Arranging a £2 million bridging loan for an HNW client to buy his daughter a W2 mews house — while waiting for the bonus cheque to clear — is nothing unusual, says William Cash.
A year ago, Spear’s ran an interesting article about why so many HNWs, or even UHNWs (assets over £15 million) had such low credit scores and were often regarded as ‘risky’ borrowers by the mainstream banks. The article began with an amusing anecdote told by Alexander Hoare, chairman of his family bank, about how he had been refused a mobile phone when he walked into a shop. The reason was that his credit report came up blank.
The main reason for being shunned by the banks is that HNWs, especially the entrepreneurial and internationally mobile types, don’t tend to have PAYE slips to satisfy the new box-ticking, one-size-fits-all mentality that has been implemented by banks following the sub-prime mortgage scandal. ‘How much do you spend on groceries per month?’ will get most HNWs scratching their heads.
I haven’t yet seen The Big Short, based on the book by Michael Lewis, but I gather there is a scene in which it turns out that banks were so keen to lend money that they were targeting pole dancers in Midwest strip clubs for mortgages. A combination of larger balance-sheet requirements, retail-bank ringfencing, and tighter regulation has meant a new, post-crunch lending culture in which the two tribes at opposite ends of the financial spectrum — the short-term, cash-needy, asset-rich and the asset-poor — are now both looking towards the ‘alternative’ financing space. Call it The Big Lend.
For HNWs — and property developers — who need money fast, there is a whole new ‘alternative financing’ universe, led by such dynamic characters as Hugh Wade-Jones at Enness Private, Mark Posniak at Dragonfly, and Paul Welch at LML. Like many in this niche sector, Wade-Jones began as a mortgage broker (for Foxtons), but he soon realised that the HNW sector was being poorly serviced. From offices in Mayfair, he has built up a strong alliance with private banks across Europe, many of whom are keen not to lose clients to whom they can’t extend loans (and often it is fast loans) themselves. Much better to refer to a broker like Enness than lose the client to another bank.
Wade-Jones says he loves his work because he can solve ‘life-changing’ problems for an HNW — or a PEP (politically exposed person) — with a few phone calls. It may be a bank in Monaco or Switzerland but it is all about ‘knowing your client’. The only problem he sometimes encounters are clients who are less than forthcoming about their finances. ‘I need to know about their wealth or their income,’ he says. ‘Either works. But I can’t work without their help. I often start by telling them, “I’m on your side.”’
Dragonfly was set up in 2009 as a ‘self-funded principal lender’ — as opposed to a broker — and has won many awards. It has now opened its wings to become much more than just a traditional bridging finance company. The firm has a wide range of prod- ucts, with lending periods of up to five years.
Under the sharp-minded Posniak, the Holborn firm has almost reinvented the property finance space. It was founded with a team of four (including Posniak) by the property finance visionary Jonathan Samuels, with just £25 million (including his own money) after being finally backed by Octopus Investments. The firm has a loan book that is now well in excess of £600 million and a team of around 34. An ‘exciting’ new product for HNWs is launching in a few months. ‘We already have a platform for deals. We do not need to take excessive risk. We have £1.7 billion completed and only £3,000 of losses in more than 3,500 transactions. It’s an unbelievable track record.’
‘Our aspiration is to continue to grow and scale the business,’ Posniak adds. ‘We do residential bridging, non-corp, buy-to-let, commercial bridging, commercial term development loans, mezzanine loans, refurb loans, regulated bridging. Most deals are done in ten days. We have a really wide-ranging alternative property financing range. I use the term “alternative” deliberately. We are not a bank; we have no intention of becoming a bank.’
Dragonfly’s success is being followed by well- funded newcomers such as Mitheridge Capital (co- run by ex-Goldman Sachs high-flyer Archie Lord). In the peer-to-peer (P2P) space the market leader is LendInvest, co-founded by Christian Faes, who saw the opportunities after setting up Montello bridging finance in 2008. His property division is run by Rod Lockhart formerly of Barclays. All these have grown up on the back of the banks’ reluctance to lend to property professionals and HNWs alike. If you call up your private bank today and ask to borrow a million to buy a new Cotswolds retreat, the answer — over grilled chicken and a tolerable South African white wine in the Linley-panelled corporate dining room — will be: ‘Love to help. Can you deposit £2 million with us?’ That is why private banks like Coutts have been writing to their clients asking them to maintain minimum balances of £1 million if they want to keep their accounts.
Enter the ‘shadow banking industry’, which the Financial Stability Board (FSB) estimates now accounts for a quarter of the world’s financial system, with assets of $80 trillion, up from $26 trillion just over a decade ago. The sector’s rise is not unlike the rise of alternative financing classes such as hedge funds, which grew up in New York and London in the Eighties and Nineties.
Although some (including Mark Carney) have expressed concerns about the growing power and influence of this sector, financial pundits such as the Economist have said the sector could be the saviour of the global economy, filling the void as banks have largely closed up their shutters to commercial and HNW entrepreneurial lending, especially in the property world.
Shadow banking is defined as any form of financial services or lending that is outside the mainstream of banking regulation, anything from, say, a Singaporean private property fund to P2P lending. In the Middle East and Far East, the industry has contributed heavily to the growth of such cities as Dubai, Hong Kong, Singapore, and Shanghai. According to the Economist, shadow banking in China grew by 42 per cent in 2012 alone.
So what has this got to do with your London HNW? Well, maybe everything if his private bank isn’t willing to lend him the £3 million bridge he needs to complete on a £6.5 million Chelsea townhouse — or risk losing his £650,000 deposit. A typical scenario would be that the buyer lined up to buy his £3 million Bayswater mews house pulled out after the new rates of stamp duty were introduced. With 12 per cent to pay over £2 million, the super-prime London market has started to cool cryogenically.
To save his deposit, an HNW might approach a top-flight ‘alternative financing’ broker such as Paul Welch at largemortgageloans.com, who specialises in helping out HNWs and international entrepreneurs who need money — usually fast. Usually, the loan is property-related but often it’s for a classic car, a yacht or a plane.
‘Every client is unique,’ says Welch. ‘Every client has different requirements and challenges. With classic cars, my clients often don’t want their wives to know when they buy a Ferrari. They may borrow three or four million against the car, but the wives don’t even know the car exists.’
Since Welch started the business from the proceeds of selling his house and car, his two companies, Large Mortgage Loans and Million Plus, now have more than 40 employees servicing a colourful armada of HNWs. ‘We have unique sources of capital from over 84 global boutique lenders. We have staff in Singapore, where there are so many wealthy. I travel the world to do what we need to do.’
Other specialist HNW brokers who operate in the same space are Wayne Coleman (see page 66), Paul Munford at MCIFA Property Finance, and Omni Capital. Whilst Steve Lamb of 2XL Commercial is well known in the North and Midlands.
For all the above, arranging a £2 million bridging loan for an HNW client to buy his daughter a W2 mews house — while waiting for the bonus cheque to clear — over a Claridge’s latte is nothing unusual.