The new stake in specialist lender Finance Ireland suggests big banks won’t do things their own way as KBC and Ulster Bank exit, and has a healthy yield through the Irish Strategic Investment Fund (ISIF). generated for taxpayers.
With the fresh backing of investment manager M&G and long-term shareholder Pimco, CEO Billy Kane has secured the capital he needs to expand market share in mortgage, auto finance and other niche areas where the lender competes.
Finance Ireland is already the largest non-bank lender in Ireland, generating over £1bn in new business in the last year.
With half of all mortgages being granted through the broker channel, up from 15 per cent a decade ago, Finance Ireland has a strong competitive position and the clout to take advantage – something M&G has clearly seen.
Taking a large equity investment was a logical next step for the investment manager after providing finance to Finance Ireland for the mortgage side of the business.
With a quarter of the mortgage market up for grabs, it’s easy to see why. Finance Ireland’s long-term fixed income products are also perfect for a market faced with high inflation.
“M&G likely sees an opportunity in the changes in the banking market,” said Diarmaid Sheridan, banking analyst at Davy.
“This is a statement of support that they fully support Finance Ireland with the equity to achieve growth. It is a longer-term investment in an important market with good returns.”
But that doesn’t mean there aren’t short-term challenges.
The current turmoil in mortgage rates due to the European Central Bank’s forthcoming rate hikes will hit non-bank lenders first.
Finance Ireland is raising money for new loans by securitizing its existing portfolio of mortgages. The cost of that funding has skyrocketed this year as it tracks yields on five- and 10-year government bonds. Meanwhile, banks can fund cheaply from abundant deposits that cost them little.
But as markets normalize and adjust to the tightening cycle, this difference should be leveled out and Finance Ireland’s capital strength should show.
The money was originally supposed to come from a major IPO in 2020, but Kane had to go through with the deal when Covid struck during the company’s US roadshow.
This transaction was expected to bring in 120 million euros, with 40 million euros to be paid out to shareholders, leaving 80 million euros to invest in the company.
Under the terms of today’s deal, ISIF arguably fared better from the aborted IPO.
ISIF is understood to have taken a 33 per cent stake in 2016 and taken its money off the table for just under €70m – more than a 50 per cent return over six years.
This beautiful deal is the ideal ISIF investment: limited holding period, successful scaling of the business, exit on great terms, recycling the money for new opportunities.
Meanwhile, Billy Kane and the management team still have a 10 percent stake in the game, which means there will be further shareholder restructuring in the future, although today’s volatile markets will likely delay that somewhat.
https://www.independent.ie/business/irish/finance-ireland-deal-shows-investor-appetite-for-mortgage-competition-41818270.html Finance Ireland deal shows investors appetite for mortgage competition