Saturday 21 October 2017

Cardinal mulls €200m SME credit fund

'The retreat of banks from the SME industry has left fertile ground for more nimble players but the new entrants lack the scale needed to make a significant impact on the sector, according to Cardinal's spokesperson, who stressed the firm supported the
'The retreat of banks from the SME industry has left fertile ground for more nimble players but the new entrants lack the scale needed to make a significant impact on the sector, according to Cardinal's spokesperson, who stressed the firm supported the "transfer of risk" from the main banks to alternative lenders.' File photo: PA

Gretchen Friemann

Cardinal Capital, the investment firm founded by Irishmen Nigel McDermott and Nick Corcoran, is weighing a new €200m credit fund aimed at small and medium enterprises in an effort to capitalise on the main banks' retreat from the sector.

While the vehicle remains in gestation, Cardinal has been courting prospective investors in the venture for some time. A spokesperson confirmed the project was under consideration but stressed it may not come to fruition for another six months. He added there was no guarantee Cardinal would pursue the venture.

However, the sub-€5m loan segment, where the planned Cardinal fund would be targeted, continues to suffer from a dearth of credit as banks huddle in less risky, larger-scale corners of the market, preferring to lend to bigger corporations where margins are tighter but the chances of default are far lower. The retreat of banks from the SME industry has left fertile ground for more nimble players but the new entrants lack the scale needed to make a significant impact on the sector, according to Cardinal's spokesperson, who stressed the firm supported the "transfer of risk" from the main banks to alternative lenders.

The firm has already cut a swathe in the non-bank sector with its €300m WLR Cardinal Mezzanine Fund, established in the aftermath of the financial collapse and provided a vital source of capital when the pillar banks reined in lending in the rush to repair their balance sheets.

The fund, backed by US commerce secretary Wilbur Ross, also gained backing from Ireland's state investment fund, ISIF. While it was aimed principally at mezzanine lending, which provides a bridge between debt and equity, some of the cash wound up in less risky senior loans.

The firm has previously supported some of developer Johnny Ronan's ventures, committing money to a proposed redevelopment of AIB Bank Centre in Ballsbridge. As the Sunday Independent revealed recently, it is also considering pledging cash to the building of Ireland's tallest building adjacent to Tara Street railway station, which will require a financing package of about €150m.

Despite the steady stream of deals backed by Cardinal's mezzanine fund, it is understood the investment phase is still some distance from completion, partly due to the flow of redemptions.

The firm declined to comment on whether a second, similar vehicle was on the cards.

If the trigger is pulled on its SME venture, Cardinal is likely to source all the equity from private investors, preferring to "retain flexibility on the underwriting and pricing" of loans.

While the growth of SME non-bank lending has been powered by the Strategic Banking Corporation of Ireland (SBCI), an intermediary of the European Investment Bank, Cardinal said it had little appetite for the restrictions that accompany an investment from the government entity.

A spokesperson for Cardinal claimed it preferred a "capital markets" orientated vehicle.

While the firm insists the more cumbersome credit criteria imposed by the SBCI are anathema to its more nimble model, the state entity is eager to pursue deals in Ireland.

Vice-President of the EIB Andrew McDowell told an Oireachtas committee recently that Brexit offered a "window of opportunity" to Ireland as the bank's executives in the UK were eager to shift focus to its smaller neighbour, where the legal and financial laws are similar.

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