Challenger bank joins PE subscription line market

OakNorth Bank, a UK lender which focuses on small and medium-sized enterprises, has become the latest to join the growing market for alternatives fund finance.

The London-headquartered bank, which has approved more than £650 million ($860 million; €721 million) in loans since March, has completed a revolving subscription credit facility with consumer-focused private equity firm Bluegem Capital Partners in what is the bank’s first such deal.

It is understood the facility relates to Bluegem Secondary fund, a vehicle created in 2018 through a GP-led secondaries process in which assets from the firm’s debut 2006-vintage fund were moved into a continuation vehicle.

“There is an underserved space in the fund market between £5 million and £25 million,” Mohith Sondhi, senior director of debt finance at OakNoarth, told sister publication Private Equity International. Mainstream banks only get out of bed for a minimum ticket size, he added. “We are very happy to fill that void and talk to people and spend the time looking for those transactions.”

Most mainstream banks typically provide subscription credit lines of between £20 million to £50 million and upwards, Leon Stephenson, a partner at law firm Reed Smith who focuses on fund finance, told PEI. Smaller and challenger banks are usually those that are keen to develop wider relationships with funds and which have the ability to provide “high-volume capital call facilities” to clients, he added.

OakNorth Bank’s facility took just six weeks to close – much faster than the typical three-to-six months for mainstream lenders, Sondhi said.

Marlborough Partners advised on the deal.

Bluegem co-founder Emilio Di Spiezio Sardo said in a statement seen by PEI that it was a “truly unparalleled experience” for a lender to turn around a deal in a few weeks amid unprecedented times.

Sondhi declined to comment on the size of the facility or which fund it relates to.

Bluegem chose OakNorth because the bank was able to offer a bespoke facility and be comfortable with the high concentration of one LP in the fund, Sondhi said.

“For us, if you have a high-quality investor behind [the fund], concentration risk doesn’t bother us so much,” he said.

For OakNorth Bank, which typically partners with entrepreneurs and small-to-medium-sized businesses, working with a private equity firm was an efficient experience.

“The biggest difference was that private equity GPs are quite sophisticated, whereas SMEs can be a mixed bag. This is not necessarily a problem – entrepreneurs have great business ideas – but perhaps do not have systems or information to hand that is user-friendly for a bank,” Sondhi said.

Private equity fund managers and LPs typically have information at their fingertips, which helps expedite the process, he added.

“They are seasoned negotiators as well. They know what they’re looking for and you must be on top of your game. They expect you to know your stuff.”

Bluegem’s portfolio includes department store Liberty, make-up brand Iconic London, haircare group Medavita and nursery product maker Mamas & Papas, according to its website. In the 2018 GP-led secondaries process, the firm moved assets from its 2006-vintage debut fund into a continuation vehicle. That vehicle was subsequently backed by secondaries capital from Glendower Capital, as reported at the time by sister title Secondaries Investor.

Asked whether Bluegem’s consumer-facing portfolio posed an issue for the bank given the pandemic-induced downturn, Sondhi said OakNorth Bank conducted due diligence on the underlying assets to become comfortable with the deal. “We’ve got the capability to credit assess all those different investments, which we did.”

There is an opportunity for smaller lenders in the fund finance sector, given the challenges incumbent mainstream banks are facing, Sondhi added. In addition to uncertainty in the overall market, these lenders must focus on monitoring their existing portfolios and have fewer resources for new business. 

Of the loans OakNorth Bank has approved since March, £230 million was via the UK government’s Coronavirus Business Interruption Loan Scheme and the Coronavirus Large Business Interruption Loan Scheme.

The bank has lent almost £4.5 billion since its launch in 2015.

This article first appeared in sister publication Private Equity International