Lending to the “Missing Middle” – the forgotten middle child of banking

By Stewart Haworth, Director of Debt Finance at OakNorth Bank

In 2005, OakNorth’s founders, Rishi Khosla and Joel Perlman, were looking for a working capital facility to support their growing business, Copal Partners, a financial research firm they’d founded three years previously. They approached numerous high-street banks and kept getting variations of the same response – “the computer says ‘No’”. Despite being a profitable business with strong cash flow and retained clients, none of the commercial banks were willing to lend to them. It was too small a ticket to offset the costs the bank would incur in doing a fundamental assessment of their business and structuring a finance facility for their needs. A few months later through one of their institutional client’s special situations desk, they managed to secure 100x the amount of debt for a dividend recap. So, an institutional division of a bank was able to support them, but the commercial lending part of the bank was not.

This experience stuck with them.

After they’d scaled Copal Partners to a 3,000-employee business and sold it to Moody’s Corporation (NYSE: MCO) in 2014, they set out to address the funding gap they had experienced first-hand and help growth businesses achieve their potential. At OakNorth, we refer to this gap as the ‘Missing Middle’ – these businesses have developed productive and profitable business models, so by giving them access to finance, you enable them to scale and in doing so, improve productivity, employment and GDP growth across the country. Yet still so many of these businesses struggle to get access to the fast, flexible debt finance they need to pursue their growth ambitions.

In September 2015, Rishi and Joel launched OakNorth Bank to address this funding gap in the UK. There are a few things that set it apart from traditional, high-street lenders:

  • Speed: quick ‘yes’ or ‘no’ decisions, and we’ll work to get a deal completed in weeks rather than the usual months, so that you can get back to building your business;
  • Flexibility: we’ll take the time to understand your business so we can design a bespoke facility for your needs. No off-the-shelf “solutions” or computer-says-no decisions;
  • Transparency: you’ll be invited to Credit Committee to discuss your borrowing needs directly with the decision-makers;
  • Entrepreneurial: as a bank founded by entrepreneurs rather than bankers, everything we do is with the business in mind.

Since its launch, OakNorth Bank has lent almost £5bn to the Missing Middle, and now has hundreds of borrowers across the UK focused on the early years sector, elderly care and retirement living, hospitality and leisure, manufacturers, private equity, business services and more.

Our appetite to lend and support these businesses hasn’t been dampened by COVID-19 – throughout 2020, our team hosted over 400 Credit Committees to ensure we could continue getting capital into the hands of Missing Middle businesses who need it. We approved over £1.7bn in new loans, including c.£572m through the Government’s Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS).

Some of the deals we’ve complete to support businesses in the North and the rest of the UK include: a loan to a technology company to support its growth ambitions in the North, a fund buy-out deal to FORE Partnership to support the buy-out of a minority shareholder, a subscription funds finance facility to Bluegem Capital Partners, a private equity firm focused on European consumer-facing businesses.

OakNorth Bank has teams in London, Bristol, Birmingham, and Manchester where I’m based.

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