Bridging Paper v16

UK Bridging Market Study
November 2017
MARKET FUNDING MARKET STRATEGIC VALUATION PREPARING BUYER
OVERVIEW SOURCES TRENDS ROUTES APPROACH BUSINESS UNIVERSE
Introduction
Welcome to the first market study from the EY Financial Services Corporate Finance team. In this edition we cover the
UK Bridging market, a sector that we as a team have completed a number of engagements across the last 2 years covering
Merger & Acquisition and debt advisory, vendor and commercial due diligence and business modelling. Its also a sector
we believe will have increasing activity and transactional interest in the near term, which you will hear as you read
through this report.
This report provides insights into recent trends, a view on market trajectory and covers the available strategic equity and
funding options in the market. The paper also incorporates the results of a survey we conducted with 11 market
Nick Parkhouse participants, we would like to thank those that participated and provided their interesting perspectives on the development
Associate Partner of the sector.
Corporate Finance
We hope you find this an enjoyable read and we would welcome the opportunity to discuss this more thoroughly with you
at your convenience.
Contents
Market Overview 1
Where is the UK bridging market heading? 2
Strategic routes 3
Debt financing 4
Equity financing 5
Preparing business for a transaction 6
EY Corporate Finance 3
Market overview
Introduction to bridging loans

A bridging loan is a short-term loan (<18 months) secured against property, typically used by the borrower as a temporary financing solution while transitioning to another
financial arrangement or prior to selling the property.
Need… Product suitability… Exit…

Typical needs for a bridging loan include: Reasons borrowers take out bridging loans: Various exit routes for bridging loans:
The most recognisable purpose of a bridging

loan is additional finance to buy a new ► Sale of property.
► No prepayment penalties.
property whilst the sale of another property is
still being completed. However, bridging ► Speed of execution, a bridging loan can be
► Conversion to long-term financial arrangement
finance is increasingly being used for executed within 2 weeks versus months for a (mortgage, Buy-To-Let product, development
alternative purposes including: traditional mortgage. finance).
► Buying a property at auction. ► Unusual / non-standard credit history (e.g.
► Redemption of loan with operating cash flows
international borrower). (for businesses).
► Property refurbishment and development
finance. ► Quality of service and tailored approach of
► Re-bridging of loan.
speciality lenders.
► A form of short term capital for business
uses.
Exact definition to be ch
Purpose of bridging loan Bridging market breakdown Regulated vs unregulated bridging loans
Auction Purchase Business Purpose Re-Furb

Regulated bridging loans are those on a property
Re-Bridge Mortgage Delays Other
First Charge Second Charge Regulated Unregulated in which the borrower or a close family member
will reside in and is secured by a first charge
against the property that is currently (or will be)
15% 9%
11% 17% occupied by the borrower or close family member.
25% 46% Unregulated bridging loans are those which are
27% 54%
13% 83%
secured against commercial or investment
properties.
Source: Bridging Trends by MT Finance

5
GDS: To confirm source

Bridging market size
UK gross bridging lending amounted to £4.3bn in the year to June 2017 with strong historical growth at a Compounded Annual Growth Rate (CAGR) of 26.1% since 2013.
Last Twelve Months (LTM) performance:

Brexit vote
► The market contracted immediately after the EU UK gross LTM bridging lending (£bn)
Referendum in June 16 as investors tried to gauge the
4.4
4.3
4.3
4.2
4.2
4.1
4.1
impact of Brexit on the real estate market.
4.0
3.8
3.7
3.3
► The market partially recovered in H1 2017 however is still
2.9
affected by Brexit concerns in the wake of the general
2.7
2.6
2.5
election and recent regulatory changes to the buy-to-let
2.4
2.3
2.3
2.2
2.1
2.0
2.0
market which have impacted house prices and borrower’s
1.9
1.8
1.7
appetite.
► While growth has been slowing down, the fundamental
trends in the UK housing market remain unchanged,
mainly that a shortage of supply will continue to protect Jul- Aug Oct- Dec Feb Apr Jun- Aug Oct- Dec Feb Apr Jun- Aug Oct- Dec Feb Apr Jun- Aug Oct- Dec Feb Apr Jun-
property values from downward pressures. 13 -17 13 -13 -14 -17 14 -14 14 -14 -15 -15 15 -15 15 -15 -16 -16 16 -16 16 -16 -17 -17 17
Source: WestOne Loans
Long term view:
► The key factors supporting growth of the bridging market in the long run include:
 Strong history of housing liquidity and value creation in the UK;
 Inefficiencies of mainstream lenders in providing short-term property finance due to increased
regulation and capital requirements;
 Increasing regulatory hurdles for longer term financing solutions such as buy-to-let mortgages; and
 The need for a more tailored approach in this segment due to the focus on speed in property
execution.
6
Bridging market landscape Entry Expansion Exit
► Post the financial crisis, the market was highly fragmented and underserved Recent participant announcements
following the departure of high street lenders.
July’17: Interbay Commercial: InterBay Commercial, part of OneSavings Bank,
► This departure provided capacity for new market entrants, with both institutional launched a residential and commercial bridging finance proposition for
and entrepreneurial players keen to capture a share of the growth in the bridging property investors with rates starting at 0.44% per month.
market.
July’17: Borro: Announced that it is withdrawing from the UK property bridging loan
► The majority of these players were initially funded by high net worth individuals but market following a full strategic review in order to focus on its core luxury
this has since trended towards greater institutionalisation. asset finance activities.
► Large specialised bridging lenders and challenger banks currently account for more
May’17: Octane Capital: Launched bridging business with a focus on complex, non-
than a half of the bridging market. The remaining portion is highly fragmented, with standard loans and larger deals across the residential and commercial bridging,
a strong inflow of new market entrants in the past three years. bridge-to-let, bridge-to-sell, and heavy and light refurbishment markets (the
business was set up by the founders behind Dragonfly Property Finance).
► Positive housing market fundamentals, renewed investor sentiment, a lack of
regulation (driving borrowers from mainstream regulated markets) and availability
of credit were key contributors of the growth seen in recent years. Mar’17: Elysium Bridging: Launched bridging business with a core offering in first
charge short-term commercial property loans nationwide (headed up by ex-
HBOS adviser Paul Gammond and Cheval co-founder David Gammond, and
Selected market participants plans to lend over £25m within its first year).
Together
Mar’17: BondMason: Peer-to-peer lender announced it aims to expand its lending
Octopus Enra through bridging lenders in 2017, with over half of investment expected to be
Masthaven
Loan book size (inc. HNW Funding)
Property Lendinvest through non peer-to-peer platforms.
Shawbrook Amicus
Precise Jan’17: Pluto Finance: Development finance lender Pluto Finance entered the
Mortgages bridging market with bridging loans of £1m-6m with up to 70% LTV,
OSB United Trust including rolled-up interest (term of 3 months to 12 months).
(Interbay) MT Bank
Finance
Aug’16: Aldermore: Challenger bank exited the bridging market just two years after
HTB launching the offering. The move comes as a result of the lender refocusing on
Roma
Finance its core mortgage areas, including buy-to-let, residential, commercial and
Affirmative property development.
Funding 365 Finance Oblix
MSP Capital
Kuflink Capital July’16: Freedom Finance: Launched a new bridging and commercial arm, created to
Zorin Mint bolster the company’s offering in bridging market.
Finance Bridging
Low Book growth High

UK Bridging Market 7
Note: not scaled to size. Source: public information, EY estimate

Section 3.
Where is the UK bridging market

heading?
Our view on the bridging market
The market is highly External debt funding The recent acquisition of Strong and differentiated
fragmented suggesting remains a key issue, with Enra by Exponent origination channels
future consolidation banks becoming more demonstrates that there is will ensure a continued
cautious in recent equity investor appetite competitive position
months
Data capture has not Robust policies are We believe there is Unique product
been a strength of the important to ensure opportunity for better use positioning can ensure
market, but is critical to supplementary of technology to assist growth, but could come
demonstrate track record information known by underwriting decisions at the detriment to
Directors is reflected in and to make them more external capital
business practice efficient
Market growth
► The UK bridging market has more than doubled since 2013 and is projected by Market forecast – UK bridging
Mintel Forecasts to continue to grow at a CAGR of 11% in 2018-2022 (this includes FY18-22 CAGR: 11%
development loans) with residential bridging lending growing less than commercial 1.6
or 2nd charge market. 1.3
1.4
1.3 3.2
1.1 2.9
► House prices being a key market driver are expected to grow by 4% in 2017, remain 1.0
2.4
2.6
0.9
flat in 2018 and resume growth in 2019, according to Oxford Economics. 0.7
1.7
1.9
2.1
0.5 1.4 3.7
0.3 1.1 3.0 3.4
2.3 2.6
0.8 1.9
► We believe the biggest challenges to bridging market growth in the medium term 1.0 1.2 1.4 1.6
1.3 1.4 1.5
could be further correction in property prices, macroeconomic risks and changes in 0.8 1.0 1.1 1.2 1.2 1.2 1.3
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
regulation that could force some of the smaller players that are not able to adapt to
exit the market. Residential Commercial Development 2nd Charge
FY20-22 CAGR breakdown:
Residential: 5% Commercial: 13% Development 11% 2nd Charge: 9%
Source: Mintel Forecasts
International expansion: survey responses

► Bridging lenders generally believe the UK market provides sufficient growth Potential risks: survey responses
opportunities for their business. The primary route to expansion is geographically in ► Most of our survey respondents believe that the bridging market
the UK rather than going international. growth will be flat in the short term due to general economic
► If they were to consider international expansion, many bridging lenders believe the uncertainty and property pricing.
US market is interesting as they see a similar product proposition there, quickly ► Key impediments to growth and potential risks that the market
growing high-capacity market and no language barriers. players have pointed out are related to macroeconomic uncertainty,
► Some lenders believe it would be a more appropriate opportunity for brokers to first ‘market reputation’ (borrowers’ perception of the bridging market)
explore and gain the necessary market knowledge and expertise before sharing with and property market correction.
lenders. ► Some respondents believe that regulatory changes in the bridging
► The key barrier to entry for international expansion is rebuilding market knowledge market and adjacent markets (e.g. Buy-to-Let) could significantly
into a new jurisdiction. Furthermore, the potential regulatory differences and the affect the market.
additional resources needed to build the expertise (and educate the customers in ► The challenges to grow the book include access to talent and human
another jurisdiction where the product is not commoditised) make this challenging. capital as well as flexible and efficient funding to support growth.
Technology impact
Technology impact
► The impact of technology on the bridging market is significant as evidenced
by the increasing entrance of FinTech players into the bridging market and
constant technology innovation by existing players.
► Bridging lenders currently successfully adapt and develop new technologies in
client origination, funding (Peer-to-Peer platforms), information gathering and
data analytics, valuation and servicing.
► In our view, technology is important as it helps to streamline the process for
the borrower and lender and increase speed of execution which is one of the
main differentiators in the bridging market.
► Technology also provides scalability and efficiency needed to become a
winner in the market.
► We believe the impact of technology on the bridging market will increase
going forward and could transform the following processes:
1. Client acquisition;
2. Interacting with customer i.e. digitalisation of the customer journey
from Know Your Customer (KYC) to exit;
Technology as a game changer: survey responses
3. Underwriting and data analytics where a wealth of data aggregated and
accessed via technology will continue to increase; and The opinions of the respondents were split on the potential disruptive impact of
technology:
4. Automation of simple repeated tasks and applying artificial intelligence
to replicate human decision making. ► Many respondents believe that technology could have a disruptive impact in
the bridging market both in client origination and funding (Peer-to-Peer
platforms) as well as completely automate certain functions and processes.
► Other respondents believe that due to the bespoke nature of a product, the
market will remain broker-led and customer service processes will not move
away from human interaction.
Market competition
Increased competition in the UK bridging market over the last 12 months has had a number of effects:
Total lending and interest rate

Total Contributor Lending (£m)
1 2 3 Average Monthly Interest Rate
160 0.95% 1.00%

Margin compression Loan To Value increase Increased flexibility 140 0.92% 0.89% 0.85%
0.83% 0.95%
0.87% 0.88%
120 0.90%
►In some cases the market has seen 0.84%
►Pricing in the bridging space has gone ►Growing competition requires lenders 0.91%
aggressive lenders assuming higher risk 100 0.85%
down significantly in the past 3 years to be more flexible to borrowers both in 0.78%
loans and increasing Loan To Value above 80 0.80%
largely driven by benign interest rate terms of product terms (e.g. longer term
environment and the inflow of market the historical cap of 75%. products, diverse property types etc.) and
60 0.75%
entrants advertising and offering lower in terms of communicating with the 40 0.70%
►Almost all our survey respondents did
rates. borrower during deal execution. 20 0.65%
132
121
125
140
126
119
150
not view this as being sustainable going
80
99
91
0 0.60%
►Most of our survey respondents believe forward, however a few respondents noted ►Our survey respondents believe this
that higher risk-higher return is an Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3' 16 Q4 '16 Q1'17 Q2'17
that the trend will continue in the short to flexibility to borrower and high quality
medium term and market players need to alternative business model which has service to be one of the main
adapt to this by securing efficient low cost worked for some lenders in the past. Source: Bridging Trends by MT Finance
differentiators in the market.
funding.
Average Loan To Value and term
Key winners’ capabilities: survey responses Average LTV Average Term

13 54%
► Increased market competition requires lenders not only to be competitive in terms of the speed of execution,
pricing and flexibility to the borrower, but develop a range of other capabilities in order to be successful in 12
52%
the market. 12
50%
► The respondents pointed out key capabilities that are required for a bridging lender to be successful in the 11 11 11 11 11 11 48%
market: 11
46%
1. Market reputation and commitment to deliver on the terms set out to a borrower; 10 10 10
44%
10
2. Strong origination capabilities in the niche a lender is targeting through relationship with brokers 42%
50%
46%
51%
50%
53%
47%
47%
51%
46%
45%
and / or direct channels; and 9 40%
Q1 Q2 Q3 Q4 Q1 Q2 Q3' Q4 Q1'17 Q2'17
3. Efficient and scalable underwriting practices and risk management procedures. '15 '15 '15 '15 '16 '16 16 '16
Source: Bridging Trends by MT Finance
Market consolidation
► We believe the bridging market will see a consolidation among mid and small size players in the
next few years.
► The unregulated bridging market is still highly fragmented and there are synergies in increasing
market share by acquiring a competitor or a business with a unique selling proposition (USP) such
as proprietary origination routes, underwriting and best in class technology.
► We believe companies who can demonstrate winners’ capabilities and have a diversified business
model (in terms of product offering or additional revenue channels such as broker capabilities)
will be more attractive from an Merger & Acquisition perspective.
► Merger & Acquisition activity in the bridging market over the last few years shows that non-bank
lenders and private equity investors have been the most frequent acquirers of bridging businesses.
We believe that the trend will continue with smaller participation of private equity investors as the
market matures (unless acquired as a bolt on to another portfolio company).
► We believe that challenger banks are less likely to become buyers of bridging business following
recent regulatory changes to capital requirements which make this business significantly less
attractive from a capital perspective for banks.
Link this to the further

details on page 30
Market consolidation: survey responses

► Many respondents expect the number of players in the industry to decrease in the next few years due to:
1. Market correction forcing some riskier and more aggressive market players without unique selling propositions to exit the market;
2. Top existing players organically growing larger and diversifying across adjacent market segments; and
3. Further consolidation in the midsize and niche segments where smaller lenders will be acquired by bigger ones.
► It was expected that lenders that have strong origination capabilities, scalable underwriting and are more diversified in their product offering to be a more attractive target
in the industry and to have a higher value to shareholders.
► However, a number of respondents also believed that monoline lenders could be interesting to larger diversified players within the challenger banks segment planning to
enter the market or use it as a bolt on to their own book in the future.
Broker acquisition
Reasons to acquire a broker Buying a broker – Survey responses
► We asked the respondents if they expected any

1 2 3 changes in the current value chain, in particular
through vertical integration with brokers or
funders.
Direct origination channel Increase origination Increase market visibility
► Given the importance of origination in the
► Reduces reliance on 3 rd parties who are ► Market participants are wary of ► Can this be obtained through the highly competitive bridging market, there has
becoming increasingly expensive. majority stake acquisitions of brokers, existing strong broker relationships been an increased interest from lenders with
► Defendable market position, but comes which is likely to erode value of already in place?
respect to brokers. However, many respondents
at the cost of origination. broker unless it remains independent. ► The correct funding platform is
► But doing so would then unlikely important to ensure the business can
have flagged the risks of eroding the value of
► At what point does owning a broker
lower the cost to originate vs paying increase originations. act upon market intel (i.e. responding brokers through a controlling stake acquisition.
broker fees? to reducing pricing / flexibility).
► In order to avoid value attrition in a lender-
broker transaction, findings suggest the broker
has to remain independent and prove the ability
to treat all lenders on their panel fairly though
built-in processes and controls.
4 5 6 ► Acquiring minority stakes in brokers and

developing long-term relationship is viewed as
a more common way to strengthen origination
Diversify revenue streams Secure origination Regulatory burden and obtain valuable market insights, but may
not be equity enhancing.
► Fees charged by the broker to originate ► Increase defensibility of market ► Acquiring a broker would require the
from other lenders provides a new position and prevent a competitor from necessary compliance procedures be in
source of income that’s independent of acquiring a key route to market. place to meet Financial Conduct
growing the business’s own loan book. Authority (FCA) standards.
► Owning a broker introduces the ability ► The broking division would be
to earn fees through broking more required to demonstrate the customer
when the market is over heating and has received the best outcome, and this
the lender may choose to scale back will involve removing any cherry-
operations. picking bias.
Section 4.
Strategic routes
Strategic routes for a bridging lender
1 Refinance 2 Sell now ahead of the rush

►Refinancing can provide additional and / or more flexible funding for growth, e.g. ►We are aware of a number of bridging lenders targeting a sale of the business in the
increased advance rate, facility tenor or reduced pricing. next 2-5 years, though there are very few currently up for sale.
►There has been a number of financing transactions in the market recently, across ►One of the reasons for this is that many small and medium-sized bridging lenders
senior, mezzanine, unitranche and forward flow structures. are not yet at the size that would achieve the shareholders’ target exit valuation.
►We have seen funders becoming more selective around which businesses they ►If the market becomes crowded in future with several platforms being sold at the
finance, but pockets of liquidity remain even for assets that are traditionally more same time, valuations may be adversely affected, meaning it could be preferable to
challenging to fund on a wholesale basis, such as large commercial loans. sell now.
3 Merge 4 Expand overseas

►With the bridging market size showing signs of plateauing, organic growth may ►Another option to achieve growth in a flattening UK market could be to expand
only be achieved through increasing market share, which can be costly. overseas.
►A merger, on the other hand, can achieve immediate growth in the loan book and ►The most similar overseas model is the US ‘fix and flip’ market, though we have
the associated economies of scale. seen limited examples of US ‘fix and flip’ lenders entering the UK bridging space,
►Integration, and vice versa, except where under common equity ownership.
however, may be complicated if businesses run bespoke systems or
have materially different underwriting and collections processes.
Strategic routes for a bridging lender (cont’d)
5 Expand product range 6 Buy a broker

►The short-term nature of bridging lending means that intense origination activity is ►Broking fees are an alternative source of recurring revenue (without additional
required simply to maintain the loan book. burden of capital requirements), which can be created by launching or acquiring a
►For
broker.
lenders focused on growing assets, adding longer-term products can be
complementary to bridging in generating more recurring revenue. ►The additional benefit of owning a broker is that it provides a view on overall
►We
market activity, though it is important to ensure other brokers to the lending
have seen this recently in the case of ENRA Group, which launched its own-
business do not perceive there to be a conflict of interest.
book second charge lending product in May 2017 through the West One brand.
►Acquisition of a minority stake in a broker is a potential route to secure a long-term
relationship and access to market intelligence without eroding the value of a broker.
7 Retrench from the market 8 Bring in an equity backer

►The bridging market is becoming increasingly competitive and some market ►Once a bridging lender reaches scale with a book size of £40m or more, the range
players choose to re-focus their business and exit the market (e.g. Aldermore exited of funding options increases substantially.
the market in 2016, just two years after launching the offering, to focus on its core
►Given the availability of wholesale funding is more limited for smaller lenders, it
mortgage areas).
may be more efficient to bring in an equity backer to build the book to a critical
►We believe small bridging-only lenders will be worst affected due to a lack of both mass, before rebalancing the capital structure with wholesale funding.
firepower and diversification.
►Some lenders have reached scale with High Net Worth funding but this can be
►If profitability has been significantly reduced as a result of yields tightening, more time-consuming and subject to liquidity risk.
further investment in growing a bridging book may not improve matters.
►However, if the lender has unique origination routes then it may be possible to
reposition management expertise into becoming more like a broker.
Debt financing
Debt funding options

► Rapid growth of the UK bridging market in the last four years and higher yields offered by the specialist lenders has
driven an increased awareness into the segment. Several banks and funds have entered the space offering to support more
Funding structures
established players as well as some newcomers able to demonstrate origination growth, scalability and a good quality of
► The majority of small bridging
underwriting.
lenders entering the space use
► In recent months, we’ve noticed a shift in the market sentiment with funders gradually becoming more cautious on initial funding from founders and
bridging. A few funders have highlighted increased competition in the bridging market, emergence of a multitude of high net worth individuals to
small players focused on the same target customers and competing on pricing which makes it challenging to build long- establish a track record, for some
term differentiators. Many funders believe the market to be overheated and predict there will be some winners and losers this continues to be an attractive
in the short run and a ‘flight to quality’ in the market funding. form of funding due to flexibility,
albeit more expensive.
► It becomes increasingly important for bridging lenders to give funders additional comfort regarding unique selling
proposition, robust underwriting practices, strong management team, track record and scalability as well as sufficient ► As the market competition
equity to support business growth. intensifies, it becomes increasingly
important to build an efficient
capital structure and some market
Retail players are looking for alternative
deposits funding routes, such as peer-to-
Forward flow
Capital peer lending.
Unitranche
markets
/ private ► There are several structures
Senior & placement currently deployed by bridging
mezzanine lenders with external funding
providers such as senior, senior
and mezzanine, unitranche
HNW / P2P
facilities, forward flow
arrangements and issuance of
privately placed listed notes.
► Certain market players, such as
challenger banks, also have access
£25m- to retail funding, attracting
£20m-£100m £20m-£150m £50m-£150m £50m-£250m £150m-£1bn
£250m customer deposits, with the
Single lender Multiple Single lender Single lender Customers respective capital requirements.
/ platform lenders Investors
Debt funding options (cont’d)

1 High Net Worth funding and Peer-to-Peer funding 2 Senior & mezzanine structure
Key characteristics Key considerations Key characteristics Key considerations

►Size: £20-100m ►High Net Worth funding is usually ►Size: £50-£150m facilities ►Additional leverage can be used to
►High expensive as High Net Worth fund growth.
Net Worth funding often comes ►Pricing: 2.5-5.0% for senior tranche
Individuals view this as an equity
in the form of equity and subordinated and 8.0-15.0% for mezzanine tranche. ►There is limited liquidity for smaller
investment (even if structured as debt)
loans in the early life of the business. ►Advance debt facilities, particularly at
and require a high minimum return on rate: senior of 65-75% and
►With mezzanine level.
the emergence of marketplace their capital. mezzanine of 80-90%.
lending, some bridging lenders ►Eligibility
►Interactions between senior and
►Attracting investors into a Peer-to- criteria and covenants
launched Peer-to-Peer platforms mezzanine can make the legal
Peer platform involves additional similar to senior facilities.
attracting retail investors’ and High Net structures more complex.
regulatory and marketing costs.
Worth Individual’s funds (e.g.
►Reduces equity requirement.
LendInvest, Kuflink).
Key insights: Key insights:

►Whilst this is still a common source of funding for bridging market players, we see ►Followingan flow of funding into the bridging market for the past 12 months, we
it as an initial form of funding for companies which is quite costly and less efficient now see a decreased appetite from both senior and mezzanine perspective for
than funding through asset-backed facilities and capital markets. monoproduct lenders with short track record.
►We’ve noticed a recent shift towards larger professional investors in marketplace ►Some senior funders who reached a high concentration of bridging loans in their
lending. assets are becoming more cautious on the market outlook and require more diligence
and longer track record to further fund bridging lenders.
►However, we still see strong appetite for lenders able to differentiate themselves in
the market and evidence good origination capacities and scalability.

3 Unitranche funding 4 Capital markets

►Size: £50-£150m facilities ►Potentiallyless complexity and ►Size: £25-£250m ►Would usually be first funded
►Pricing:
quicker execution than the senior and through a bank’s warehouse facility.
5.0%-9.0% ►Private placement of listed notes or
mezzanine structure.
►Advance
issuance of retail bonds. ►Requires public reporting of
rate: 80%-90% ►Limited number of funders are able ►Not
performance.
rated by a credit rating agency.
►Typical eligibility criteria and to provide a unitranche facility at a
covenants similar to senior & competitive price. ►Size: starting at £20-30m for retail
mezzanine structure. bonds and £100m-£250m for private
placement.
►Pricing: 3.0%-6.0%

►Due to small size of mezzanine this may be an attractive way of increasing leverage ►There has been only one public placement of listed notes collateralised by a pool of
whilst growing. bridging and development loans, the £100m securitisation by Amicus Mortgage
►Market
Finance in August 2015 (listed on the Irish Stock Exchange's Global Exchange
is currently more expensive for the senior and mezzanine structure.
Market).
►Due to the short term nature of bridging loans (incl. higher perceived risks of
bridging finance), they have not become part of the public markets yet and this can’t
be currently regarded a well-established source of funding.
►Retail bond is another potential source of funding for bridging lenders. In August
2017 LendInvest offered a five year retail bond with a minimum of £2,000
investment.
UK Bridging Market
21

6 Forward flow arrangement 7 Retail deposits

►Size: £50-£250m ►Helps build strong origination profile ►Size: £150m - £1bn ►For large diversified financial
►Bridging and get scale quickly. institutions retail deposits are a
lender / originator sells the ►Retail funding includes different
loans to the funder and transfers the ►The lender is unable to take full traditional source of funding being a
types of deposits from households and
respective proceeds for a set fee or a advantage of growth potential and the comparatively cheap and less volatile
small companies.
share in profits. value upside. funding source compared to capital
►This form of funding is specific to markets.
►In addition to eligibility criteria and ►Limited equity required. banks and subject to regulations.
►Costs of funds can be significant
covenants the funder would usually
►Anecdotal evidence suggests cost of when all the regulatory and
approve some individual loans prior to
purchase. retail funding in the UK to be about administrative costs are taken into
1.00-3.00%. account.

►We see continued appetite for forward flow transactions, including in some niche ►Retail deposits are a traditional and efficient source of funds for large financial
segments such as larger loans, or bridging loans secured by commercial property. institutions and challenger banks, however they are not available for alternative
bridging lenders.
Section 5
Equity financing
Equity funding options

► Retained earnings (especially for smaller company) are often not sufficient to pursue an aggressive growth strategy, and to grow the book organically or via an acquisition,
companies are seeking for additional funding in the form of equity or debt.
► Equity funding could come from existing shareholders, trade and Private Equity investors and public (stock exchange listing).
► There are certain advantages and disadvantages to be taken into account for all the options available.
Equity raise from current Equity raise from strategic Equity raise from Private
Public equity issuance
shareholders players Equity players
► Relatively quicker to access leading to ► Sale to a trade buyer provides balance ► Private Equity involvement makes ► Rather than selling to a specific 3rd
accelerated business growth. sheet capability to ensure accelerated significant equity capital available party, equity capital could be raised
book growth on day one and often on day one, which helps accelerate via a listing on a stock exchange.
► Typically limited in size. results in immediate realisation of loan book growth and allows for
value to existing shareholders (many ► Equity markets could then be used for
► Could be challenging where one group sizeable acquisitions.
deals would also include future pay- future equity raises as opportunities
of shareholders (i.e. management)
outs through an earn-out mechanism). ► Similar to trade buyers, Private arise.
have limited capacity to invest further
in the business, but at the same time Equity has demonstrated a strong
► However, a trade sale would usually ► This would result in immediate value
do not want their equity share to be appetite for the bridging market,
involve a majority or 100% shares sale realisation for existing shareholders as
diluted. with capability to write over £100m
with strategic decision making yielded well as improved market perception as
of originations per annum.
to the buyer. a Public Limited Company (PLC).
► To attract Private Equity investors,
► May provide value above and beyond ► However, the cost and time (1 year)
companies need to demonstrate
capital through realisation of required to go through a listing
strong record of growth and financial
synergies. process and ongoing cost of regulatory
performance driving potentially
compliance are usually quite
higher valuation bids.
significant.
► We are aware of a number of players
interested in purchasing within the
bridging market, but we see
challenger bank appetite as relatively
UK Bridging Market modest. 11
Recent Merger & Acquisition transactions in the bridging market

► There has been a number of public transactions in the bridging market in the past five years, demonstrating a good level of appetite from both strategic and financials
investors, however the deal value and valuation multiples are often not available.
Precedent transactions
Date
Target Target description Acquirer Stake (%)
Announced
Brokerage engaged in the packaging of secured bridging loans, second charge loans and
Mar 2017 Intelligent Loans (iLoans) 1pm plc 100%
commercial mortgages. £2m deal value
Dec 2016 Pink Pig Loans Master broker that offers specialist second charge loans and bridging loans Y3S Group 50%
ENRA lends and brokers short term bridge mortgages as well as distributing specialist second
Nov 2016 Enra Group Exponent Private Equity Minority
charge and buy-to-let products. Owns West One Loans and Enterprise Finance.
Brightstar Financial Lending distributor that offers specialist residential and buy to let mortgages, second charge loans,
Jul 2015 Omni Equity Partners LLC Minority
Limited bridging loans, and commercial finance
Dec 2014 Chaseblue Loans Mortgage and loan brokerage; bridge and commercial financing; and consultancy services Y3S Group 50%
Capital Bridging Finance

Nov 2014 Mayfair Bridging Limited Residential and commercial bridging finance 100%
Limited
Sep 2014 West One Loans Short term bridging finance for residential and commercial properties Enterprise Finance Limited 100%
Specialist distributor of secured loans, and also specialises in bridging finance and commercial
Feb 2014 Enterprise Finance ISIS Equity Partners Minority
mortgages. Transaction valued Enterprise Finance at £28m
Dragonfly Property
Nov 2013 Bridging lender. Octopus had provided a funding line to Dragonfly since it launched in 2009 Octopus Investments 100%
Finance
Sources: Press Releases, Capital IQ
Deal focus: selected Merger & Acquisition case studies

1pm plc Intelligent Loans (iLoans)
► Date Announced: 16-Mar-17
► Deal Value: £2m
► % Acquired: 100%
Rationale and Impact:

► The acquisition will allow 1pm to fund selected loans on its own balance sheet and extend its product range into adjacent, complementary sectors, which is part of the
group’s growth strategy.
Y3S Group Pink Pig Loans

► Date Announced: 15-Dec-16
► Deal Value: Not disclosed
► % Acquired: 50%
Rationale and Impact:

► Acquisition part of growth strategy of Y3S which has made a number of acquisitions in the past 5 years in a bid to increase its market share.
► The deal was the result of an ongoing collaboration between the firms and will see Y3S provide a range of support to the brokerage, Pink Pig Loans, to facilitate fast growth.
Exponent Private Equity Enra Group

► Date Announced: 15-Nov-16
► Deal Value: Not disclosed
► % Acquired: 100%
Rationale:
► Exponent intends to fund ENRA’s expansion into the specialist buy-to-let and second charge mortgage market.
► It will also support ENRA to expand its product offerings that meets the changing needs of its customers.
► The transaction will ensure the continuation of growth strategy of ENRA Group.
Valuation approach
Valuation methods
Valuation of Speciality Finance businesses
Price-to-book (“P/BV”) multiple
► There are a number of listed Speciality Finance companies. These companies have a broad
range of operations such as asset financing, leasing, specialist consumer and commercial Price-to-tangible-book (“P/TBV”) multiple
lending, broking services, debt purchase. Whilst some of the listed Speciality Finance
companies offer short term financing (mainly unsecured consumer loans), there are no listed Dividend discount model (“DDM”)
“pure players” offering bridging finance only.
► Within the Speciality Finance segment in the UK, we have historically observed that P/E multiples are more relevant when valuing
earnings year on year tend to be volatile compared to some of the larger peers, such as listed a non-lending broking business that generates
high street retail banks. As such, when valuing Speciality Finance companies, we prefer to earnings from fees and commissions.
base our valuation on book values, which are more stable over time. A price-to-earnings
(“P/E”) multiple is typically used as a cross-check for valuing Speciality Finance businesses.
Regression analysis - Specialty Finance ► We have performed a regression

7.0x analysis to demonstrate the
6.0x relationship between return-on-
5.0x tangible equity (“ROTE”), a key value
LTM P/TBV
4.0x
driver and P/TBV.
f(x) = 10.7085263650253 x + 0.102606136895655
3.0x
R² = 0.51168139844219
► Despite certain outliers, the
2.0x relationship between the two metrics
1.0x
is evident.
0.0x ► The regression analysis is typically
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
used to identify overvalued or
LTM ROTE undervalued comps compared to their
Source: CapitalIQ; Valuation date is 30 June 2017; LTM is last twelve months from the valuation date. peers.
Companies: Provident Financial Plc, H&T Group Plc, Intermediate Capital Group Plc, International Personal Finance Plc, Private & Commercial Finance Group Plc, Manx Financial Group Plc, 1pm Plc, Orchard Funding Group Plc, Morses Club Plc, S&U Plc, OneSavings Bank
Plc, Arbuthnot Banking Group Plc, Virgin Money Holdings (UK) Plc, The Paragon Group of Companies Plc, Close Brothers Group Plc, Secure Trust Bank Plc, Shawbrook Group Plc, Aldermore Group Plc
Valuation approach (cont’d)

Our approach to valuing a mono-line bridging finance business
Top five factors that may lead to a discount to
Adjusted Book Value
► Our key area of focus from a valuations perspective is the quality of the loan
book. - Lack of scale, i.e. relatively small loan book of £10m-£20m.
► For small loan books we typically perform a loan-by-loan valuation taking into - Issues highlighted in due diligence on loans.
consideration contractual terms, risk, collateral assessment, market conditions - High concentration risk in the loan book.
and borrower characteristics. For larger loan books, we may consider taking a
- Uncertainty in collateral valuations.
portfolio approach to value the loan book with appropriate segmentation.
- Lack of pipeline and no/limited visibility on future earnings.
► Based on the above, we calculate a range of adjusted book values (“Adj BV”).
We would then apply a discount or premium on the Adjusted Book Value, based
on several factors, some of which are listed on the Right Hand Side.
► Regression analysis and comparable multiples could also be used to value
bridging businesses.
► In this case the population for comparable multiples and the regression should
consist of companies that have operating histories, overlap of products between
individual companies, proven business models, and earnings and returns
expectations (management and analyst coverage), all of which improves: (i)
predictability of profit metrics, (ii) comparability between companies, and (iii)
strength of the relationship between valuation multiples and profit metrics.
Top five factors that may lead to a premium to
Adjusted Book Value
- Sizeable market share.
- A scalable platform.
- Presence of a corporate brand(s).
- Distribution capabilities and/or strong relationships with
intermediaries.
- Strong underwriting standards underpinning the quality of
the loan book.
Valuation approach (cont’d)
1
Long-term and formal funding lines (bonds, loans or securitisation) to
provide a sustainable source of finance to drive growth.
2
Investment in marketing campaigns to build brand and corporate
awareness.
3
On the previous page, we have
listed certain factors that could Partnerships with Fintech companies or development of proprietary
lead to premiums above book platforms can diversify originations and drive growth in top line.
value in the context of valuation.
We list out here key actions that
vendors can take to support a
more positive valuation. 4 Strong corporate governance and internal controls improve overall risk
and financial management, which would likely be perceived as value
supportive for investors and potential acquirers.
5 Diversification of revenue, both geographically and by offering a wider

range of lending products (e.g., longer term loans, leases) would likely
increase value.
6
Strengthening relationships with intermediaries perhaps by entering
into long-term contracts with them.
7
Build capability and infrastructure to originate directly at borrower
level.
Business model considerations

► Given the number of bridging lenders in the ► Diversification of product lines helps a
market, pure non-bank bridging lenders may bridging lender to generate scale,
struggle to differentiate themselves in the particularly by adding longer term
eyes of potential buyers (unless they show mortgage products.
proprietary origination and a strong brand). ► A good example of such a lender is
Non-bank ► The short tenor of bridging assets means that Diversified non- Together, which provides bridging, first
the acquirer would be focused on the value and second charge mortgages, buy-to-let
bridging lender of the platform, which will be relatively
bank lender mortgages and commercial mortgages.
small unless the lender has genuine Unique ► The combination of scale and
Selling Propositions, such as unique
diversification can open up a number of
origination routes.
exit routes, including a trade sale, private
► We believe the most likely buyer for a pure equity and an Initial Public Offering.
bridging lender is another bridging lender
looking to grow inorganically.
► The combination of a lender and broker ► Some bridging lenders, such as

helps address the key issue raised above of Masthaven, have obtained a banking
having a unique origination route. licence.
► For example, ENRA Group provides ► Given the process of obtaining a banking
bridging finance and acts as a master licence is relatively time-consuming, a
Non-bank lender specialist broker, with the latter adding lender funded through retail deposits may
and broker strong origination capabilities for the lending
arm.
Challenger bank be an attractive target for a non-bank
lender if retail deposits can provide a
reduction in cost of funding and
► We see the greatest value where neither side
diversification of funding sources.
is wholly reliant on the other – i.e. where the
lender originates through other brokers, and ► We may also see consolidation among
the broker provides business to other challenger banks, with bridging
lenders. potentially providing diversification of
assets.
Regulatory considerations
Residential mortgages exposures
► Regulation of bridging loans and potential
Current approach RW 35%
capital requirements are an important
consideration for banks acquiring a bridging LTV < 40% 40% - 60% 60% - 80% 80% -90% 90% - 100% > 100%
lender. Latest proposals(1) RW
RW 25% 30% 35% 45% 55%
counterparty
► We have set out here the latest proposals for LTV <= 60% 60% - 80% > 80%
Latest proposals(2)
revisions to standardised capital treatment for RW 70% 90% 120%
banks – if bridging loans were categorised Commercial real estate exposures
under the second band of “repayment is Current approach RW 100%
materially dependent on cash flows generated
by property”, the capital treatment would at LTV <= 60% > 60%
Latest proposals(1)
least double for residential bridging, and may RW Min (60%, RW of counterparty) RW counterparty
go up or down for commercial bridging LTV < 60% 60% - 80% > 80%
depending on Loan To Value (LTV). Latest proposals(2)
RW 80% 100% 130%
► In our view, these changes can make the
Latest proposals(3) RW 150%
challenger bank model less attractive to
potential buyers, and reduce the appetite
of banks to acquire a bridging lender. RW – risk weight
(1)Repayment is not materially dependent on cash flows generated by property
(2)Repayment is materially dependent on cash flows generated by property
(3)Land acquisition, development and construction
Section 6
Preparing business for a

transaction
Preparing business for a transaction
Preparing business for a debt or equity transaction involves setting clear objectives and expectations of the transaction and preparing the relevant data, systems and polices
for Due Diligence (for equity raise) and Agreed Upon Procedures (for debt raise).
Set clear objectives Desired transaction terms

►Be it an equity or debt raise, the business should have a clear idea of what it is ►For both equity and debt transactions, it is important to have a clear view of what
seeking to achieve from the fundraise and what is the expected timeline to success looks like, and what the deal-breakers are before embarking on a
completion. fundraising process.
►The quantum of capital should be driven by the lender’s business plan and ►For an equity raise, the business should benchmark expectations against bridging
projected book growth. lender valuations, transaction terms and structures and assess the potential
►The
implications for the company (drag and tag rights, vetos on distributions / certain
company should be able to support this by a 3-5 year origination plan and
decisions beyond the ordinary course of business).
financial forecast and to break down each key component of the capital
requirement and articulate how it will drive incremental value for the business. ►For a debt raise, the business should determine what transaction structure is more
appropriate given the growth strategy and stage of business, the required level of
flexibility and expected target pricing.
Data & preparation Process

►Itis critical for a bridging lender to capture all the portfolio data in the system and ►It is critical to have a well prepared and timed process, targeting the right set of
be able to extract it in a convenient format for buyers or funders as the loan investors or funders simultaneously to generate and maintain competitive tension.
datatape is one of the key areas of due diligence focus. ►Ongoing / perpetual market conversations may lead to a sub-optimal outcome
►The company should have an executable business plan covering all elements of the giving market the impression that the business can’t raise funds and encouraging
business (market opportunity, product and USPs, competitive landscape, them not to put their best foot forward on pricing and key terms.
origination strategy, underwriting, technology, operations, personnel and financial ►The process should have a shortlist of targeted investors or funders who have the
forecasts) and be able to clearly set it out to investors and funders in a management
relevant sector experience, track record in the bridging marker and appetite to
presentation.
support projected business growth.
►Itis important to have the company’s operational processes properly documented
and evidenced by a set of policies which gives comfort to investors and funders and
decreases key people risk in a transaction.
Preparing business for due diligence

Preparing well for the due diligence process protects value by supporting the equity growth story, ensures risks associated with the business are known and documented in a
way that maintains value, and reduces execution risk by producing clear and consistent information to potential investors.
Investment thesis Distribution capability

►Due diligence preparation should start with a clear articulation of the investment ►Evidence stable and diversified distribution arrangements through third party
thesis that will be provided to potential investors and a robust assessment of the contract start dates and volumes by channel / broker. Any significant relationship
potential risks that could reduce value. wins can be emphasised and losses put into context. Exclusive distribution
►Knowing
relationships can be highlighted.
what you want for the business and delivering an achievable business
plan helps demonstrate business growth trajectory and sense check exit price for ►If a direct sales capability sits alongside broker channels, there should be a clear
potential buyers. articulation of how potential conflicts are managed.
►Information gathering and analysis should seek to provide potential investors with ►A robust broker on boarding and monitoring process should be demonstrated,
consistent information that supports (or at minimum does not contradict) the equity particularly where regulated bridging products are sold.
story.
Underwriting consistency Portfolio performance

►The rapid growth of many bridge lenders, a competitive market and the availability ►Loan datatape information should be clean, consistent and the trends properly
of funding makes demonstrating underwriting (and pricing) consistency critical for understood before being provided to potential investors.
bridge lenders. ►Areas of focus for due diligence on bridge lending portfolios includes
►There should be a well articulated through-line between the overall strategy, credit concentration risk (e.g. by property location, distribution channel), shifts in risk
risk appetite, lending policies, and the underwriting in practice as evidenced characteristics (and whether the increased risk is being appropriately priced), the
through loan files. basis of collateral valuations and an analysis of defaults and arrears.
►Any significant changes to underwriting strategy or implementation should be ►Given the customised nature of much bridge lending, a portfolio analysis is
documented and supported by the reasons for the change. frequently supplemented with reviews of loan files.
Preparing business for due diligence (cont’d)

Funding capacity and strength Accounting policy stability
►Sufficient funding capacity to support future growth plans should be demonstrated. ►As bridge lending repayment typically occurs at maturity, arrears estimation can be
►The
more subjective than some other types of lending. Changes to provisioning
due diligence preparation should include an evaluation of diversified sources
methodologies should be supported by clear explanations for the basis of the
of future funding, particularly where the business is a non-banking entity (and
change. Similarly the circumstances under which forbearance is granted should be
therefore unable to access retail deposits and certain Bank of England programmes)
transparent.
new product types are planned.
►The estimation of conditional prepayment rates can be particularly subjective for
bridge lending and assumptions can become out of date faster than longer term
products.
Scalability Regulatory exposure

►Potential investors will want to understand whether the current operating model is ►Governance and control of new and existing regulatory requirements is critical. For
fit for purpose and can support future growth, particularly as competition tightens. example, the interpretation of Capital Requirements Regulation (CRR) applicable
►Automation can be a source of competitive advantage – articulating this well to regulated Bridge lenders subject to capital requirements is a complex area and
means addressing the extent to which technology can be leveraged to deliver such a changes to the categorisation can result in a change in risk weights and the
customised product accompanied by a realistic assessment of delivery costs and associated capital requirement.
future benefits. ►Those bridge lenders acting as both lender and broker (or planning to do so in the
future) should ensure they can present evidence that it considers the fair treatment
of customers.
Preparing business for Agreed Upon Procedures (AUPs)
Agreed Upon Procedures (AUPs)

Potential buyers of a business or lenders of a facility will look for factual and independent reporting on key aspects of the strength of the operational controls and processes and
the underlying quality of data.
What does Agreed Upon Procedures encompass? What good quality data looks like:
► The procedures to be performed can vary depending on the nature of the due diligence sought. Specifically, buyers ► Key policies and procedures need to be
look at Data Integrity and Operational due diligence via Agreed upon Procedures (AUPs). formally documented and periodically
► Agreed Upon Procedures are usually performed by an independent party in accordance with an appropriate updated with relevant staff required to read
reporting standard (typically ISRS 4400 in the UK). and acknowledge their understanding of
these.
► Static Data and relevant physical records
should be stored in an easily retrievable
Operational Processes Agreed Upon Procedures Data Integrity Agreed Upon Procedures
format, including developer access to the
► These procedures will relate to the review of the ► These Agreed Upon Procedures will relate to the integrity database warehouse for automated SQL
servicing of the bridging loans i.e. key policies, of the underlying static data via a listing/data tape that access for data analytics.
procedures and documentation already in place and sets out various standing data attributes of customers and
by observing the entity level policies, procedures receivables to ensure that the underlying data can be ► Key staff with the required knowledge and
and controls implemented by the firm with actual agreed to substantiating documentation or similar expertise available to respond to queries
data being checked. evidence.
raised and follow up issues identified
► Typical Operational areas that are included: promptly during the Agreed Upon
► New business approvals; ► Typical fields would include: Procedures fieldwork and thus reducing the
► Underwriting; redundant staff time for outstanding queries.
► Settlement reporting;
► Borrower name;
► Cash collection;
► Contact details;
► Receivables aging and write-offs;
► Property details (and any other collateral);
► Internal and external audit reports;
► Amount lent;
► Disaster recovery framework; (including
► Loan To Value as at the relevant date;
data back-up); and
► Loan term;
► Stakeholder reporting, where relevant.
► County Court Judgements (CCJs) etc.;
► Documented signatures & Correspondence
address.
EY CONTACT DETAILS
How EY can help?

► Advising shareholders on strategic options
► Our combined Merger & Acquisition and debt offering in the Corporate Finance team allows us to fully consider the available options.
► We recently worked with a bridging lender to assess its strategic options and are now raising growth funding for this lender.
► For potential buyers of bridging lenders we can advise on capital structure options through the Merger & Acquisition process.
► Advising bridging lenders on raising finance

► The EY Debt Advisory team previously worked at banks providing wholesale financing to speciality finance companies.
► This experience means that we are able to structure transactions well and understand key areas of focus for funders.
► Our strong relationships with funders across the capital structure mean we can access the right pools of liquidity to meet a company’s financing strategy.
► Analysing data tapes of bridging lenders

► Our transaction experience in the sector means we are able to analyse data tapes and compare against best-in-class operators.
► We recently advised a private equity firm on an acquisition in the speciality finance sector, providing insight on the loan book and data quality.
► Securitisation advisory
► We recently advised a secured lender on the appointment of arrangers for its first public securitisation.
Selected recent credentials in the bridging market

This announcement appears as a matter of record only. This announcement appears as a matter of record only. This announcement appears as a matter of record only. This announcement appears as a matter of record only. This announcement appears as a matter of record only.
This announcement appears as a matter of record only.
Project XXX Project XXX
March 2017 January 2017 April 2016 2016 2016 2015

Entering into a relationship with a Raising of a £90m facility for funding £17.5m Bilateral Revolving Credit Vendor due diligence on Charter Court Pre-acquisition debt advisory and buy- Buy-side due diligence for a Private
global institutional investment manager bridging finance activity Facility to support loan book growth Financial Services side due diligence for a major Equity house on its potential
to acquire bridging loan assets from European Private Equity house on a investment in United Trust Bank
MTF EY acted as Sole Financial Advisor EY acted as Financial Advisor leading UK bridge lender
and Arranger on the Debt Financing EY acted as Sole Financial Advisor on EY acted as Financial Advisor
EY acted as Sole Financial Advisor on the Debt Financing EY acted Financial Advisor
the Debt Financing
EY CONTACT DETAILS
Key EY contacts
Ian Cosgrove Nick Parkhouse
Partner, Corporate Finance Executive Director, Corporate Finance
Tel: + 44 20 7951 1094 Tel + 44 20 7197 7658
Email: icosgrove@uk.ey.com Email: nparkhouse@uk.ey.com
Peter Galka Jordan Blakesley

Partner, Transaction Support Senior Manager, Corporate Finance
Tel +44 20 7197 7661 Tel + 44 20 7197 7517
Email: pgalka@uk.ey.com Email: jblakesley@uk.ey.com
Akhil Shah Taylor Gwilliam

Manager Manager
Tel: + 44 20 7951 9346 Tel + 44 20 7951 6715
Email: ashah12@uk.ey.com Email: taylor.gwilliam@uk.ey.com
Matthew Tucker James Bateman

Executive Director, UK Corporate Finance Strategy Executive Director, UK Extended Assurance
Tel +44 20 7951 5501 call Tel +44 20 7951 1269
Email: mptucker@uk.ey.com Email: jbateman@uk.ey.com
Rommel Johnson Vivek Kavdikar

Senior Manager, UK Valuations & Business Modelling Senior Manager, UK Extended Assurance
Tel +44 20 7951 9145 call Tel +44 20 795 13617
Email: rjohnson1@uk.ey.com Email: vkavdikar@uk.ey.com
EY | Assurance | Tax | Transactions | Advisory
About EY
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services
we deliver help build trust and confidence in the capital markets and in economies the world over.
We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing,
we play a critical role in building a better working world for our people, for our clients and for our
communities.
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young
Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company
limited by guarantee, does not provide services to clients. For more information about our organization,
please visit ey.com.
About EY’s Transaction Advisory Services

How you manage your capital agenda today will define your competitive position tomorrow. We work with
clients to create social and economic value by helping them make better, more informed decisions about
strategically managing capital and transactions in fast-changing markets.
Whether you’re preserving, optimizing, raising or investing capital, EY’s Transaction Advisory Services
combine a unique set of skills, insight and experience to deliver focused advice. We help you drive
competitive advantage and increased returns through improved decisions across all aspects of your capital
agenda.
©2017 EYGM Limited.

All Rights Reserved.
EYG no. 01101-174Gbl
1610-2101865
ED None
This material has been prepared for general informational purposes only and is not intended to be relied
upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.
The views of third parties set out in this publication are not necessarily the views of the global EY
organization or its member firms. Moreover, they should be seen in the context of the time they were made.
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UK Bridging Market Study

Where is the UK bridging market heading? 2

Preparing business for a transaction 6

Introduction to bridging loans

Need… Product suitability… Exit…

The most recognisable purpose of a bridging

Auction Purchase Business Purpose Re-Furb

Source: Bridging Trends by MT Finance

GDS: To confirm source

Last Twelve Months (LTM) performance:

Long term view:

Bridging market landscape Entry Expansion Exit

Property Lendinvest through non peer-to-peer platforms.

Low Book growth High

Note: not scaled to size. Source: public information, EY estimate

Where is the UK bridging market

Our view on the bridging market

Residential: 5% Commercial: 13% Development 11% 2nd Charge: 9%

Source: Mintel Forecasts

International expansion: survey responses

Total lending and interest rate

1 2 3 Average Monthly Interest Rate

160 0.95% 1.00%

Key winners’ capabilities: survey responses Average LTV Average Term

Link this to the further

Market consolidation: survey responses

► We asked the respondents if they expected any

4 5 6 ► Acquiring minority stakes in brokers and

Strategic routes for a bridging lender

1 Refinance 2 Sell now ahead of the rush

3 Merge 4 Expand overseas

Strategic routes for a bridging lender (cont’d)

5 Expand product range 6 Buy a broker

7 Retrench from the market 8 Bring in an equity backer

Debt funding options

Debt funding options (cont’d)

Key characteristics Key considerations Key characteristics Key considerations

Key insights: Key insights:

Debt funding options (cont’d)

Key characteristics Key considerations Key characteristics Key considerations

Key insights: Key insights:

Debt funding options (cont’d)

Key characteristics Key considerations Key characteristics Key considerations

Key insights: Key insights:

Equity funding options

Recent Merger & Acquisition transactions in the bridging market

Capital Bridging Finance

Sources: Press Releases, Capital IQ

Deal focus: selected Merger & Acquisition case studies

Rationale and Impact:

Y3S Group Pink Pig Loans

Rationale and Impact:

Exponent Private Equity Enra Group

Regression analysis - Specialty Finance ► We have performed a regression

Valuation approach (cont’d)

Valuation approach (cont’d)

5 Diversification of revenue, both geographically and by offering a wider

Business model considerations

► The combination of a lender and broker ► Some bridging lenders, such as

Preparing business for a

Preparing business for a transaction

Set clear objectives Desired transaction terms

Data & preparation Process