Navigating the Surge in Back-Leverage Lending
What’s Propelling the Back-Leverage Boom and Making it a Win-Win for All Participants?
1. Accelerating liquidity and new business for debt funds
Debt funds can use back-leverage to rapidly scale investments or unlock capital without deploying fresh equity, thereby improving internal returns.
This allows them to support larger, higher-leverage transactions while still offering competitive pricing to borrowers.
Once a relationship with a back-leverage provider is established, it can be scaled to finance greater volumes and larger deal sizes.
2. Stronger capital efficiency for banks
Banks increasingly favour back-leverage because it offers exposure to commercial real estate (CRE) assets without direct lending—and carries more favourable capital treatment.
By financing a debt fund’s exposure via a structured approach—such as loan-on-loan or repurchase agreements (REPO) — they reduce risk-weighted assets and liquidity requirements.
3. Improved conditions for the end borrower
Borrowers benefit from:
Lower equity contributions
Enhanced liquidity and leverage via credit funds
Streamlined execution with a single counterparty
Key Market Dynamics at Play
Wider appetite from banks
Back leverage is gaining traction in the banking sector, with many institutions already active and more preparing to enter the market especially in CRE bank lending. Momentum is building as banks expand their involvement, signalling strong growth ahead.
Falling cost of debt amidst better terms
As interest rates have eased and margins tightened, financing costs for debt funds have dropped. That makes back-leverage even more attractive for boosting return on equity.
Individual-deal focus is rare but rising
Traditional providers tend to deploy back leverage at the fund or portfolio level; what we see now is growing demand for individual deal financing. (Knight Frank)
Credible sponsors are essential
Banks demand strong, established sponsors to underwrite risk when they lend against a fund structure.
Minimum scale thresholds
Typical deal sizes are substantial—usually a min of £50m and above—to justify structuring complexity and relative cost.
Amortisation & cash sweeps
Facilities often feature reinvestment phases followed by a mortisation periods, with cash sweeps that capture loan repayments for debt servicing—something Arc & Co. carefully engineer.
Why Arc & Co. Is Uniquely Positioned
At Arc & Co., our institutional network—including deep relationships across debt funds and banks—combined with my personal expertise, allows us to facilitate these complex deal structures. We have access to a wide range of back leverage lenders securing funding not only in a for ramp up lines, but also on a single-transaction basis.
Particularly important in these deals are negotiations around security, amortisation schedules, and cash-sweep mechanics—areas where our advisory expertise adds significant value.
The Road Ahead
Back-leverage is already proving to be an important way in which private credit is changing the UK lending market. As banks, funds, and advisors like Arc & Co. refine their models, we expect this to become a mainstream tool—especially for individual CRE and equity-backed deals.
In summary:
At Arc & Co., we believe back-leverage lending represents a strategic crossroads—uniting institutional capital, bespoke structuring, and operational agility. By aligning the interests of debt funds, banks, and transaction sponsors, we’re helping clients seize opportunities while keeping a close eye on prudential safeguards.