The best specialty lenders tend to thrive during periods of uncertainty. By exploiting lender biases and serving new or disfavored industries and customers, specialty lenders provide a needed service for the economy and attractive risk-adjusted returns for capital providers especially when an uncertain path forward leads banks to stay on the sidelines.

If uncertainty is the siren song for this industry, that condition abounds today:

• A new administration in Washington keen to change the status quo

• Uncertain global economic and political conditions

• An anticipated rising interest rate environment – a first time phenomenon for many professionals

• Weakness in some specific industry sectors

• Headline grabbing governance and process failures at a few specific lenders

What will all of this mean for specialty finance and non-bank lending? To compare my observations with what other industry participants are saying about this question, I decided to attend the iGlobal Specialty Finance Summit held at the Pierre Hotel in New York City on January 12th. The over 250 attendees were predominantly comprised of senior leaders at specialty lending platforms and capital providers to the industry.

Tone and Sentiment

The overall tone of the conference was cautiously optimistic. Speakers and attendees noted with favor the positive impact on growth and profitability that could arise from lower taxes and a more relaxed regulatory environment. Those bullish sentiments were balanced against concern that higher interest rates could put stress on certain lenders and borrowers, the fact that some argue we may be overdue for a recession and apparent shoddy lending practices that could be masking portfolio weakness in some corners.

Banks and De-Regulation

The most widely discussed topic was regulation and how the rules that govern the industry may change during the Trump administration. Would a more relaxed regulatory environment lead banks to change their businesses and enter into new markets or products? What should stakeholders in specialty finance platforms expect regarding new rules or enforcement of existing regulations?

On this important topic there was a consensus among conference speakers:

• Given competing and pressing other priorities, federal lending rules and regulations will not likely be drastically altered in the near term.

• Rather, most participants anticipate a more balanced and less reactive enforcement environment. Speakers expressed looking forward to a less expansive interpretation of existing rules and less strident enforcement of certain regulations.

• Banks are generally very healthy and a positive case exists for growth in bank earnings due to rising interest margins, lower taxes and stable compliance costs.

• It is unlikely that banks will significantly change how they operate and therefore will not rush into new or less favored products or markets because of a perceived more favorable regulatory environment.

The Current Deal Making Environment

While at the conference I observed many public and corridor discussions about DEALS: Raising capital, growing via portfolio purchase or acquisition and other strategic alternatives. On this topic there was both consensus as well as some unique perspectives:

• The transaction process remains difficult – everything takes longer than it should or used to take.

• A few speakers stated that they were “shocked” at the dismal state of credit/documentation in  portfolios recently offered for sale.

• Some noted that the absence of traditional aggregators is being felt in the market. Some sponsors are dismayed at the choices for viable exists from post-crisis investments as banks will only buy a narrow category of assets, certain BDCs are capital constrained and traditional aggregators of non-bank lending platforms (such as GE Capital) are less active.

• There is a noted difference between how private equity and venture capital firms view financial services. This was most obvious with valuations, but also on disparate topics such as process and regulations.

• One speaker suggested that stakeholders should carefully monitor flows out of certain asset categories due to the impact of higher interest rates and predicted that institutional investors may increase their portfolio allocations for “alternative credit.”

So, back to the original question: what does all this mean for specialty finance and non-bank lending? The enduring answer through any cycle will always be “it depends” – it depends on the nature of the asset and the quality of the originator/servicer. But more specifically for the current market, the observations from the conference help frame today’s outlook: banks will largely remain on the sidelines for off-the-run assets and that creates the opportunity for non-bank lenders. This opportunity will be enhanced for better managed firms as the poor processes/underwriting of weaker operators becomes exposed. Changing funding structures and demands of capital providers will likewise place a premium on transparent, well managed platforms.