Online mortgage lender Nesto Inc. is in talks to buy a controlling stake in Canada’s third-largest non-bank mortgage lender CMLS Financial Inc., according to three people familiar with the matter.
The deal, which has not been finalized, would allow Montreal-based Nesto to diversify into new lines of business, particularly commercial mortgage lending − a segment of the market Nesto does not currently serve, one of the sources who is close to the negotiations told The Globe and Mail. The Globe is not identifying the sources because they are not authorized to speak publicly about the deal.
Both companies will continue to maintain their separate names and branding, the source added.
Nesto spokesperson Adam Daifallah declined to comment about the transaction when contacted by The Globe. CMLS did not respond to a request for comment.
Backed by Portage Ventures, the venture-capital arm of Power Corp.‘s Sagard Holding, Nesto was co-founded in 2018 by chief executive Malik Yacoubi, along with founders Damien Charbonneau, Karim Benabdallah and Chase Belair.
By 2022, the company had raised more than $167.5-million over three rounds of financing, attracting several large institutional investors including Sagard-backed Diagram Ventures, National Bank of Canada’s venture capital arm – NAventures – and BMO Capital Partners. The latest round also brought in Michael Paulus and Michael Rowell, co-founders of Assurance IQ Inc., a U.S. online insurance seller purchased by Prudential Financial Inc. in 2019. The rounds also saw Sagard acquire a 20-per-cent stake in Nesto in 2021, followed by Power Corp.’s IGM Financial obtaining a minority stake in 2022.
Nesto has built an online mortgage brokerage service that automates much of the application and underwriting process, offering lower rates and quicker turnaround times for approvals. It also allows clients to upload mortgage documents using a mobile device.
IG Wealth Management was the first financial institution to use the Nesto tool with its group of 3,300 financial advisers in early 2023. While IG Wealth already provided mortgage services to its clients, president and CEO Damon Murchison told The Globe in an interview in late 2022, that the IG Wealth process was more traditional, with longer wait times and paper-based applications.
“The mortgage business is one where, quite frankly, you have to invest,” Mr. Murchison added.
The start-up online mortgage lender has been steadily growing as some Canadians turn to quicker automated lending services. Non-traditional lenders are also experiencing higher demand as more Canadian borrowers have been unable to qualify for a large enough mortgage at traditional bank lenders, which have stricter qualifying rules.
Now, the CMLS deal will see Nesto broaden its customer base with one of Canada’s largest independently owned real estate finance companies with about $46-billion in mortgage assets under administration. Its only larger independent competitors are MCAP and First National Financial LP.
Started in 1974 with an office in British Columbia, Vancouver-based CMLS first specialized in commercial real estate, before expanding into residential mortgages in 2012. Today, CMLS has grown nationally with eight locations across the country and a large presence in Western Canada. Earlier this year, the lender shuffled its top executives as Sam Brown moved into the role of president and chief executive of CMLS, and CMLS Asset Management. Mr. Brown took over from Chris Brossard, who was appointed executive chair of the board.
Last December, Nesto’s growth was boosted as the mortgage lender announced a strategic partnership with another Power Corp. subsidiary, Canada Life, to provide mortgage service and administration for the insurer’s residential mortgage customers. The partnership allowed Canada life – as of Jan. 1 – to start transferring the servicing and support of its existing mortgage portfolio, after its earlier decision to withdraw from the residential mortgage market.
During that time, Mr. Yacoubi told The Globe the company was on track to originate more than $1.5-billion in mortgages.