How to lend to non-bank lenders

Non-bank lending is growing in popularity, but it can be tough to find the best way to access this lucrative and increasingly important part of the economy. Pollen Street's Matthew Potter takes a look at how to make good investments in the sector.

Non-bank lending is a large and growing market, with an important role to play in driving growth, financial inclusion and more. There is a real opportunity to access and accelerate the growth it can bring.

The first part of this series took a deep dive into the current non-bank lending market and the important role that companies like Pollen Street Capital play in providing financing to non-bank lenders that then reach millions of consumers and businesses. This article will outline Pollen Street Capital’s differentiated investment strategy, highlighting the benefits of the tried and tested approach, driving real positive impact.

Lending to non-bank lenders – a senior secured investment strategy

Our investment strategy at Pollen Street Capital involves lending directly to specialist non-bank lenders. In our previous article, we demonstrated the scale and importance of the market and, owing to the specialised nature and small scale of many of the individual lenders, on the ground origination is required alongside a model that has the expertise to access a diverse market. There has been a dearth of institutional access in this space.

Simply put, we use our years of experience in this sector to lend to top tier non-bank lenders. We work with the experts in their respective fields who create carefully designed lending products and the majority of our investments are sourced internally and negotiated bilaterally.

At Pollen Street our own expertise in this market has driven us to develop a differentiated investment strategy. We operate an asset-based credit strategy whereby our lending is predominantly on a senior basis and secured against the loan portfolio of our non-bank lending partners. Each investment is secured by real or financial assets that generate cashflows which support the repayment of the loan principal and interest and is structured to be super-senior to non-essential operational expenses within the underlying operating business.

Our approach combines the structuring and credit disciplines of asset-based finance with those of direct lending. Loans are fully covenanted at both the asset performance level as well as at the corporate level. This means that these direct loans are structurally super-senior to most of the operational expenses of the business and certainly ahead of marketing and other growth expenses. The underlying lending assets are typically highly granular in nature and generate highly predicable cashflows to support the loan repayment to the lender.

Typically, unlike corporate loans that are at risk of extension in stress situations, the underlying collateral have short duration and hence the recovery of principal and interest can occur swiftly in any downside scenario.

Covid – A counter-cyclical case study

The senior secured strategy we have outlined is designed to reduce potential volatility and losses even in times of extreme stress.

This was tested during 2020 and as we entered lockdown in March, we worked closely with our partners daily enabling us to have a balanced approach of prudence and support, as well as gathering granular insights from data collected across our credit positions.

What we saw validated our approach. Across our senior secured portfolio we have seen no defaults on our facilities through covid. Cash collection in 2020 was more than £290 million.

This robust performance in the sector generally has been attributed to:

  • Regular dialogue between lending platforms and borrowers enabling rapid response and containing risk appetite during periods of uncertainty.
  • Proactively engaging with our partners to ensure appropriate forbearance plans we put in place swiftly and then to support resumption of payments as appropriate.
  • Swiftly re-assessing risk appetite, dynamically managing underwriting approach and re-entering the market with tailored products.

It is this combination of a resilient asset class and senior secured structures that means we have generated strong and consistent returns since inception and throughout covid.

Investing with Impact

We believe that the financial services sector has a critical role to play in driving impact in a tangible way for the real economy.

It is through this lens that Pollen Street assesses opportunities to invest wisely, to help build better businesses, to improve access to finance and to help improve the environment.

In private credit this can be by driving financial inclusion, regional economic development, green transport and energy efficiency in homes, to name just a few.

As we have seen, the role of non-bank lenders is ever increasing, as banks narrow their focus and customers are attracted to platforms that employ technology to deliver more tailored and efficient service. Our long-term industry relationships help drive a strong pipeline of deals for us to assess. We are able to select those that align with our strategy and ambitions in driving positive impact.


Dynamic allocation. At Pollen Street, our expertise and reputation in the sector means that we are privileged to work with the highest quality businesses and work with them as a financing and strategic partner. We use a proprietary system to manage credit risk, integrated directly into lending partners. This gives us live performance updates, with loan-by-loan granularity to monitor loan level performance, covenant calculations, compliance, cash test and more.

Non-correlated. Given the specialist markets that these borrowers target, they tend not to be correlated to the overall market and hence provide an attractive complement to corporate direct lending strategies.

Through the cycle opportunity. The structure of the loans is highly resilient in a downside scenario. The underlying collateral tends to be short duration in nature and therefore the loans typically pay off faster in a downturn. Further, in times of market dislocation, the opportunity increases as more standardised forms of liquidity often shut down leaving more opportunity for the specialist.

Access to a growing opportunity. The overall non-bank lending environment is both large and growth is driven by structural changes in the sector. The market is fragmented, it can be difficult to navigate without deep sector expertise.

Through its longstanding experience in the industry, Pollen Street has developed a deep expanding network of long-term industry relationships enabling a diverse and differentiated dealflow.

We believe this is a growing market with increasing importance to a thriving and heathy and well-functioning economy as a whole. There is an opportunity here to deliver consistent returns with strong downside protection while also driving positive impact for society.

Matthew Potter is a partner at Pollen Street Capital.