Interview: Rishi & Joel – Britain’s Unicorn Financiers  

Recently valued at $2.3 billion after closing a $100 million funding round, challenger bank OakNorth is turning the world of property financing on its head.

The bank has backed some major projects in recent times, including two new residential towers in Manchester consisting of 356 homes, and the conversion of 92,472 sq ft of commercial space in Birmingham into 500 new homes.

It has also provided a £10 million loan to well-known property developers Nicole Bremner and Avi Dodi.

DealMakerz spoke to the bank’s co-founders, Rishi Khosla and Joel Perlman, to find out the secret behind their success.

Tackling the funding challenge

The duo met while studying at the London School of Economics, after which Perlman went on to work at McKinsey & Co and subsequently started a dot-com incubator, while Khosla went into private equity, working at GE Capital and later Lakshmi Mittal’s family office.

In 2002, Khosla and Perlman launched Copal, a financial research outsourcing business. They had just £40,000 of start-up cash but over a period of 12 years built it into a business with almost 3,000 employees across 11 markets.

It was during this time that Khosla and Perlman discovered the difficulties businesses can face in securing debt finance.

“We were four years into the business and were looking for growth capital to scale. We had good cash flow, a strong client list and were profitable so we didn’t want to go for equity finance and dilute. However, the best offer we could get from a UK high street lender was £100,000 and only if it was secured against property,” said Perlman.

“Over the next 12 months, we went to the US several times and were able to structure a dividend recap for £10 million. Over the next eight years, we met numerous entrepreneurs who’d had a similar experience when it came to borrowing, so we decided to try and tackle the issue with OakNorth – a bank for entrepreneurs, by entrepreneurs.”

OakNorth is currently based in new offices right by Carnaby Street in Soho, which Khosla appreciates for its wide choice of Japanese cuisine – the foodie’s firm favourite.

“Many of our clients have sites within a five-minute walk – LEON, Tamarind, Scarlett Green, Simmons Bars, Brasserie Blanc..” he added.

Property target

Property developers and investors make up a significant portion of OakNorth’s portfolio, but it has also lent to hotels, restaurants, private equity firms, bars and coffee chains, care homes, nurseries, schools, tech companies, law firms, recruitment companies, marketing agencies and manufacturing businesses.

The bank offers a range of savings products to individuals and businesses and uses their deposits help fund lending to UK businesses. It lends between £500,000 and £40 million to established, profitable businesses and property developers.

“The savviest of property developers establish relationships with multiple financial institutions, using multiple providers to ensure they get the best of every product and service.”

It doesn’t have a specific target in the property sector, having provided debt capital to a vast array of development projects over the past year: care homes, student accommodation, serviced apartments, co-working/co-living spaces, and properties for first-time buyers.

“We look for experienced management teams with a strong track record and a thorough understanding of the market they’re operating in,” said Perlman.

Standing out from the crowd

The past few years have seen a range of challenger banks and specialist lenders being launched, so what makes OakNorth stand out from the crowd?

Perlman puts it down to the bank’s speed (it typically completes transactions in weeks rather than the months it takes traditional lenders), its willingness to design bespoke solutions for borrowers, its flexible repayment terms, and its entrepreneurial approach.

“Our entire offering is designed around what entrepreneurs need and will make their lives easier, not the other way around,” he explained.

One of OakNorth’s most well-known competitors is LendInvest, but Khosla said it is extremely rare for the two firms to be competing on a transaction. OakNorth’s average loan in the property space is between £7 and £10 million, and it has done deals as large as £40 million. The maximum loan LendInvest can make is £7.5 million.

“Additionally, as most entrepreneurs go to their clearing bank as their first port of call when seeking a loan, and most businesses bank with the big five banks, it’s much more likely that we’ll be competing with one of them on a deal,” said Khosla.

The duo reckon the property financing sector will grow further as long as developers and investors are willing to look outside the big five banks when it comes to borrowing.

“There has been a little retraction in the market since the Brexit vote, it’s not been the disaster that I think many people anticipated it would be”

“Too often, entrepreneurs go to their current account provider as their first port of call when seeking a loan,” said Perlman. “The savviest of property developers establish relationships with multiple financial institutions, using multiple providers to ensure they get the best of every product and service.

“Entrepreneurs shouldn’t just assume that their clearing bank will give them the best deal or complete a loan faster than another provider, they should do their research and make sure they’ve considered all their options.”

One of the most interesting businesses OakNorth has lent to is Warwick Estates, an established property management business which manages over 850 sites, encompassing 27,500 units.

“They’ve designed a custom-built technology platform which brings core management and data systems under one roof and they’re using it to continue scaling at an incredible pace,” said Perlman.

Top tips for developers

For aspiring property developers wanting to finance their projects, the entrepreneurs have a few words of wisdom

1. A little due diligence goes a long way

OakNorth can process complex loans in a fraction of the time it takes larger lenders, but it can work even faster if the borrower prepares a robust due diligence pack with planning consent, development appraisals, valuations, the business plan and sales forecasts.

2. Know your market

Last year OakNorth provided a £14.4 million loan to Frogmore, a real estate fund manager. The funds were going to be used to acquire a cleared site on Ufford Street in Southwark and, in its place, develop a new 275-bedroom boutique hotel.

Southwark may not have seemed the obvious location for a new boutique hotel in London, given that there were already several projects underway in the area, but its proximity to some of the capital’s most popular attractions means the borough is still experiencing a shortage in hotel supply relative to demand.

3. Have skin in the game

“When seeking growth capital, a big tick for us is seeing that the borrower has skin in the game and has invested some of their own money in the project,” said Perlman.

Khosla and Perlman have invested their own money in OakNorth and almost half of its workforce are shareholders in the company. “We want to see this same commitment from our borrowers,” Perlman added.

Steaming ahead

OakNorth is in a strong position in the UK lending sector, but with a dampened property market and Brexit looming on the horizon, it can’t afford to rest on its laurels.

Khosla reckons London will always be an attractive market for property developers and investors.

“There is still a huge amount of money flowing in from foreign buyers and investors, and while there has been a little retraction in the market since the Brexit vote, it’s not been the disaster that I think many people anticipated it would be,” he said.

Equally, Khosla argues that Brexit has actually been positive for OakNorth because many of its larger competitors have been retracting from the market and being even slower in their decision-making than usual.

“This has given us the opportunity to gain market share as evidenced by our loan book numbers. Prior to the vote, our loan book stood at £98 million. By the end of 2016, it had tripled to £300 million. By the end of 2017, it had reached £1 billion and in August of this year (supposedly one of the quietest months of the year) we did £303 million of new loans,” he said.

Can the business continue to scale at such a ferocious pace? At DealMakerz, we’re certainly eager to find out.

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