders, banks, leasing businesses and technology companies that are serving these end markets taking security over their diverse portfolios of cash flow producing assets, such as loans, leases and vehicles, alongside corporate guarantees.
This asset backing at conservative loan to values means the strategy has significant downside protection because if things go wrong the assets can either be sold or contractual cashflows can be collected to fully repay our loan. In comparison, corporate direct-lending entails lending against the goodwill value of a business, i.e. there are typically no tangible assets to sell to recover debt if a company underperforms.
Moreover, our ABL lending strategy is covenant heavy, with a comprehensive, tight and enforceable suite of covenants. Additionally, we secure corporate guarantees on deals. Therefore, our lending facilities are collateralised directly against independent asset portfolios, and then secondarily by the cash flow or EBITDA of the business.
UK SMEs are chronically underfunded and underserved by traditional banks… we can provide finance to the sector by funding large and diversified portfolios of SME loans on a senior basis.
Matthew Potter, Pollen Street Capital
We, at Pollen Street, are experts in this large and growing market, with a deep network and experience that allows us to identify opportunities and target an underpenetrated part of the market. Our team focuses on the mid-market where we believe the greatest opportunity and largest financing gap exists, meaning we can create the most favourable risk reward profile compared to other credit asset classes.
This dedicated focus is believed to be a key source of competitive advantage which has enabled us to commit over £3.7bn across more than 100 facilities and deliver a zero-loss track record.
Can you discuss the size of the ABL market in the UK and the types of assets that you finance?
We estimate the size of the UK is £145bn and is experiencing fast growth. It has been the core geographic focus for Pollen Street since the inception of the strategy, owing to the size and depth of the market relative to Europe. To date we have financed over 75 transactions and provided over £2.7bn of credit facilities to UK borrowers.
As referenced earlier, lending to SMEs is a core focus for Pollen Street. It has been well publicised that UK SMEs are chronically underfunded and underserved by traditional banks. This means there is a large market opportunity for Pollen Street where we can provide finance to the sector by funding large and diversified portfolios of SME loans on a senior basis. Since the inception of our strategy, we have completed 20 deals in the sector, financing over 50,000 UK SMEs.
In the real estate sector, we provide the finance to small and medium sized developers to enable them to construct mass market family homes. We do this on a senior basis at conservative loan to values and are currently financing the build of 3,000 homes across the UK.
Finally, we have continued to see attractive opportunities in the auto sector, as evidenced by our facility with Octopus Electric Vehicles, and are proud to have helped finance over 10,000 electric vehicles across our platforms.
Notwithstanding seeking attractive returns, are there additional benefits to investing in your strategy?
First and foremost, as alluded to earlier, we believe the risk-diminution attached to the returns is the most attractive feature of the strategy. Through robust structural protections, asset-security and comprehensive covenants, principal protection is core to the strategy and our philosophy.
Secondly, the uncorrelated nature of the returns, both to public market and other private credit strategies, ensures the strategy has excellent diversification characteristics, and should be a complement in any portfolio. In private credit this can be seen most notably in periods of stress: often direct-lending exhibits extension risk, whereas our ABL loans are self-amortising with robust borrowing base concepts that are designed to shorten duration and deleverage in times of stress.
Thirdly, this strategy provides a high current income, and an indirect source of liquidity. These standard fixed-income characteristics of a current coupon should be attractive to the LGPS community.
Through robust structural protections, asset-security and comprehensive covenants, principal protection is core to the strategy and our philosophy.
Matthew Potter, Pollen Street Capital
Are you able to incorporate ESG principles?
Given our strategy is financing the real economy we believe that our loans can drive change, whether it’s financing the build of new family homes in areas of under supply, facilitating the adoption of electric vehicles or providing the financing required by SMEs for growth.
In addition, all our loans are sustainability linked with two-way margin ratchets based on our ESG scoring mechanism and progress of the business towards pre-agreed goals. This not only incentivises businesses towards overachieving but also facilitates comprehensive data collection across all our borrowers.
Disclaimer: This confidential presentation (the “Presentation”) is provided for discussion purposes only, is based on Pollen Street Capital’s industry experience, is not complete, and does not contain certain material information about Pollen Street or the Funds, includes important disclosure and risk factors, and is subject to change without notice. This Presentation is not to be construed as legal, tax, investment, ERISA or accounting advice and may not be relied upon as such. Recipients should consult their own advisors in respect of such matters. This Presentation does not constitute an offer document or an offer of transferable securities to the public and should not be considered as an invitation to subscribe for, or a solicitation of any offer or invitation to subscribe for, or recommendation that any person should subscribe for, any interests in any security, including any fund or other investment vehicle (each, a “Fund,” and together, the “Funds”) managed by Pollen Street or any of its affiliates (together, the “Pollen Street Group”). You are reminded that any offer, sale, issue, solicitation or acquisition may only be made on the basis of the Fund Documentation, in their final form and any information in this Presentation is qualified in its entirety by the Fund Documentation. This Presentation is being made to and is directed only at professional investors. Any person who is not a professional investor who receives this document must delete or return it immediately. Neither this document nor any copy of it may be taken or transmitted into or distributed in any jurisdiction where such distribution or use would be contrary to local law or regulation. Each recipient further agrees that without the prior written consent of Pollen Street it will (i) not copy, reproduce, publish, disclose or distribute this Presentation, in whole or in part, to any person or party including any employee of the recipient other than an employee directly involved in evaluating an investment in a Fund; and (ii) keep permanently confidential all information contained herein that is not already public. Additionally, by accepting this Presentation, each recipient agrees that this Presentation is being delivered to them subject to the provisions of this disclaimer and any confidentiality agreement entered into between Pollen Street and each such recipient.
