Peer2Peer Finance News July 2021 by Alternative Credit Investor

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MIDDLE EASTERN PROMISE

P2P is growing in Saudi Arabia

EUROPE, PROPERTY AND BREXIT

>> 16

Collections and recoveries special report Supported by

EstateGuru’s Marek Partel talks to P2PFN

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ISSUE 58 | JULY 2021

P2P chiefs highlight challenges of venture capital funding PEER-TO-PEER lending platform bosses have spoken out about venture capital (VC) firms’ investment approach and have deemed it incompatible with the industry. VC firms typically invest in early-stage businesses they believe to have longterm growth potential. But industry executives say that they demand “aggressive growth” and quick profits that do not necessarily fit with the P2P scale-up model. “I’ve spoken with everyone, angel investors and VCs, typically they want to see high growth and if you cannot demonstrate you can scale the company with aggressive growth, you’re not suitable for them,” said Filip Karadaghi, managing director and co-founder of LandlordInvest. “Lending can be very risky and if a lender goes through dynamic growth, that’s a risk for the business. We’ve seen that in the P2P space. “Very few platforms have raised money from VCs. We know it doesn’t

always work out too well.” There are other sources of funding for P2P platforms, such as family offices, high-net-worth investors and equity crowdfunding. Shojin Property Partners prefers to target family offices and individual investors to raise money, as it prepares for an upcoming Series A funding round. “All fintechs say avoid venture capital money,”

said Jatin Ondhia, chief executive and co-founder of Shojin Property Partners. “In the US, venture capital firms understand it, but in Europe they don’t get it and want you to make a profit too quickly. “Obviously it’s important to make a profit in the long-term, but you need VCs who can run those losses for longer.” Ondhia said that his

property investment platform is looking to raise £10m over the summer, which will be a split of £5m from individuals in Shojin’s existing community and £5m from family offices worldwide. “Family offices are good as they get the long-term play,” he added. “They control their own cash and back firms not just on technicals but on fundamentals.”

It has never been more important to keep up to date with the latest peer-to-peer lending news. These are extraordinary times and our team is working hard to keep you informed about how the UK’s P2P sector is responding and what new trends are starting to emerge. If you want to be the first to learn about the latest developments in the world of P2P, please purchase a subscription today. We offer a range of subscription options, starting at just £1.95 a week. Please go to www.p2pfinancenews.co.uk/subscribe to buy a subscription today, so that you can enjoy unlimited digital access to P2PFN, with the option of a monthly print magazine. For more information on subscriptions, including overseas queries, please email tehmeena@p2pfinancenews.co.uk.

EDITOR’S LETTER

Published by Royal Crescent Publishing

Green Park House, 15 Stratton St, Mayfair, London W1J 8LQ info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk Michael Lloyd Senior Reporter michael@p2pfinancenews.co.uk PRODUCTION Tim Parker Art Director COMMERCIAL Tehmeena Khan Sales and Marketing Manager tehmeena@p2pfinancenews.co.uk SUBSCRIPTIONS AND DISTRIBUTION tehmeena@p2pfinancenews.co.uk Find our website at www.p2pfinancenews.co.uk Printed by 4-Print Limited ©No part of this publication may be reproduced without written permission from the publishers. Peer2Peer Finance News has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any peer-to-peer finance product, or any other security, product, service or investment. This publication does not purport to contain all relevant information which you may need to take into account before making a decision on any finance or investment matter. The opinions expressed in this publication do not constitute investment advice and independent advice should be sought where appropriate. Neither the information in this publication, nor any opinion contained in this publication constitutes a solicitation or offer to provide any investment advice or service.

he peer-to-peer lending sector has reached a new stage in its evolution, as long-predicted trends come to fruition including consolidation, profitability and evidence of sustainability. The pandemic has presented a mammoth challenge for many businesses, with peer-to-peer lenders forced to adapt to a new environment of higher default rates, economic uncertainty and more flexible approaches to collections and recoveries. A significant number of platforms have reported profitability in their latest financial results (see page 6), showing that the industry can survive – and thrive – despite these challenges. However, the Covid-19 crisis has also marked the demise of Growth Street, Octopus Choice and The House Crowd, with more platform closures expected as the industry thins out. The make-up of the industry has changed considerably over the past couple of years, but evolution is no bad thing. At our next P2P Investing Summit, a virtual event held on 13 July, we will be discussing innovations in P2P lending and newcomers to the industry with our panel of experts. If you’re an investor or IFA, please email me directly at suzie@p2pfinancenews.co.uk to register for the event.

SUZIE NEUWIRTH EDITOR-IN-CHIEF

We hope you’re enjoying the latest edition of Peer2Peer Finance News! We have now moved to a paid-for subscription model. If you would like to continue reading the magazine, please go to www.p2pfinancenews. co.uk/subscribe/ to find out about subscription options.

NEWS

P2P administration fees hit £5m ADMINISTRATORS of collapsed peer-to-peer lenders have clocked up more than £5m in fees so far from the sector’s largest closures but are struggling to recover more than a third of the loanbooks. Analysis by Peer2Peer Finance News has shown that the administration costs for Lendy, FundingSecure, Collateral, MoneyThing and The House Crowd are mounting up, while many investors are still unclear on how much they will be repaid. Administrators can charge for anything from managing loanbooks to dealing with recoveries and answering press queries. Collateral was one of the first P2P lenders to enter administration in February 2018. It has already moved into liquidation and its administrator BDO has earned £677,163. The firm has recovered £2.2m from a property loanbook worth £14.8m, equivalent to 14.8 per cent, but is still working on recoveries for Collateral’s pawnbroking assets. Lendy has become the most expensive administration in the P2P lending sector to date. RSM has been paid £3.7m since taking on

the administration of Lendy when it collapsed in 2019. During this period, it has recovered £46m of the £117m development finance loanbook and £12.8m of the £32.9m lent to bridging borrowers. That means 39.2 per cent of the loanbook has been recovered. There are still 16 live development loans with a value of £83.1m but 11 of these have entered insolvency proceedings, RSM said. Of the 31 live bridging loans with an outstanding value of £34.6m, 28 have entered insolvency. RSM has said it is still not possible to say when the administration, which has already been extended by three years, will end. In contrast, CG&Co,

which was named administrator of FundingSecure when it collapsed in October 2019, has been paid costs of £593,575 so far. The loanbook was valued at around £80m at the time of the administration but CG&Co has already written off several bad loans that took the value to £56.6m. It has recovered 41.5 per cent of this figure at £23.5m and said there are still 95 remaining defaulted loans to recover with £47.7m invested but there is no indication of when this will complete. The FundingSecure administration has also been extended by three years. The House Crowd, which only went into administration in February 2021, has

already generated time costs of £283,525 for its administrator Quantuma. Meanwhile, Moorfields Advisory, which was appointed administrator of MoneyThing when it closed in December 2020, had incurred costs of £126,665 up to February 2021 and has estimated the total administration’s fees will be £358,872. Administration fees have become a hot topic of late. It was revealed in March that the administration costs of collapsed minibond provider London Capital & Finance are expected to total £7.7m by next January. The latest progress report from joint administrators Smith & Williamson revealed that fees have already reached £5.6m.

NEWS

Propetly seeks head of sales ahead of Proverest launch REAL estate investment marketplace Propetly is expanding its team, ahead of launching its own proptech marketplace – Proverest – later this year. Andrew Smith, head of UK for all Propetly and Proverest products and operations, told Peer2Peer Finance News that the two companies will work closely together, with

Proverest supplying the data that informs the Propetly market. “Proverest is effectively the machine learning that goes into Propetly, so they work very closely together,” Smith said. “Propetly was built to create intelligent tools for ambitious developers, and the data that [Proverest is] pulling will hopefully help inform

the Propetly marketplace to a massive extent and accelerate our vision.” Smith added that he is currently hiring a number of sales people, including a head of sales who will work initially for the Propetly market and latterly on the Proverest side of the business. Propetly is also working with “some very exciting partners”,

said Smith, many of which were set up by the company’s interim managing director Brian Cartwright. Earlier this year, Cartwright left his position at Propetly and moved to a newlycreated role at Bank of Baroda. Smith has taken over his responsibilities. “He leaves big shoes to fill,” said Smith.

New aggregator aims to standardise data in European property lending A EUROPE-WIDE property lending aggregator is set to launch later this year, with the aim of standardising data, as well as bringing transparency and trust to the alternative property lending sector. Brikkapp will allow investors from all over Europe – including the UK – to browse peer-topeer property lending opportunities, and to invest directly with multiple platforms. “Currently in Europe there are more than 170 real estate crowdfunding platforms,” said Brikkapp’s chief executive and cofounder Jan Vecerka. “What we do is we aggregate all the information about this space in one place, so our users can go to Brikkapp and see what platforms are out there, what is

their track record, and view data about past investment opportunities, and statistics.” Vecerka added that his aim is to work on the standardisation of this data. “For example, if you would like to invest with one platform, you should be able to compare the investment with the offer that is on another platform,” he said. “We really want to work

on the standardisation of this data. “The next step is that we want to standardise the risk metrics as well, which is really important because most platforms have their own risk metrics but it is very difficult to compare what is A++ on one platform to B or C risk level on another platform. It is almost impossible.” Brikkapp is expected to have finalised its

licencing requirements by the end of the summer. The platform has already entered into a number of partnerships with existing platforms across Europe, including Shojin Property Partners in the UK. “We only want to cooperate with those platforms and partners which are regulated because we feel that offers a level of security to the investors,” Vecerka added. “What we want to build is something like a framework for cooperation among the real estate crowdfunding platforms. “We don’t want to be just an aggregator – we want to build a platform where we all can cooperate and really enable the market to grow by building this ecosystem to make the market more trustworthy.”

NEWS

Is Saudi Arabia set to become the next P2P hub? A SPATE of recent platform launches in Saudi Arabia has hinted that the country is set to become the peer-to-peer lending capital of the Middle East. Fintech solutions company JustCoded has noted a rise in enquiries coming from Saudi Arabia-based P2P startups, while a recentlycreated regulatory sandbox has been helping Saudi-based lenders to scale up. This follows several years of research into the fintech lending market by Saudi authorities and regulators. A 2017 white paper by the Saudi-based financial services firm Derayah identified a $300bn (£216bn) credit gap in the

small- and medium-sized enterprise (SME) lending market in the Middle East. Meanwhile, the growth of the fintech market has been named a key part of the financial sector development programme of Saudi Arabia’s Vision 2030 initiative. By 2020, there were 60 active fintechs operating in Saudi Arabia, including 12 P2P lenders: Forus,

Funding Souq, Sahlah, Tamam, Tayseer, Nayifat, Ta3meed, Maalem Financing, Tammwel, Sulfah, Raqamyah Platform, and Lendo. Since then, several more names have joined the market, including UAEbased business lender Beehive, consumer lending platform Quara Finance, and micro-lender Zain. Funding into the

country’s P2P sector has also increased over the past few months. In February 2021, Raqamyah raised $2.3m in a Series A fundraising round, with investments coming from a mix of institutional and angel investors. The following month, Lendo announced a successful $7.2m Series A funding round led by Derayah Ventures.

P2P platforms start to reach profitability A SIGNIFICANT number of peer-to-peer lending platforms in the UK are now turning a profit, despite the uncertainty caused by the Covid-19 pandemic. Over the last few months, more than a dozen UK-based P2P lenders have either reached profitability for the first time or increased their previous year’s profits. Funding Circle UK became profitable for the first time in the second half of 2020, achieving an

operating profit of £21.3m. Earlier this year, Folk2Folk said that it had made a £1.1m profit in its latest full-year results, up 460 per cent from £198,043 the previous year. And Relendex made a profit of £135,760 in the 12 months to 31 January 2021, reducing its losses since inception to £5,773,702. Shojin Property Partners reported a £234,000 profit on almost £1m in revenues in the year to 30 June 2020, after making a £830,000 loss in the previous

financial year, and a loss of £2.64m in 2018. EasyMoney also turned around its balance sheet, making an operating profit of £57,184 last year, after posting a loss of more than £1.023m the previous year. It is believed that higher lending volumes, the normalisation of alternative lending options and government support packages are behind the trend of P2P profitability, as well as the long track record of some platforms and the success of their

business models. “One could argue that it is a bull market for P2P/marketplace lending because of the high level of investor appetite,” said Roy Warren, managing director of Folk2Folk. “These funds are the essential ingredient to drive the engine of lending to SMEs where demand for business loans remains strong as business owners look to invest in their business to adapt, diversify or ‘future-proof ’ by building in greater resilience.”

NEWS

Folk2Folk not applying for recovery loan scheme FOLK2FOLK is not currently looking to gain accreditation under the government’s recovery loan scheme (RLS) and is instead focused on its core business and retail lenders. The peer-to-peer business lending platform, which has recently repositioned itself as a national marketplace lender, was accredited for the coronavirus business interruption loan scheme (CBILS) last year although it did not ultimately lend under the initiative. Despite this, the platform achieved a stellar

year that has continued into 2021. Folk2Folk made a £1.1m profit in its last full-year results and has since reported a 125 per cent year-on-year rise in firstquarter profits. For now, the platform is not interested in gaining accreditation to the RLS, which is due to run until the end of the year subject to a review, but has a “never say never” attitude to the topic. The RLS is the successor to several governmentbacked lending schemes to support businesses during the pandemic,

including CBILS which closed for new applications on 31 March this year. “We haven’t had any borrowers ask about the RLS,” a Folk2Folk spokesperson said. “We get borrowers coming direct to us and from brokers, and they just want our regular loans. “We have seen strong demand on our borrower side, we’re just busy originating loans to satisfy demand. “Our core business is so strong we don’t want to distract ourselves in any way or push out retail to

one side instead. We have a loyal retail investor base, so we owe it to them to pay them attention and try to give them what they expect from us. “We’re still actively in discussions and engaging with institutions, we’re still really keen to build up that side of the business. “We want to have that broader array of investor streams of finance, but our retail investing side isn’t going to suffer as a result of taking on institutional investors. We’re still dedicated to making sure we look after our retail investors.”

JustUs founder defends Andrew Bailey on crypto concerns PEER-TO-PEER lending boss and cryptocurrency backer Lee Birkett has come to the defence of Bank of England Governor Andrew Bailey after he aired concerns on digital currencies. Speaking at the City UK Annual Conference last month, Bailey said that while new forms of digital money present an important source of innovation, public interest must not be ignored and “tough love” is needed. He has also previously told the Treasury committee of MPs that he is “sceptical” about cryptocurrencies because “they're dangerous and

there's a huge enthusiasm out there”. Birkett is founder of P2P lending platform JustUs and its sister company Moneybrain, which has its own cryptocurrency called BiPs. He said that Bailey recognises that people could leave traditional

banks in favour of digital currencies, which poses a threat to the banking system, so is therefore working on a digitalised central bank currency. “Bailey’s been an honest supporter of digital currency, what he doesn’t like is the anonymous crypto side of it,” Birkett said. “Crypto has many uses if operated by good actors, he’s just wary there’s a lot of bad actors but there are more bad actors in the banking system than the world of crypto I can assure you. “It’s because cash can be dirty with money laundering. The percentage

of this in cash is far bigger than that of crypto. “Bailey’s rightly saying there’s a huge risk to the economic system, but this is not going away, and the Bank of England needs to step in and have its own currency. “Digital money is the same as [video rental store chain] Blockbusters being replaced by streaming services. Those are elements of life completely getting transformed, it’s a better experience for customers, delivering a better value and outcome for them. It’s massively positive for P2P. P2P and crypto are the future of banking.”

PROMOTED CONTENT

Below the surface

Look beyond the claims of great returns and ask to see the nuts and bolts, says Kuflink chief executive Narinder Khattoare

EER-TO-PEER LENDING platforms work tirelessly to look like the swan gliding effortlessly on a lake, while down in the engine room, there is ceaseless activity of rarely mentioned departments all making a huge contribution to that success. For example, the collections process. One of the unsung heroes of any lending operation, it is the most crucial part of the business. One of the truisms for P2P lenders is that whilst it is easy to lend money, the true test is making sure the money lent is recovered at the end of the term so it can be recirculated and used for the benefit of other borrowers. At Kuflink, we have put a lot of resource into our collections process. We allow 30 days after maturity for borrowers to catch up, failing that the loan goes into default and passes onto our recovery team who then will endeavour to get the funds owed back to investors in the shortest possible time. Collections’ protocol differs from lender to lender – many adopt a more relaxed regime but, in our experience, the longer a case is allowed to drift, the harder it becomes to recover. We feel that our process works best, as it still allows time for the borrower to repay but also means we can act swiftly if needs be. We have to be aware at all times of the pressures that can be caused by sudden house price falls, pandemics or recessions, which can massively

impact a business when it comes to property-based lending. While we are enthusiastic adopters of new technology to improve performance, employing staff with experience and the ability to train up suitable recruits is still the key to a successful business, and particularly in lending. The underwriting phase is where every lender has the opportunity to limit future exposure to poor prospects and as in collections, lenders need to have experienced staff who have worked through recessions and downturns and know how to assess risk. Just because a prospective client wants a particular sum, it is important to establish whether a lower figure will work. A lower loan-to-value (LTV) means that lenders are not over-offering and because the borrower is putting more of their own funds into a

project, there is less risk for the lender while the borrower has a greater incentive to complete a project on time to safeguard their investment. Many of our peers chase business by offering lower rates and higher LTVs. With the right security and borrower that can be fine, but that is where default problems can multiply. Also, let’s not forget that P2P platforms with too much institutional money can become too aggressive and end up with loans in default as they are under pressure to lend the monies out, otherwise they end up paying non-utilisation fees. Investing via a P2P platform can offer investors solid returns. However, the only question to ask is, ‘How many individual investors like me have lost any capital?’ At Kuflink, not one investor has yet lost a penny of capital invested, since we launched in 2016.

FUNDRAISING

Show me the money

Fundraising can be a daunting task – especially for young peer-to-peer lending platforms. Michael Lloyd explores the barriers to entry for start-up and scale-up P2Ps…

AISING MONEY FOR A new business is never easy – just ask any of the hundreds of entrepreneurs who have faced down the venture capitalists of Dragon’s Den. Most peer-to-peer lending platforms will understand the pressure, risk, and excitement of a showdown with the dragons, because they’ve had to go through this process themselves, in one form or another. There are myriad ways to access equity funding, so how do nascent platforms secure the backing they need to enter the P2P space?

According to Robert Pasco, chief operating officer at soon-to-launch P2P platform Plend, it’s all about perseverance. “Everyone says you have to kiss a lot of frogs and get a lot of ‘no’s, and that’s definitely true,” says Pasco. “We’ve applied for everything, we’ve been to talk to pitch events and angel groups. “The ones that become a ‘yes’ are those we have not given up working on, giving updates. The best experience is talking to someone, not asking for fundraising and building a rapport.” As Pasco suggests, there are plenty

of avenues for P2P platforms to seek funds, even if the outcome is not guaranteed. Funding can come from family and friends, from institutional investors, venture capitalists, or via crowdfunding. P2P platforms have collectively raised more than £17m through crowdfunding platforms such as Crowdcube and Seedrs. But despite sharing a ‘people-powered’ ethos, these crowdfunding platforms come with their own challenges. “Crowdcube and Seedrs are some of the hardest money to earn, so much effort is required to make your profile look attractive, a ton of

FUNDRAISING

money is needed first and a strong marketing campaign to get as much user base converted to investors as possible,” says Pasco. “It can be quite an expensive form of funding.” Equity crowdfunding platforms usually require businesses to have secured a substantial lead investment before they will let their crowdfunding campaign go live. Sources have told Peer2Peer Finance News that this lead investment requirement can be as high as 30 to 80 per cent of the fundraising target, which significantly raises the barrier to entry for new P2P platforms. However, both Seedrs and Crowdcube say that there is no set figure for pre-campaign fundraising, as it is measured on a case-by-case basis. “There is no set number, but we advise investee businesses to be able to generate some momentum before publicly launching their campaign, whether that's through a lead

investor or their own community,” says Debra Burns, compliance director at Seedrs. Similarly, a Crowdcube spokesperson says that the platform has no set thresholds and it really

“ Everyone says you have to kiss a lot of frogs and get a lot of ‘no’s, and that’s definitely true

”

comes down to a discussion between the campaign manager and the entrepreneur. “It's very hard to put an exact figure on the lead investment, it really does depend on the type of business, sector, size of its community etc,” the spokesperson says. “There are no rules around it, it is down to the discretion of

the campaign manager on the amount of lead investment that is required, and it really depends on the size of the business and its community. “If we don't feel that a business has a reasonable amount of lead investment, then we wouldn't advise a company to launch. Some businesses don't come with any, most recently Curve, Secret Cinema and Taster.” Stuart Law, chief executive of Assetz Capital, says that lead investment is used on these platforms as an extra layer of due diligence. “If a company can’t bring substantial investment from people that understand it, such as close contacts like friends and family, why on earth should a single investor on Seedrs or Crowdcube believe it and back it?” he says. “If you haven’t raised a significant amount of money from people close to you before going live your company probably isn’t worth investing in. That’s the reality of it.”

FUNDRAISING

Despite these challenges, both Crowdcube and Seedrs have reported significant growth in investments and have hosted an array of successful P2P campaigns. Seedrs achieved record levels of fundraising and investing last year, funding 265 deals in total and seeing £293m invested in campaigns, while Crowdcube witnessed a 24 per cent increase in new investors across 2020. P2P platforms believe that equity

or high net worth. Then they have to be assessed by the platform to ensure that they understand the risks of the investments in question. Typically, this is done through testing their knowledge of the risks of the investment such as liquidity, diversification and dilution. “Far more concerning for equity fundraising would be where the Financial Conduct Authority (FCA) wants to take the rules later on this

“ If you haven’t raised a significant amount of

money from people close to you before going live your company probably isn’t worth investing in crowdfunding is well suited for their fundraising activities due to the notable similarities between the two business models. Furthermore, the platforms which have been able to meet the lead investment thresholds have typically managed to meet – or overshoot – their fundraising targets. “It's the same as reaching out to the crowd and getting funding from them, there are some similarities,” says Filip Karadaghi, managing director of LandlordInvest. “And you expect equity crowdfunding platforms to understand what P2P is, better than venture capital or angel investors.” Fundraising P2P platforms have another challenge to contend with – the ongoing issue of changing regulations. Platforms selling equity investments to private investors who aren’t being advised need to ensure that those sales are appropriate. Firstly, the investor has to certify that they fit in one of three categories: restricted, sophisticated

”

year,” says Gillian Roche-Sanders, partner at Adempi Associates. “Changes are afoot that mean the platforms wouldn’t be able to rely on investors self-certifying. The FCA wants platforms to police the public. “That means if someone certifies as high net worth because they have read the statement and believe they meet the criteria, the FCA still wants the platforms to find a way to prove that they have the wealth required. “For online businesses, that’s going to be incredibly tricky. How do you check someone has a level of income or net assets in a cost-effective way and at scale, when people’s situations will all be so different? “There are so many less onerous ways to achieve the same aim, that I really hope the regulator listens to the industry and finds a way to make their new regime for high-risk investments work for online and non-advisory businesses.” One P2P platform head says that the regulatory obstacle is only becoming worse due to the

FCA’s ongoing scrutiny of financial promotions. “Why is there not an ability to do crowdfunding in a low-cost way?” the platform head says. “The regulatory compliance for each financial promotion requires thousands of pounds of work, to approve a campaign is thousands of man hours and someone who’s FCA approved for financial promotions has to sign it off. “Regulation is a huge hurdle for fundraising – whilst it’s being made easier in the EU and US, it’s being made more difficult in the UK.” Assetz Capital’s Law says that the FCA should not change the current rules but should continue to increase its supervision. “There’s definitely movement

FUNDRAISING

in wondering about whether to make it much harder to promote a specific investment to the public,” he says. “It would be a bad idea to change it. They should exercise control

to people, including family and friends, who are best to speak to on a one-to-one basis. Seedrs and Crowdcube offer regulatory cover to platforms, which can reduce this regulatory

“ Regulation is a huge hurdle for fundraising,

whilst it’s being made easier in the EU and US, in the UK it’s being made more difficult over the operations they already have. They’re out on a supervision mission to check people are complying with the regulations.” Platform owners need to be incredibly careful not to be exposed to regulatory risk when pitching

”

risk while pitching for equity investments. “One of the reasons Seedrs and Crowdcube are successful is they do it in the legal way, you can introduce investors to an approved financial promotion from Seedrs,”

Law says. “The regulation is intentionally a minefield. Everything is illegal until proven otherwise. “Raising equity privately by default is illegal. You can put a ton of work in and pay some lawyers or go to Seedrs and Crowdcube to find the narrow legal path. “Some people have tried to do it themselves and ended up in hot water. Many self-issued promotions by companies ended up being case studies of fraud or people losing money.” The regulatory repercussions of improper fundraising seem truly frightening and may put off some from fundraising in this space, creating yet another barrier to entry for the UK P2P sector. However, the environment for raising funds is not in its worst state and there are signs of improvement. According to the British Business Bank, investment in UK deep tech companies has continued to grow rapidly over the past five years, rising by 291 per cent to £2.3bn in 2020. Meanwhile, equity investment in smaller businesses reached £4.5bn in the first quarter of this year – the highest amount ever recorded in a single quarter. Furthermore, the board of Zopa backer Augmentum Fintech is currently seeking permission to change the company’s investment policy to allow it to invest up to one per cent of its net asset value in fintech seed-stage investments. Fundraising is changing, and as the pandemic finally draws to a close, more and more investors appear to be waking up to the benefits of backing alternative lenders. Forget the Dragons, instead watch this space…

The home of peer-to-peer lending. Earn up to 4.1% p.a. target interest tax-free with our IFISA. Capital at Risk This tax year (2020/21) you can invest up to £20,000 into an ISA, protecting your income from tax, both now and in the future. Our Innovative Finance ISA (IFISA) is an investment that gives you the opportunity to lend to UK businesses, whilst earning fairer rates of interest tax-free.

Fairer growth for all. 0800 470 0430 assetzcapital.co.uk/invest As with most forms of investment, peer-to-peer lending carries a degree of risk to your capital; in this case, if the borrower is unable to repay their loan. At Assetz Capital, we seek to reduce this risk to our investors by taking asset security on every loan. Investment Account target interest rates should be considered along with the relevant Investment Account expected defaults & losses information. Past performance does not guarantee future performance. Investment in peer-to-peer loans is not protected by the Financial Services Compensation Scheme. We recommend that prospective lenders read the Key Investor Information pages before investing. Assetz SME Capital Limited is a company registered in England and Wales with company number 08007287. Assetz SME Capital Ltd is authorised and regulated by the Financial Conduct Authority (Reg No: 724996). ’Assetz Capital’ is a trading name of Assetz SME Capital Ltd. Assetz SME Capital is registered with the Office of the Information Commissioner (Reg No: Z3338899) for data protection purposes.

JOINT VENTURE

Forbearance forever

Assetz Capital’s head of credit Tim Harper, head of legal and recoveries Sean McGrath, and chief risk officer Chris Macklin explain how Covid has changed credit processes at the property lending platform

SSETZ CAPITAL WILL adopt a more flexible approach to forbearance schemes, while maintaining the strict credit assessment processes that were introduced in the early days of the Covid-19 pandemic, as the platform anticipates a return to normal trading conditions soon. The peer-to-peer lending platform’s head of credit Tim Harper, head of legal and recoveries Sean McGrath, and chief risk officer Chris Macklin acted quickly to protect borrowers and investors in the early days of the pandemic. “We realised the broad spectrum of the portfolio may potentially be affected by Covid initially,” said Macklin. “So we devised and introduced a general forbearance scheme which we offered to the bulk of borrowers.” This included things like extending and loosening repayment terms, offering capital holidays, or changing some of the key dates within its development facility agreements. But the platform went further than that, and changed its credit assessment process to build in some rigorous new checks – particularly around eligibility for the coronavirus business interruption loan scheme (CBILS). Assetz placed more emphasis on the longer-term viability of borrowers than it had previously. Then the platform trained its staff up so that it could respond quickly to new borrowing requests, even as its employees were forced to work from home.

As the pandemic went on, Assetz’ borrowers were able to benefit from government support, and fewer businesses needed financial support. In fact, Macklin said that some of Assetz’ borrowers “did amazingly well in some instances”, surpassing the platform’s expectations. “Initially, we envisaged this would all be over within six months, but obviously it's not,” said McGrath. “And so we've had some repetitive forbearance for certain borrowers in certain sectors, particularly hospitality. “But the numbers requiring forbearance have whittled down quite significantly over the past 15 months. And so forbearance numbers are relatively modest now.” This was a testament to the platform’s quick action in March 2020, when it took the unprecedented step of offering all its developers a threemonth loan extension, whether they had requested it or not. “That took the absolute panic of the first lockdown away, when everybody was a bit confused about whether or not building sites were shut and what they should be doing,” explained Harper. “But then as we got more into the pandemic and building sites reopened again, working on site was slower because some workers were

having to self isolate, and material prices were going up. But generally, building projects have continued and we've managed to keep most things on track.” However, this doesn’t mean that a default spike isn’t on the horizon. “Insolvencies usually spike after the end of the recession where people have run out of capital or they start to grow again,” warned Macklin. “But this situation could be completely different because the property market has held up, sales have continued and there has been unprecedented government support.” Now, Assetz plans to maintain its track record and continue taking care of its client base by maintaining some of its Covid protocols. “We will continue to look more closely at viability going forward,” said Macklin. “Particularly in the immediate period after this, where we could get an uptick in insolvencies nationally.” The first CBILS repayments will soon fall due, with many industry stakeholders warning of the possibility of rising defaults. But Macklin points out that Assetz’ loanbook has been behaving in line with what you would see in a normal cycle, with no spike in defaults. In fact, a number of Assetz’ borrowers have repaid their loans early. “We may see slightly higher levels of defaults, but we've been quite rigorous around the initial assessments and longer-term viability,” added Macklin. “So hopefully that will mitigate against the risk of defaults.”

PROFILE

Property lending’s Euro vision

Marek Pärtel, co-founder and chief executive of EstateGuru tells Kathryn Gaw about his aspirations for the European alternative lending market, and the UK platform that inspires him…

HE EUROPEAN PEERto-peer lending market is booming, and a few key names are emerging as leaders in the competitive property lending space. Founded in 2014, EstateGuru now has 85,000 investors, growing by about 3,000 investors on average per month. The Estonia-based platform has reached a series of milestones recently, lowering its default rate, expanding into Finland and Germany, and raising €1.3m (£1.1m) from 971 investors in a Seedrs fundraising campaign. The company’s founder and chief executive Marek Pärtel reveals what’s next for EstateGuru and the European property lending sector. Kathryn Gaw (KG): How did you get involved in the P2P lending market? Marek Pärtel (MP): I have been an entrepreneur all my life and I’ve been in the real estate sector almost 20 years. Having been a real estate developer, asset manager and investor myself, I very often came across situations where traditional finance providers like banks were slow and not very flexible in making their decisions. I had to turn to private investors to do property investment or development deals and at the same time, when I was looking for investment opportunities related to real estate, there actually weren’t too many options – especially if you

wanted to diversify and invest in smaller amounts. My co-founder told me about the P2P lending concept and showed me companies like LendingClub. He suggested we should do something in the real estate space and given my background in property, I decided to do it! In 2014 we went live with a proper platform and since then, we’ve been growing our volumes every year. Now we are a 65-people team. KG: How did EstateGuru deal with Covid? MP: For six weeks, we had to make

rapid decisions such as raising interest rates for borrowers in order to keep investors on the platform. Fortunately, things changed in June. So for a couple of months it was a little bit hectic, but between June and December 2020 we reported massive growth. KG: Did you pause new lending when the pandemic began? MP: No, we didn’t pause our lending. We just had to motivate our investors to keep investing by raising interest rates up to 14 per cent and we also had to tranche the loans into smaller ticket sizes,

PROFILE

in order to get them funded more quickly and to avoid the cash drag for our investors. The risk didn’t really change. In fact, it was the other way around – we became more conservative. But at the same time, we said to borrowers that if you want to get this deal done quickly, you have to pay more because we have this high uncertainty. This wasn’t only a challenge in the P2P market, it was the same across all the global debt markets. The capital market situation changed dramatically for some time. Everything was closed, and in Estonia (for example) private deposits grew. So what do you do with that? You can do some shopping on Amazon, or you can start investing in loans, in stocks or in crypto. It gave a big boost, not only to us, but to all digital businesses. KG: Do you know the geographic breakdown of your investors and borrowers? MP: The majority of our investors come from Germany, followed by Estonia, Lithuania, Switzerland, UK, Spain, Italy and the Netherlands. In terms of borrowers, we believe the German market is going to be the biggest market for us in the next few years. This year, we are also planning to begin originating loans in the Netherlands. We are also considering the UK market. KG: How does Brexit impact your decision to expand into the UK market? MP: We actually got our licence from the Financial Conduct Authority (FCA) around three years ago, but we haven’t done anything with it. We planned to move into the UK before the Brexit news, so we applied for our licence a few years

ago. The UK is probably not going to be our core market in the coming years, but we see a lot of investors coming from the UK – both retail and institutional investors. We already have a London-based debt fund investing into our loans. I can’t tell you the name but it's one of the biggest debt funds in London. KG: Why do you think you saw such an increase in UK investors last year? MP: EstateGuru is actually the biggest property-backed lending platform in continental Europe and our biggest model is very similar to [UK alternative property lender] LendInvest, which is well-known by UK investors as a reliable platform. They have also been good sparring partners and I have spoken often to their management team. What EstateGuru is offering is the diversification between different loan types and also diversification between different geographies. KG: What are the key differences between the European alternative lending market and the UK alternative lending market? MP: The UK is definitely the most established alternative lending market in Europe due to the regulatory framework. In comparison, we are only going to have Europe-wide regulation by the end of the year, so we have to obtain separate licences in Lithuania and Finland. The UK market is much bigger and there are more established players compared to mainland Europe. The European market is so fragmented due to different legislations. KG: Is there more room for growth in the European market? MP: Definitely. The question is

how these new players or existing players are scaling up. I’m sure there is more room. I think there is still a huge opportunity. KG: Your default rate sat at 7.7 per cent in February – why was this? And what have you done since then to bring defaults down? MP: It hasn’t actually changed too much over the two years. It has always been between six and eight per cent. Recoveries happen on a monthly basis, so new defaults happen on a monthly basis – it’s ongoing work, a natural part of the business to have certain loans in default. Historically we have recovered about 50 per cent of the total defaults, and our investors currently haven’t experienced any capital losses to date. But if capital losses do occur, we are quite confident that the effect would be less than one per cent of the total portfolio. KG: You recently completed a €1.3m Seedrs fundraising round. What do you intend to do with that money? MP: We plan to use the Seedrs money for three areas: tech development; geographical expansion; and the development of a capital markets division for the business. In 2021, we plan to launch a new investment product for integrating fintech ecosystems. We are also planning to launch an easy investment product backed by hundreds of loans we originate. We plan to enter two new markets – one is the Netherlands. We intend to sustain our growth of at least 70 per cent per year, and we hope to double our lending volumes to €240m.

COLLECTIONS AND RECOVERIES

The life cycle of bad debt As lenders prepare for a potential rise in defaults, Michael Lloyd explores the life cycle of bad debt, and how collections and recoveries can be managed in the post-Covid economy

HAT HAPPENS TO bad debts? That’s a question that has been thrust into the spotlight in recent months, as Funding Circle has sold off some of its defaulted loans to Azzurro Associates, a debt buyer owned by US asset manager Elliott Management. The peer-to-peer lending platform sold 280 defaulted loans to Azzurro late last year and completed a fresh deal this June. It should be noted that bad debt sales are relatively common in the P2P industry, with Zopa and former P2P platform RateSetter having both sold off books of

defaulted loans on a number of occasions. Yet when news emerged of the first of these bad debt sales last December, Funding Circle had to defend itself from criticism that the sale could hurt vulnerable borrowers during a time of particular economic hardship. The

“ I don’t think it’s right lenders can sell loan books to organisations

”

platform has explained that the loans represented a small fraction of its overall loanbook, and that all struggling borrowers are offered support including short-term payment plans. MP Kevin Hollinrake, cochairman of the All Party Parliamentary Group on Fair Business Banking, publicly sought assurances that Azzurro Associates will recover any outstanding debt from the business and business assets before attempting to recover from the personal assets of a guarantor. “When selling off debts to a company that is not customer

COLLECTIONS AND RECOVERIES

facing, we have concerns but we understand Funding Circle has the right to do this,” Hollinrake told Peer2Peer Finance News. “The next step is to mitigate the risk. We spoke to Azzurro and received assurances from them and Funding Circle that the personal guarantees will be dealt with in the right way, realising business assets before personal assets. “I don’t think it’s right lenders can sell loanbooks to organisations; they have a duty of care to that lender and borrower and it’s natural to assume if borrowing from a wellknown entity, that organisation is more likely to treat its borrowers fairly and we’ve seen instances where that is not the case when the debt is sold off.” Hollinrake is now calling for the Lending Standards Board to update its Standards of Lending Practice to ensure that business assets are always recovered before personal assets. “One of the things we want to be careful with in this space is personal guarantees being taken in the right way,” he adds. “Most people think to try and help them restructure, it’s business assets before personal. That’s not a requirement. “We’ve been speaking to the Lending Standards Board and other lenders and speak regularly in parliament about UK-regulated

“ The best way is to evaluate and work

with the borrower but if they are completely belligerent, we get the insolvency practitioners and lawyers in and let them do what they do

”

financial services entities selling loanbooks off, particularly in these kinds of circumstances, and are keen to try and change the rules about how this can happen.” Funding Circle declined to comment for this feature. However, last month it emerged that the platform’s latest bad debt sale was set to return £16m to individual investors. “Azzurro Associates is Financial Conduct Authority (FCA) regulated and as the first commercial debt firm to join the Lending Standards Board, we are confident they will continue to service these borrowers with the equivalent level of service and care,” Lisa Jacobs, Europe managing director of Funding Circle, said at the time. Selling defaulted loans is one way to recover debt and it tends to be the final act of the lender, after all other recovery options have been explored. But every debt sale begins the same way – with a late payment on

a loan. After a certain period of time, this late payment becomes a default, and the defaulted loan goes into recovery. According to the FCA, a propertybacked loan can be classed as being ‘in default’ when a payment is 180 days overdue. For loans which have not been secured on property, the deadline is 90 days after the original due date. “I think 180 days for property backed lending is sensible because of the nature of the transaction,” says Stuart Law, chief executive of Assetz Capital. “It often has delays working through it and we can’t do things instantly.” Collection and recovery processes differ from platform to platform and experiences vary on a case by case basis. But all P2P lenders point out that they work with borrowers to find out what the issue is and determine what they can afford, then agree to a revised payment plan or payment holiday.

COLLECTIONS AND RECOVERIES

“When people get into default their head gets fuzzy,” says David BradleyWard, chief executive of Ablrate. “It’s a situation where you need to calm them down and say ‘we’ve defaulted and let’s work with you to see how we get out of it’ and that’s the general approach. “A legal situation is expensive for everyone – us, the borrowers and lenders. Pulling the trigger immediately is never the best way to do it. “The best way is to evaluate and work with the borrower but if they are completely belligerent, we get the insolvency practitioners and lawyers in and let them do what they do.” P2P consumer lending platform Lendwise triages its overdue borrower cases. Where a borrower requires more help with their money management, the case can get sorted within a week. Others require forbearance of some kind, while others may require a bit more chasing via emails and letters. “And then if we have no luck, we will consider other options including legal routes,” says Rishi Zaveri, chief executive of Lendwise. For LandlordInvest, depending on the specific situation, failure to repay a loan without any reasonable explanation will lead to a demand issued by its solicitors. This is followed by a final demand and thereafter receivers or administrators are appointed. ArchOver remains in close contact with troubled borrowers so it is aware if an interest payment might be late or if there might be reporting issues. The P2P business lending platform will immediately serve a breach warning notice called an RN01 if the payment does not arrive on the due date.

“

When people get into default their head gets fuzzy

”

“The RN01 points out the breach issues against the 36H facility agreement,” says Ian Anderson, chief operating officer of ArchOver. “If we believe the firm is in serious trouble we will give as little as 24 hours to rectify it before declaring a default. “Our normal period is seven or 14 days. The RN01 is really effective at giving borrowers a jolt to sort out their money or reporting.” Alex Hilton-Baird, managing director of debt collection agency the Hilton-Baird Group, says prevention is better than the cure and the best way to collect customers’ debts is by

being firm and fair. “I don’t think I’d ever use the word aggressive in anything we do,” he says. “It’s nothing to do with being hard or aggressive as some people put it, it’s about listening to the reason for non-payment somebody is telling you and working with that customer to find a solution. “The best way to collect money is by building a relationship with those owing the money and understanding why they’re struggling to make repayments. The majority of people would pay on time if they could.” Hilton-Baird says what happens next depends on the guidelines agreed by each platform, but the threat of legal action can make all the difference. “As a rule of thumb, it would typically be where the customer is not engaging at all with you and

COLLECTIONS AND RECOVERIES

legal escalation point is notice of issuing legal proceedings. “By far, most recoveries are prelegal notices and working with customers and talking to them.” As well as communicating with borrowers to recover repayments, platforms also need to be wary of vulnerable customers and have collections experts who can listen and pick up on signs and take appropriate action. Hilton-Baird says he believes the

Debt management and collections will become more significant for the P2P sector as the first batch of governmentbacked support loans come due. Defaults are expected, but the real test will be how P2P platforms respond to them. John Cronin, an analyst at Goodbody, has forecasted more bad debt sales along the lines of Funding Circle’s sale to Azzurro Associates.

“ Clearly there’s a strong recovery underway in the economy and that should be supportive in both a collections and recoveries context

”

you have done enough research to know the customer does have assets, very often the act of issuing court proceedings tips the balance,” he says. “Unfortunately, there’s human nature in this. Many bury their heads in the sand and have other priorities, a letter from the platform hasn’t resonated and, although a letter from us may have got them to pay attention, the next

sector’s collections processes have withstood Covid and while the underlying principles are largely the same, P2P platforms have more-data driven systems that are easier to interface with. “The big difference in terms of being a debt collection agency working for both sectors is the flow of information,” he says. “Most P2P lenders are very data driven. Therefore, the systems they have are easier to interface using API connections, so the data exchange and reporting is better.”

“Clearly there’s a strong recovery underway in the economy and that should be supportive in both a collections and recoveries context,” he says. “I think given the environment we could see other P2P lenders going down the route of selling bad debts. Certainly, Funding Circle may stimulate others to think about it.” How P2P platforms respond to additional defaults will shape the future and this can only be aided by a swift economic recovery.

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