The Growth of Alternative Finance Providers in the Irish Market

18th October 2020

The Irish lending market is dominated by the traditional pillar banks who operate across small to medium size enterprise, and mid to large sized corporates. Many of the traditional pillar banks have specialist lending teams that focus on specific sectors of the economy such as healthcare, hospitality and, agriculture. There are also a number of other banks that focus on funding or larger corporates, normally large international players that have an Irish division. The after effects of the Global Financial Crisis resulted in many of the larger indigenous corporates moving away from the Irish banks and towards international banking providers. This resulted in the traditional pillar banks refocusing their corporate lending on mid-market corporates.

Shocks to the Irish economy such as the Global Financial Crisis, Brexit and more recently Covid have shaped the Irish lending landscape. In the wake of the Global Financial Crisis, Ireland saw the emergence of new sources of funding from alternative providers. This change was driven by several factors including the withdrawal of banks from the Irish market and winddown of certain institutions. Additionally, regulators across Europe introduced tougher regulatory requirements, including higher capital ratios for the banking sector. This reduced the available pool of money for lending. Combined with enhanced qualifying criteria for lending and reduced levels of lending to certain sectors of the economy, the availability of credit was more difficult.

Due to the gap in available lending, a number of alternative lenders entered the Irish market in response. While a relatively new phenomenon in Ireland, this follows an already established trend in the US and the UK, where borrowing from non-traditional lenders would not be seen as unusual. Alternative lenders consist of a wide range of firms with different strategies, including the provision of private debt, mezz finance, unitranche, growth and distressed debt. They can often execute quickly and be flexible on structure, something traditional banks may struggle with due to regulatory and risk restraints. Lending can take the form of competition between banks and alterative lenders, but also cooperation on transactions.

In recent years Brexit, and more recently Covid have created uncertainty for many Irish businesses. Until the full effects of Brexit are known, banks will likely become more risk averse and pursue higher quality borrowers with more restrictive lending conditions, in particular for sectors that have a high exposure to the UK market. This climate will likely create further opportunities for alternative finance providers.

While the entry of new providers is a welcome development for businesses, traditional bank lending still accounts for the majority of lending in the Irish market, estimated to be around 90%. Nonetheless, the awareness of alternative finance providers has become more prominent due to the effects of Brexit and Covid, a trend that will likely increase over the coming years.