The UK referendum has caused uncertainty in the financial
services industry, but what does it mean for alternative capital
providers? And could it create some business opportunities?
Alternative capital providers are unregulated, or at least
non-bank, financial institutions. Alternative finance embraces
lenders from the smallest participants in peer-to-peer platforms to
multibillion dollar global alternative lending funds. They cover
product areas such as leveraged finance, real estate finance,
factoring, leasing, consumer lending and trade finance.
The referendum has two key consequences for the alternative
The first is economic. Alternative lenders are not funded by
deposits, central banks or short-term wholesale funding tools such
as commercial paper or the overnight repo market. As a result, they
need higher returns and tend to operate where banks cannot.
Financial stress in the short-term funding markets could cause
banks to stop or delay lending to some borrowers who are otherwise
perfectly sound. Credit rating downgrades (both to the UK itself
and potentially to UK-based banks) are also likely to have a much
greater impact on the traditional financial sector, both in terms
of their funding costs and the investments they can make. However,
the referendum is unlikely to affect the health of many businesses
for some time, even within the UK, provided they are not dependent
on new investment. For example, the construction industry is being
affected immediately, but the food and beverage industry is less
likely to see immediate issues. Where there is increased demand
from stable businesses for funding, alternative capital providers
can move fast to provide short-term, secured finance where needed.
This in turn offers attractive returns to investors and helps SMEs
through difficult times.
The second is regulatory. It is possible that the UK leaving the
EU (depending on how negotiations progress) would make it more
difficult for UK-regulated financial institutions and funds to
invest in or raise capital in other EU states. In any event, there
must be a degree of regulatory and political uncertainty as to how
easy it will be for financial services businesses established in
the UK to access EU markets. Alternative capital providers are
either unregulated, or at least much less regulated, than banks.
This could create opportunities for lenders who have less reason to
be concerned about regulatory pressure or political interference.
Even some highly regulated jurisdictions such as France, where
banks have a traditional monopoly on lending, offer opportunities
for unregulated lenders in the form of private placements and
mini-bonds. At the very least, an alternative lender may need to
spend less time and resources than a bank on studying what the
regulatory impacts could be.
When it comes to capital raising, there could be more
challenges. This is becoming an increasingly protectionist area,
even within the EU. However, some less regulated financing tools,
such as securitisation vehicles or raising capital in the form of
loans from institutional investors, may provide attractive
alternatives. It remains to be seen whether the Capital Markets
Union project, an initiative originally pushed by the UK to
increase the access of European businesses to capital markets
funding, will continue to progress.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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