Good lending decisions are about detailed analysis, not just market conditions
A month ago I wrote a blog about the gym industry. A few people asked why I hadn’t written about Brexit because, at the time, the referendum date was approaching. I said the subject had become too emotive and I’m too busy to argue with anyone (apart from my colleagues).
However, there is a famous quote “the secret of change is not to focus all of your energy on fighting the old, but on building the new” … its regularly attributed to Socrates (wrongly as it happens) but it feels appropriate because the time has probably come to park the emotion and move on. It is also important to take time-off from the newspaper headlines and ask what has actually changed.
Well, at Ortus, major changes have occurred over the past few weeks … almost none of them related to Brexit.
Firstly, we hired Justyna Czarnecka as a Relationship Manager which is a testament to the growth we have seen over the past year or so. Justyna joined us from Handelsbanken and is responsible for managing deals from approval to drawdown … ensuring that our award-winning service remains quick, friendly and reliable.
Secondly, we have moved from our office at Charles Street to new premises on Wimpole Street, around the corner from Oxford Street in central London. Anyone who visited us in Charles Street will understand why it was a wrench to leave … we had a dart board, a fridge full of beers and a very comfy sofa. However, we now have a mobile bar, a roof terrace and two comfy sofas. And the working area is painted white instead of black … so fewer aching eyes.
However, our underlying business is unchanged. The main reason is the closing of our fund which occurred in November last year and increased our fire-power by £40 million. This means we are not dependent on shareholder equity or external bank funding lines in order to complete deals. We remain completely in control and our capacity to lend is unchanged.
That said, Brexit has made a significant difference to some sectors. The obvious one is high-end London property which, according to Bloomberg, has seen a 43% reduction in sales volumes since Brexit. This is despite many commentators predicting that a weak pound would mean overseas investors piling into the high-end London market. At Ortus we had no particular expectations … we simply didn’t know what would happen to the high-end London residential market, which is the main reason we have no exposure to it.
Of course, we do have exposure to other sectors which many people consider high risk. Once example is pubs. However, we mitigate the risk at the analysis stage by studying the business plan in detail, assessing the demographics, checking historic barrelage (if we can) and generally reaching a view of the pub’s chances of success. It doesn’t make any deal risk-free (far from it) but it does mean we’re backing quality operators who stand a chance of trading through a different period if necessary.
And to some extent recent figures released by CAMRA (the Campaign for Real Ale) supports this notion. The stats reveal that the number of pubs closing per week has fallen from 27 to 21 in the last 6 months. The reasons for the improvement almost certain include the freeze in beer duty and business rate reductions, but CAMRA also believe that strong campaigns by local communities to support their local pubs have played their part. Therefore, the quality operators who give their customers a great experience have been protected (at least to some extent) by their loyalty.
Therefore, at Ortus we’re not suddenly going to declare that political and macroeconomic factors are irrelevant. We track things and react like any sensible lender. However, we strongly believe that, whether the market is rising or falling, the best method for mitigating risk is old-fashioned deal-by-deal analysis … undertaken thoroughly, transparently and quickly.