'The banks have lost some really good-calibre staff and we've been the beneficiary'
Pallas Capital is having a growth spurt. Having originated around $1.3bn in loan volumes last year, the private lender is aiming to close 2025 somewhere in the ballpark of $2.2bn to $2.4bn.
That is an ambitious rate of year-on-year growth, but Pallas Capital’s group executive of origination, Jason Arnold (pictured), believes he has a winning strategy – he wants to nearly double volumes by having the most experienced staff on the case, and sufficient institutional funding to deploy.
A recently launched $185 million construction warehouse facility went some ways to securing the latter, while getting the right boots on the ground is a constantly evolving process.
Luckily, as a former broker on the frontlines of the industry, Arnold gained some invaluable insights into what does and doesn’t work.
When Arnold was working in the broker realm, the best banks to deal with “were those that had significant specific property experience”, he told MPA. This has directly informed his hiring strategy at Pallas.
“The team I’ve built is deliberately really experienced on the frontlines,” he said. “Some of the other smaller lenders, they'll deploy quite a few BDMs that don't have in-depth credit knowledge, and they'll push those deals into credit, and credit will determine whether it's a deal or not.
“That system doesn't work with complex transactions or with astute property investors and developers.”
This emphasis on getting credit experts out where the action is “has been a really good system for us, and it’s really helped up to turbocharge growth”, said Arnold.
It is to Pallas’ benefit that some of the best talent in the credit space is leaving the banking majors to sniff out employment opportunities in the private sphere.
“The banks have lost some really good-caliber staff and we've been the beneficiary of that,” said Arnold. “Their credit knowledge is second to none. We're fortunate to have a really good credit team, loan management team, product team, and strong parameters around our policy.”
It raises the question – if there really is an exodus of top-tier talent from the majors, why is this happening?
While redundancies and internal restructurings have played a part in this trend, Arnold also explained how dealmakers appreciate being able to flex their muscles more in the private lending space.
“The bank's appetite in the property space, for example, has probably decreased… So if you're a deal doer, then non-banks are probably doing more deals and more interesting transactions.”
Volumes climb, challenges escalate
It is well documented that the risk-off appetite and restrictive lending policies among the majors is driving greater volume into the private credit market.
Pallas, for instance, has the capacity to lend up to 70% of on-completion value, while the banks, noted Arnold, “are typically limited to 60-65% at best”.
A lender like Pallas also lets a developer commence construction without having any pre-commitments or pre-sales. This, explained Arnold, allows developers to convert inquiries into sales at a faster clip.
Speed comes at a cost of course – private lenders cannot compete on rates. Though as other private lenders have attested, these higher interest costs can be offset by faster turnaround times.
But while private lenders like Pallas certainly welcome higher origination volumes, there is no denying the challenges that they are also facing.
In Arnold’s view, the biggest ongoing struggles in non-bank lending, no matter who you are, are maintaining permanent liquidity and keeping the cost of capital down.
The influx of private lenders into the market also brings a more competitive environment, though it depends on what spectrum of the value chain you’re operating in.
“What I've found in recent times is in $50m to $60m space, there's quite a few competitors at the moment,” Arnold said. “In a tough environment, it is hard to find really good transactions and it's extremely competitive.
“Not for a long time have I seen such downward pricing pressure on quality construction deals in the large-ticket space.”
How fortuitous for Pallas, then, that its wheelhouse is very much within the mid-market space.
“There’s not many players in the mid-market construction space that have permanent liquidity and a lower cost of capital,” Arnold said.
Advice for brokers
Speaking as a broker-turned-lender, Arnold recommends a bit of restraint despite the onward march of diversification.
“It's a good thing to have rounded knowledge, but I also think you've got to be careful in the way you do that,” he said.
“Don't grow too quick, don't pretend you're a jack of all trades when you're not. If you're strong in the home loan market and you want to morph into commercial lending, then maybe look at employing for that skill set and taking your time setting up your infrastructure.”
He recommended checking out the resources available through the industry bodies, such as the Commercial and Asset Finance Brokers Association of Australia (CAFBA) in order to build knowledge over a longer period of time.
“So don't sit in front of a client and say you know how to structure their loan if you don't. Bring along a lender, bring along an experienced broker to share the intel accordingly,” he said.
“You can certainly diversify, and I would encourage diversification, but structure diversification over a longer period of time and employ to help you grow in that space.”
