Lender Finance, Revisited: A Portfolio Inside a Portfolio
Some subjects are worth returning to.
We’ve written about lender finance before, but like any good portfolio, the more you study it, the more it reveals. Lender finance is not just a sector in which we participate. It’s a strategy that continues to exemplify what we look for across our entire book diversification, security, and control.
Let’s start with the basics. When we lend to another lender, we are booking one loan on our books. However, beneath that one loan is often a portfolio of dozens, even hundreds, of loans made by the lender to its own clients. These portfolios stretch across industries, geographies, and asset types. The result? One loan for us, but multiple streams of repayment potential. That kind of embedded diversification has appeal. But it’s not the only reason we do it.
When you lend to a lender, you also gain a built-in exit strategy. Should anything go wrong, we are fully equipped to step in and take over the portfolio directly. We know how to underwrite those loans, we know the operational cadence, and we understand what collection looks like. In some ways, it is the cleanest contingency plan a lender could ask for.
Another important layer is the structure. We do not lend on the full-face value of our partner’s assets. In fact, we often advance only a portion of what they advance, creating a cushion within a cushion. If their loan-to-value ratio is 80 percent, we may lend 70 to 90 percent of that 80 percent. The result is a deeply overcollateralized position built on a secured book that already has its own credit criteria and protections.
Of course, none of this matters without selectivity.
We are highly particular about which lenders we finance. They must have years of operating history, a proven credit policy, verifiable default and delinquency data, and clear profitability. We do not invest in ideas. We back track records. We engage deeply to understand how they make credit decisions, how they manage growth, and what their portfolio is truly comprised of.
Instinct is good. Research is better.
As Benjamin Graham famously said, “The essence of investment management is the management of risks, not the management of returns.” It’s a belief we live by, and nowhere is it more evident than in our approach to lender finance.
In the case of consumer finance, such as auto title lenders, the spreads can be compelling.
Borrowers may pay rates in the 25 to 35 percent range, with default rates between five and ten percent. That creates a meaningful cushion, and when you consider that we lend against only a portion of the gross receivables, the excess collateral in a wind-down scenario is often understated on paper.
This is what makes lender finance worth revisiting. It is not a category; it is a lens. It demonstrates how we approach access, controls, contingency planning, and risk layering in a single perspective.
Because a well-structured deal is not about prediction, it is about preparation.
