Jonathan Samuels is a decent sport. Casting around for a location to have his picture taken, he immediately agrees to take a train to Luton early on a Tuesday morning to pose in an aircraft hangar, the purchase of which he once funded.
But then it could have been worse. The 35-year-old chief executive of Dragonfly Property Finance’s latest deal involves an unloved office block in Birmingham that has a strip club to thank for its underwhelming 30% occupancy level.
Talking animatedly over lunch at Zuma in Knightsbridge about the eclectic mix of property his bridging finance company has lent against, it is clear it isn’t the strippers that excite him, it is the huge upside he sees on the deal.
By the time our main course arrives he has rhapsodized about an anaerobic digestion plant, a Georgian Grade I listed crescent and a hotel in Earls Court… in fact, after just a few minutes in his company you get a sense of how Dragonfly has managed to close 1,200 transactions in just four years.
That phenomenal growth has helped the company capture a third of the residential bridging market and now the firm is making a concerted push on the commercial sector. But what does the rise of bridging lenders like Dragonfly tell us about the debt market? Will it last? And should we be worried about it?
In the context of his comparatively short professional life, Samuels arrived to bridging relatively late. Educated at Manchester Grammar and Oxford, he left university to become a management consultant with McKinsey, a job that would entail a certain amount of confidence for a man in his early 20s. Perhaps it is why he is so at ease with the media; talking of the challenges of lecturing FTSE chief executives and their boards on how to better run their businesses, he recalls one client who was particularly hard to please, though he is too discreet to explicitly admit he is talking about Piers Morgan.
“There was one editor who did not like hearing from us what we thought he should do with his newspaper,” he says.
“But it was great experience and you had the McKinsey badge behind you.”
Three years later, his former McKinsey mentor Peter Sands became chief financial officer of Standard Chartered and Samuels followed him to South Africa to work for the bank. A scoping study of the South African mortgage market for Standard Chartered led to him establishing its mortgage business in the country aged 25.
Amid talks over an unwelcome move from Cape Town to Johannesburg, Samuels convinced Standard Chartered to let him break the company off into a separate business called Mortgage Point to originate mortgage deals for the bank.
Shortly afterwards he set up a bridging company called Samlaw finance. Both businesses flourished in the relatively immature and relatively unregulated South African market and by 2008 private equity companies began circling.
“I sold the business to Java Capital in 2008 and at first it looked like I might have gone too early but six months later everything changed,” he recalls.
Back in the UK and R10m (£630,000) to the good, Samuels cast around for his next opportunity. The then 30-year-old set about learning everything he could about the UK bridging market, concluding that the opportunity afforded by the financial crisis and the withdrawal of dozens of lending businesses made it the right time to launch Dragonfly.
“People said, ‘Do yourself a favour and don’t come into this market’,” he says.
“But with every meeting like that I said to myself there has to be an opportunity here because I knew the market from South Africa and this is a market that can make a lot of money.”
After securing £25m funding from Octopus Investments in December 2008 the company began lending into a residential bridging finance market that had become bereft of debt. The cash was supposed to last a year, but after four months it had been deployed. Since then, the company has lent £600m.
Dragonfly’s formula is relatively simple. It will fund a range of deals that typically fall outside of what Samuels calls “the banking box”, including vacant possession, distressed assets, pre-planning or short leases, predominantly in London and the South East. The typical LTV is around 60% on an 18-month term with a 1.2% per month fixed rate and they don’t amortize.
“We are now 35% of the residential bridging market by any measure,” Samuels says. “That’s a big slug of any market to take on, especially with lending.”
So with the company reaching maturity in the residential market, Samuels has now turned to commercial property in his bid to grow from £600m revenues in the first four years, to £2bn in the next four.
The ambition is backed by investors keen to inject more capital into a business that has consistently delivered an internal rate of return of 15%.
Dragonfly has hired former Henderson UK property fund manager Ludo Mackenzie to help deploy a £200m commercial debt fund it is in the midst of raising. The five-year fund will lend on a longer term basis, with three-year loans charged at 8.99% to 9.99%, targeting a double-digit IRR. It has deployed around £60m and Samuels hopes to capture a similar share of the commercial bridging market, which he estimates to be in the region of £2bn a year.
He argues that if banks retreated from the residential market in 2008, then they fled in terror from the commercial market, making the opportunity all the bigger. But with capital values now bottoming out and an array of new lenders all desperate to deploy funds raised over the past two years, has the company joined the party too late to make a similar impact?
“When we first talked to Octopus about setting up in 2008-09, we thought there was a three-year window for it,” he admits. “We are now four years on and the window is just getting bigger and bigger. I don’t know when that starts to close but we have got more competitors now than we have ever had and we are doing more business now than we have ever done,” he says.
Even with a wholesale recovery in the debt markets, Samuels argues that there are structural reasons that will enable Dragonfly to compete with more established lenders in years to come.
New regulation has inhibited banks from returning to riskier parts of the market owing to capital constraints, and the scars of the crisis are manifest in the increasingly cumbersome credit tiers most mainstream bank deals must now navigate. But few would argue that the new air of responsibility is an unwelcome development and instead may raise the question of whether the rise of Dragonfly is the symptom of an unhealthy market.
Samuels disputes this and the notion that the company is an irresponsible lender. “We are lending at quite conservative LTVs, so from our perspective things have to go pretty damn wrong,” he insists.
The company has started to cut back its lending in some sectors amid fears they are overheating, with super-prime residential a particular concern.
“We have changed our terms because it has broken away from the fundamentals,” he says, highlighting a scheme to build two £25m houses in Hampstead that Dragonfly turned down the chance to lend against.
And he is adamant that any comparison to payday lenders like Wonga would be false and unfair.
“There is a lot to be concerned about with those kinds of businesses,” he says. “Like most people in the country I am concerned about that industry, but the only similarity is that we lend money.”
To be fair to Samuels, the figures thus far speak for themselves. Of the 1,200 loans issued to date – 650 of which have been repaid – only 10 have defaulted.
And the business model has not deterred potential buyers from enquiring about a possible takeover. So will he sell?
“I feel this market has a lot more growing to do and selling now would be too soon, it would be selling at the start of when it really takes off.”
If Dragonfly’s cornerstone funder Octopus is anything to go by, this could be a wise call. It took the company a decade to grow to £1bn and less than half that to hit £3bn. But after a lunch in which the enthusiasm showed no sign of waning, it is almost possible to believe what he says is his real reason: “There is a big opportunity there, but actually I’m just enjoying it too much.”
