Peer2Peer Finance News June 2022 by Alternative Credit Investor

>> 10

WOOING THE CITY

How to secure funding lines

BRIDGING THE GAP!

>> 16

P2P property firms are meeting demand

Lendwise’s Rishi Zaveri is making an impact >> 20

ISSUE 70 | JUNE 2022

P2P sector smashes milestones in 2022 PEER-TO-PEER lenders have continued to grow their loanbooks this year, with many of the smaller players surpassing the £100m and £200m cumulative lending milestones. Analysis of publicly available loanbook data by Peer2Peer Finance News found that lending has grown substantially over the first five months of the year. It comes after industry trade body the 36H Group released figures in March that revealed the P2P lending platforms with the largest cumulative loanbooks as of last year. The figures at the time showed many lenders in the top 10 had cumulatively lent less than £200m, but that has now changed. Our research analysed the 36H Group data and compared it with the most up-to-date figures provided by P2P platforms themselves. According to the 36H Group data, seven out of the top 10 lenders had loanbooks above £100m at the end of last

year. That has increased to eight out of 10 after LendingCrowd's loanbook increased to £102.7m so far this year. Meanwhile, three platforms are now above the £200m mark – Assetz, CrowdProperty and Folk2Folk – while Invest & Fund is expected to reach the £200m milestone by the end of June and Kuflink is hot on its heels. “The sector continues to be spread across

consumer, small business and property loans with an emerging bias towards property lending in the top 10,” Mike Carter, head of platform lending for the 36H Group, said. “Historical returns have been broadly comparable for each of these asset classes. “Growth prospects remain very positive for P2P platforms in common with the wider alternative lending sector.”

Assetz Capital, which has the largest retailbacked P2P loanbook at £1.4bn, has facilitated £7.8m so far this year, according to its loanbook statistics. That compares with £27m lent out last year and £47m the year before, reflecting Assetz Capital’s involvement in the government's coronavirus business interruption loan scheme (CBILS). In second place, Folk2Folk had a cumulative loanbook of £508m at the end of 2021 and that has now grown to £536.5m. And taking the last place in the top three, CrowdProperty investors have backed £45.4m of loans so far this year, taking its cumulative lending figure to £261.6m compared with the £178m quoted by the 36H Group in 2021. The platform lent £86m last year, so is on track to more than double that figure at the current rate of lending. Other P2P firms >> 4

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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.

ere at P2PFN towers, we all know that the peer-to-peer lending industry is going from strength to strength, but the wider public may need a little more information to be convinced. This is where data should come in, to back up the sector’s reports of stellar performance – but it is notably absent. Some platforms publish individual loanbook data on their websites and the 36H Group has started compiling top 10 rankings, but there is not a comprehensive resource to illustrate total annual lending and default rates, for example. This is an area we are looking to research and develop more closely this year, following our recent, exclusive Innovative Finance ISA statistics that featured both in this magazine and newspaper City AM. I’d like to ask all P2P stakeholders what sort of data they’d like to see (on an industry-wide basis) and for platforms, whether you’d participate in our data collection. Feel free to email me personally at suzie@p2pfinancenews.co.uk.

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

cont. from page 1 in the top 10 rankings have demonstrated strong growth this year to date. Invest & Fund’s cumulative lending has risen from £161m at the end of last year to £175m and a spokesperson said the platform is poised to hit the £200m mark at the end of its accounting year in June.

Invest & Fund is competing with Kuflink for fourth place. Kuflink has now lent out £174m to date, compared to £156m at the end of last year. ArchOver had cumulatively lent out £147m at the end of the year but its company website’s statistics page showed it has now grown

to £152.9m, suggesting almost £6m of lending so far in 2022. Proplend’s cumulative lending has risen from £145m to £158.7m, while LendingCrowd’s lending to date has risen from £89m to £102.7m. Relendex has seen its lending grow from £82m at the end of 2021

to £89m in February, according to its most recently available data. HNW Lending is the only one of the top 10 to report flat lending volumes over the comparative period, of £106m, but said its dealflow is likely to improve over the rest of the year.

P2P property lenders pioneer green change PEER-TO-PEER property lenders have been on an eco-crusade in recent months, introducing a series of environmental policies designed to offset the impact of their property development projects. Proplend has announced that it plans to become carbon neutral by the end of this year by offsetting 100 per cent of its annual emissions through the replanting of trees. Kuflink expects to reach its net zero carbon goal by 31 January 2023 by migrating its systems to the cloud and automating as much as possible, as well as funding green innovation in property developments. Meanwhile, CrowdProperty has pledged to reduce its carbon emissions, and is looking at how it can revise its lending

facilities to reward those developers who adopt sustainable measures. And Assetz Capital is reducing its carbon footprint by adopting new eco-friendly methods of construction. Property development is known to be a key contributor to carbon emissions, and the world is waking up to the necessity of net zero economies. According to a report by Savills, the built environment is responsible for almost 40 per cent of the world’s energy and related emissions. Similarly, the 2020 Global

Status report for Buildings and Construction found that real estate is responsible for 38 per cent of global CO2 emissions. From supply chain pressures to greenfield disruption, property developers have been in the crosshairs of environmental campaigners for many years. And while there has been a notable shift towards environmentally friendly construction methods in recent years, progress has been slow. However, P2P property development platforms are well-positioned to

pioneer carbon-offsetting projects and carbonsaving construction techniques. P2P platforms are smaller and more flexible than mainstream lenders, and they tend to have a much closer relationship with their borrowers, setting key milestones for each development and making regular site visits for the duration of the project. This means that any potential environmental issues can be identified early, and solutions can be implemented as quickly as possible. Furthermore, by making use of new green construction methods and technologies, these platforms can set an example to other property lenders on how to effectively green their own property development portfolios.

NEWS

CP Capital opens to HNW and sophisticated investors CROWDPROPERTY has decided to open its new mezzanine finance product to high-net-worth (HNW) and sophisticated investors only, as it is a “higher risk product” that is not suitable for retail investors. The peer-to-peer residential development lender launched CP Capital at the end of March to provide second charge finance to property developers and it was initially funded by private sources of capital.

CrowdProperty’s original offering of first charge development finance projects is still open to retail investors. Chief executive Mike Bristow said the decision to restrict CP Capital to HNW and sophisticated investors was a business decision, rather than a regulatory one. “Mezzanine finance is a higher risk product and requires closer inspection and understanding of the loan and the asset class,” he told Peer2Peer

Finance News. “We chose to restrict that availability to that market, so we are very comfortable that our investors understand the additional risks associated with mezzanine finance and the loan itself and review that carefully. “Retail investors can invest in CrowdProperty but not CP Capital. It’s our decision and proposition and not a regulatory requirement, it’s just we’ve targeted that product at that market.”

Bristow said CP Capital was launched in response to customer demand and seeing that the existing mezzanine market is poorly served. CrowdProperty only provides CP Capital mezzanine finance for loans where it has already provided the first charge. Bristow said this can save developers time and money as they have one single point of contact and single valuation, monitoring and legal fees.

CapitalRise expands lending radius beyond prime central London CAPITALRISE has expanded its remit to invest in properties outside prime central London postcodes. The property investment platform is now offering opportunities for property developments in prime outer London and the Home Counties, alongside its existing portfolio of properties in desirable central London neighbourhoods such as Belgravia and Chelsea. “We have been moving into prime outer London areas to expand our offering,” said Uma Rajah (pictured), co-founder and chief executive of CapitalRise. “We are confident in our strategy for the

business and will continue to take a consistent approach, only lending to experienced borrowers on high quality real estate in the right locations with realistic valuations, while increasing the volume and size of our loans to feed the ever-growing investor appetite.”

Over the past few months, CapitalRise has funded loans on properties located in Hampshire, Surrey, Oxford and Colchester. At the time of writing, the platform had also listed upcoming investments for two properties, one in Hove and one in the

prime outer London neighbourhood of Hampstead. Rajah added that the platform is continuing to scale and has increased its headcount by 25 per cent over the past year, with more new hires planned. “We’ve been doing a lot of work on the borrower side, and we’re continuing to grow the team to support the growing loanbook that we’ve got,” she said. Between April 2016 and April 2022, CapitalRise has originated £162m in property-backed loans, against properties which have a total value of £572m. £93m has been repaid to investors, with zero defaults or losses.

NEWS

HNW Lending mulls open banking HNW LENDING is considering a move into open banking in order to provide better underwriting services to borrowers. Chief executive Ben Shaw said the peer-topeer lending platform is looking at the datasharing initiative to see more information from borrowers in order to better assess them. “Open banking from what I understand offers the opportunity to look

at the bank accounts of borrowers to see a bit better what payments are there, and if they have a good track record,” he said. “So it might help make a more informed decision

particularly as to whether they can service your loan.” Shaw said that HNW Lending has not written as many deals this year as it did in 2021, and has only managed to meet

investor demand, as the bridging sector has been very competitive with many lenders offering cheap money. He said that he expects to see downward pressure on the property market as a result of inflation, the cost-of-living crisis and rising interest rates. “Lenders need to be aware of this risk given inflation and the inevitable knock-on to other parts of the economy," Shaw said.

Are IFISAs an affordable alternative to SIPPs? PEER-TO-PEER investors can use an Innovative Finance ISA (IFISA) or in some cases a self-invested personal pension to earn returns on their P2P loans tax-free. But in most cases, an IFISA may be a more affordable route. Here are the main differences between the tax wrappers for P2P investors.

Minimum investment Investors can set up an IFISA with as little as £100 and you can use up to £20,000 of your ISA allowance per financial year. While the annual pension contribution allowance is more generous at £40,000, Neil Faulkner of

P2P analyst 4th Way warns that SIPP P2P investors may need £50,000 to £100,000 to start with. Choice There are around 40 P2P lending and crowd bond platforms that will let investors open an IFISA. This covers a variety of loans such as consumer, business and property finance. In contrast, only a handful of P2P lenders provide P2P pensions in the form of SIPPs or small self-administered schemes. These include Ablrate, CrowdProperty and Proplend. SIPP provider Morgan Lloyd is the main firm working with P2P lenders but others have steered clear due to worries over

connected party rules, where platforms need to be sure that investors aren’t also benefiting from loans they are backing. A SIPP provider also has to hold more capital to reflect non-standard assets, which Brian Bennis, of pensions website SIPPclub, says has become a deterrent. “The market for P2P in a SIPP collapsed in 2016 when the FCA changed the capital adequacy rules for SIPP operators,” he said. IFISA providers have no such restrictions. Demand There is nothing stopping an investor holding a general P2P investment account to put towards their retirement savings

but demand appears to be stronger for IFISAs rather than SIPPS. Brian Bartaby of Proplend said only around 15 per cent of the platform’s loanbook comes through its pension product. Faulkner cites platforms who report that few people are interested in P2P lending through their SIPP wrappers. “Most likely, this is because it's a group within a niche: the very wealthy who also happen to want to do P2P lending,” he said. “IFISAs come at no additional cost, no additional lengthy due diligence and with relatively little additional red-tape when compared to ordinary P2P lending accounts.”

NEWS

Funding Empire shuts down four years after Downing acquisition FORMER peer-to-peer lending platform Funding Empire has applied to have its regulatory permissions cancelled, just four years after the business lender was acquired by Downing. According to a note on the Financial Conduct Authority’s (FCA) register, Funding Empire asked to cancel its FCA authorisation on 30 November 2021. The request is still pending. However, the Funding

Empire website is no longer active. Funding Empire was launched as the first crowdfunding platform in Wales in 2012. It stopped new lending in 2016 following a management buyout by its senior executives while they awaited full FCA regulation. However, Downing – the parent company of Downing Crowd – made an offer to purchase the platform in 2017, and the

takeover was approved in 2018. Downing had previously adopted Funding Empire’s technology in October 2016, and had also worked with the founders, Parag Patel, Jon Levy and Dinesh Patel, to launch Downing Crowd’s own in-house investment platform. According to LinkedIn, Parag Patel went on to become investor relationship director at Downing, but left the

company in February 2022 and is now head of strategic delivery at Pepper Money. Levy took a position as head of software engineering at Downing, before leaving in March 2022 to become a project manager at crypto platform BlockFi. Only Dinesh Patel remains at Downing, as director of technology. Funding Empire and Downing have been contacted for comment.

Tax change will allow Shariah-compliant IFISAs PROPOSED changes to ISA rules will enable the launch of Shariah-compliant Innovative Finance ISAs (IFISAs). HMRC has recently consulted on widening the scope of tax legislation for alternative finance arrangements, to include Shariahcompliant products. And last month, City minister John Glen said that proposed rule changes will aid the growth of the Islamic finance industry in the UK, while correcting the “less favourable tax treatment” that accompanies Shariah-compliant peer-to-peer investments. Speaking about the draft Alternative Finance Order 2022 in parliament, Glen said it is likely that changes will be made to

ISA regulations to ensure that alternative finance arrangements can qualify for inclusion in IFISAs. “Lenders and borrowers entering certain finance arrangements through Shariah-compliant P2P platforms also face less favourable tax treatment, which means that home purchase plans provided by FCA-regulated providers, and certain alternative finance arrangements facilitated by an FCA-regulated P2P platform, are on an unequal tax footing with similar products provided by financial institutions and conventional P2P lending,” Glen said. “The changes made by the draft order will allow both of those types of firms to access the alternative finance arrangements

provisions for the purposes of income tax, capital gains tax and corporation tax. “I sincerely believe that this order will help to level the playing field for those products and will aid the Islamic finance industry to move forward in the UK, and continue to develop, to cement our reputation as global leaders in this area.” Shariah-compliant finance is based on Islamic rules where interest-based loans are prohibited. Instead of a traditional loan agreement, the borrower, known as a buyer, and investor agree a deferred purchase and sell a debt obligation based on an agreed cost and mark-up of a specified commodity. The first directly authorised Shariah-

compliant P2P lending platform, Nester, launched to all investors in April. It had previously lobbied HMRC to change its tax rules to accommodate Shariah-compliant IFISAs. Youness Abidou, founder and chief executive of Nester, welcomed the upcoming tax change and said this will allow Nester to launch its own IFISA. “This is the first big step forward for Islamic finance in the fintech space,” he said. “We are extremely pleased that HMRC and the Treasury are continuing to support the Islamic finance industry in the UK and supporting Nester's innovative products. The IFISA will be integral in the next phase of Nester’s growth.”

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JOINT VENTURE

IFISA is a “complementary foil” to rising inflation

OLK2FOLK HAS HAILED the Innovative Finance ISA (IFISA) as a “complementary foil” to the volatility of stocks and shares ISAs and the low rates being offered by cash ISA providers. As one of the largest IFISA providers in the UK, Folk2Folk has seen first hand the growing demand for the tax wrapper. Roy Warren (pictured), managing director of Folk2Folk, says that yield-seeking investors are increasingly seeking out a new home for their ISA funds. The platform has been receiving a lot of ISA transfers – not just from other IFISA providers, but from cash ISAs and stocks and shares ISAs as well. “Cash ISAs offer a low return, nowhere near current levels of inflation, and so the reality is your money is losing value against inflation over the longer term,” explains Warren. “Unlike stocks and shares, an IFISA investment is typically more stable because it is invested in a single asset type with a fixed rate of return. An IFISA focuses on producing income rather than capital growth and can be a complementary foil to a cash or stocks and shares ISA.” Warren notes that the IFISA is the “sensible choice for now” as cash ISAs are unable to compete with the rising rate of inflation. By contrast, many IFISAs can offer inflation-beating interest rates, including Folk2Folk’s IFISA which has historically paid out 6.5 per cent per annum. However, Warren adds that investors should always ensure that they take the time to perform thorough due diligence on their

IFISA provider before transferring their funds. “The health and governance of the business is an essential consideration,” he says. “Is the platform authorised and regulated by the Financial Conduct Authority? Is the platform profitable and stable? What plans are in place in case the platform fails? How safe is your cash when it’s not invested? Is the platform transparent? Do they provide unambiguous answers to your questions? What are the costs of investing via the platform? “It’s also worth looking at the people who run the business,” Warren adds. “Do they appear focused on building a sustainable business or just quickly growing market share? Do they have the financial expertise to assess loan risk - is this done by people or algorithms?” Investors should also look at the track record of the business – how long has it been running, and what is its track record of losses, both as a percentage of the loanbook and amount of loss? Prospective investors should also look into the

level of liquidity that comes with their chosen platform in order to work out how accessible their money might be if they needed to access it in an emergency. “The IFISA is one of the newer and lesser-known types of ISA but is gaining greater prominence as a very attractive alternative or complement to cash ISAs and stocks and shares ISAs,” says Warren. “Like other ISAs, the main benefit of an IFISA is that there is no tax on the income you earn, and it doesn’t need to be declared on your tax return, so from an administrative point of view it’s a good place to hold your savings. Money can be withdrawn at any time without any tax penalties, and you can invest up to £20,000 per year. “In addition, your IFISA investment, if invested via a platform like Folk2Folk, is invested into a loan which is secured against the tangible assets of land or property. While there is never any guarantee and capital is at risk, this secured element provides what is essentially a measured safety net for your investment.”

INSTITUTIONAL INVESTMENT

Big fish, small pond

Institutional investment is changing the P2P lending landscape. Michael Lloyd investigates the growing role of institutional money in P2P, and how to catch that big fish…

NSTITUTIONAL INVESTORS are the big fish of the peer-to-peer investor community. While retail lenders can back their chosen P2P platform with as little as £10, institutional investors such as family offices, venture capital firms, investment groups, asset managers or banks can afford to invest millions, even tens of millions to back new lending and aid platform growth. As the P2P sector matures, more and more institutional investors

have begun to express an interest in backing P2P loans through partnerships with P2P platforms. A raft of institutions have already invested in the sector, including Aros Kapital, Fasanara Capital and Varengold Bank, as well as a number of anonymous private investors. Amid an ongoing regulatory crackdown on retail investing criteria, institutional investors have become a more attractive prospect for P2P platforms. Platforms may seek funds to aid their expansion plans, and typically agree funding

lines with institutional partners to commit to finance loans on the platform, which then allows the platform to plan its growth. Generally speaking, the balance of money in the P2P space is steadily shifting away from retail and towards institutions as platforms mature and regulation tightens. The new ‘big three’ of the largest platforms, Assetz Capital, which has lent £1.4bn to date, Folk2Folk, which has deployed over £500m, and CrowdProperty, which has cumulative lending of

INSTITUTIONAL INVESTMENT

“

Institutions look for a platform that’s growing, has their own niche in terms of the type of transactions they’re doing, has found a sufficient way of deploying capital and has contacts in their space more than £250m, have all taken institutional funds. Institutional funds also provide certainty of funding. While retail money is generally stickier, it is difficult to attract and maintain, particularly when there are so many marketing restrictions around any product aimed at a consumer audience. Some platforms have even left the retail space entirely in favour of institutional funding, such as Funding Circle, Landbay, LendInvest and ThinCats. All things considered, it is easy to see why so many platforms have been courting institutional money in recent years. But in order to catch these big fish, platforms must know what institutions look for. In conversations with Peer2Peer Finance News, both P2P lending platforms and institutional investors described an extensive due diligence process in which institutions look for predictability of returns, an excellent track record, scalability, a good risk-reward balance, and the ability to deploy lots of capital. They also examine the origination process, credit performance, risk management and quality of the management team as well as checking that all the required compliance procedures are adhered to. Folk2Folk, which is in discussions with several institutional partners

”

including insurance companies, challenger banks, asset managers and local authorities, describes this process as a “comprehensive analysis of the platform”. “Their particular focus is on processes and procedures and ensuring all the checks and balances are in place,” a spokesperson from the platform says. Allison Harwood, head of the London branch of Varengold Bank, which has invested in alternative lenders such as EstateGuru, Assetz Capital, MarketFinance and LendInvest, says the bank’s criteria for investment is no different when it comes to P2P lending platforms.

She says the bank does not favour one loan type over another and before onboarding with a platform, Varengold will send a lengthy due diligence questionnaire. It will also scrutinise a host of supporting materials including the loanbook, and will conduct a series of interviews with the senior management team. “Track record is the core part of due diligence, and the loanbook is core to getting the feel of loans the platform is originating,” she says. “I wouldn’t say we particularly favour one thing over another. We like increasing access to financing, we like low-risk lending, things like property-backed lending, depending on how it’s done. If it’s low loan-to-value bridge lending it’s good from the risk perspective. If it’s prime consumer unsecured lending, your risk is very low. It depends on the book.” Harwood adds that the due diligence process needs to be extended to cater for the P2P element which presents a “little

INSTITUTIONAL INVESTMENT

more operational risk” for an institutional investor. “An example could be if they don’t manage the retail side of the platform properly, the Financial Conduct Authority could take away their P2P licence for something entirely unrelated to the institutional side of things,” she says. “It’s a very nuclear thing to have the licence taken away, it would likely mean the platform collapses or is indicative they are not doing something right elsewhere. There is quite a lot to deal with making sure they are handling the P2P side of things right.” Will Senbanjo, partner at ACP Altenburg Advisory, a firm which advises platforms looking to raise debt finance from institutions, says that institutions look for growing platforms that present efficient ways of investing a portion of their large pool of capital. He says institutions search for platforms that have a strong track record, and he always ensures that there is no conflict between them and retail investors, by either investing alongside them or by making their investment via a special purpose vehicle. “Institutions look for a platform that’s growing, has their own niche in terms of the type of transactions they’re doing, has found a sufficient way of deploying capital and has contacts in their space,” Senbanjo says. While smaller platforms can attract smaller funding lines and Harwood says Varengold has even funded some lenders pre-launch, industry stakeholders believe that it gets easier for platforms to receive institutional funding after their total historical lending has reached the low tens of millions. However, to seek a securitisation

“ Institutional is shortterm money while the crowd is sticky longterm money

”

- which can aid future growth through cheaper funding platforms do need to be a lot larger. It is notable that the only UK platforms large enough to have completed securitisations are former P2P giants Zopa, LendInvest

and Funding Circle. “The larger you get, the cheaper the cost of funding is,” says Senbanjo. “I see it as a funding journey from using family and friends money, high-net-worth money, venture capital or debt, which could be high costs and over a period of time, to getting funding at a lower cost. But the challenge is always between showing you’re large enough and have strong enough growth prospects to attract the lower cost of capital, and being able to deploy it.” In order to further hedge against the perceived risk of a P2P investment, institutions may add

INSTITUTIONAL INVESTMENT

Institutional investors that have invested in P2P Aros Kapital Aros Kapital is a Nordic financing provider which has signed two funding lines with peer-to-peer lending platform Assetz Capital worth £1bn in total, and another €100m (£85.2m) with Irish P2P platform Property Bridges. Fasanara Capital Fasanara Capital is a London-based asset manager that has previously invested in UK P2P platforms including Fund Ourselves. Lagan Investments Lagan Investments is a Belfast-based investment group that has provided up to €5m in additional lending capital to support new housing projects from Property Bridges. Starling Bank The digital bank has previously revealed that the vast majority of its coronavirus business interruption loan scheme funding was deployed to small firms through its Funding Circle partnership. Varengold Bank The German bank is an avid backer of P2P and alternative lending platforms and has had funding agreements with several including EstateGuru, Assetz Capital, MarketFinance and LendInvest.

extra terms and conditions, such as the ability to choose from particular tranches of loans, or having the platform take the first loss. “If it meets the criteria, it will automatically be funded by the institutional investor,” says Senbanjo. “Some funders will fund a higher proportion than others. Most of these institutions want to fund on a senior basis.” Varengold’s Harwood says platforms should ensure they have their ducks in a row before speaking to new institutional investors. This includes having up-

to-date processes and documents, including their financial forecasts, management accounts, loanbook and performance statistics, that can be quickly and easily presented. “Do some prep beforehand and go out and speak to as many investors as possible, maybe engage an adviser if you don’t have someone with in-house experience,” she says. Stakeholders and institutions see P2P lending platforms as attractive and believe investment in the sector will continue to rise. On the other end of the spectrum, some platforms have grown to considerable scale without much or any institutional lending. These include Kuflink, Relendex, Crowdstacker, LandlordInvest, Invest & Fund, HNW Lending and Loanpad, which all maintain they do not have any institutional investors and

have instead relied upon retail and high-net-worth investors. Several platforms go so far as to oppose institutional funds completely. JustUs chief executive Lee Birkett says platforms that leave retail for institutional money only “lose their value in our opinion”. “Institutional is short-term money while the crowd is sticky long-term money,” he adds. Institutional investment will continue to find a home in P2P lending platforms, but it is by no means necessary for a platform’s growth. P2P platforms must keep growing and showcasing their impressive origination model and loanbook track record in order to attract funds. If they continue scaling and showing their strengths, more money is likely to start moving towards the sector.

JOINT VENTURE

Kuflink eyes June launch for BTL lending product

UFLINK WILL LAUNCH its first ever buy-to-let (BTL) lending product by the end of June 2022, as the peer-topeer lending platform prepares to expand its offering even further. Narinder Khattoare (pictured), chief executive of Kuflink, describes the BTL product as “a natural progression” for the firm, which specialises in propertybacked P2P lending. “We have funded a substantial amount of development loans over the last two years,” he says. “BTL is a natural progression as our borrowers have asked more about this over the past 12 months.” Initially, the BTL product will only be offered to mature borrowers, before being rolled out to the wider market. Three-year and five-year loan terms will be offered, with borrower rates initially set at 4.99 per cent and 6.99 per cent, respectively. Investor returns have yet to be confirmed. “We're not going to be the cheapest or the most expensive,” says Khattoare. “But we're a business that is agile and able to move the rates and our offering in the market place swiftly as we are not institutionally funded.” Kuflink’s borrowers have also expressed a growing interest in mezzanine loans, and in response to this demand, the platform quietly rolled out a new mezzanine facility recently to existing clients. Khattoare adds that it was always Kuflink’s intention to expand its

loan offering and add mezzanine and BTL products, but “the development of our investment platform has taken precedent over this to continue offering the great experience and user interaction we have for our investors.” This is just the beginning of Kuflink’s scale-up. Khattoare hints at a number of new product launches on the horizon, including IFISA-friendly loans and lending in new areas. “We need to be able to deliver on our service standards and only when we are happy with that, will we consider other products,” he adds. “We have a very good inflow of bridging and development enquiries that come through and a great team here that help get these over the line. That allows the team some capacity to work on other projects that can

further enhance the Kuflink offering in the marketplace.” To date, almost £200m has been invested in Kuflink’s loanbook, funding thousands of property developments along the way. Not a single lender has lost a penny of their money to date. Khattoare wants to build on this strong track record to make Kuflink one of the largest P2P lenders in the UK within the next few years. More product launches are planned for the months ahead, and Khattoare has already begun to hire new people to handle the new business. “There are always challenges in launching new products,” he says. “But we’re confident it will go well and that there is a place for our offering in the market.”

BRIDGING FINANCE

Bridging the gap

There has never been more demand for bridging loans, and peer-to-peer lending platforms are ready to rise to the challenge. Michael Lloyd reports…

HE BRIDGING LENDING sector achieved a record quarter last year. According to the latest data from the Association of Short Term Lenders (ASTL), in the last quarter of 2021 applications for bridging finance reached £12.7bn, while the value of completions hit an all-time high of £1.2bn. These figures tell us everything we need to know about the demand for bridge lending products, and the urgency with which bridging

finance is required in the postpandemic, post-Brexit economy. “The bridging market is continuing the momentum it has built coming out of the pandemic and there seems to be little sign of slowdown in the number of new enquiries that are hitting lenders and brokers,” says Vic Jannels, chief executive of the ASTL. “Current indications from the market are that this growth trend is continuing.” For peer-to-peer property

lenders, there has never been a better time to branch out into bridging finance – and many are doing just that. Around a third of all UK-based P2P platforms currently offer bridging solutions. Bridging loans are short-term loans that ‘bridge’ the gap between two transactions, for instance, to facilitate a smooth transition from one property development project to another. P2P lending platforms are a good fit for bridging as they are quick

BRIDGING FINANCE

and flexible and look at deals on a case-by-case basis so developers are more likely to get approved for finance if they have been turned down for funding elsewhere. More importantly, the speed of P2P credit decisions means that borrowers can receive their funds quickly, which is vital for bridging finance.

“Most small- and medium-sized enterprise developers do some form of bridging.” The bridging sector’s growth can also be explained by increasing awareness of the product and more developers requiring short-term loans to combat difficult conditions. Brexit, the pandemic and war

“ The bridging market is continuing

the momentum it has built coming out of the pandemic In fact, some P2P platforms started life as bridging lenders, before diversifying into other areas such as property development finance. Kuflink is a former bridging lender turned P2P brand, and offers bridging loans which are suitable for residential, commercial, semicommercial and auction purposes. It can offer a decision in principle to borrowers within two hours. “We're still seeing a fair bit of development, but we are trying to do more bridging as I think more brokers have seen us as a development lender due to the volume we have done over the past 18 months,” says Narinder Khattoare, chief executive of Kuflink. “We like both but to get more bridging deals for us will be even better.” At least 16 P2P lenders now offer bridging services to borrowers, ready to take advantage of a growing marketplace. “Property market demand is strong, new build property demand is strong, the housing crisis means we’re a million houses behind what’s needed,” says Lee Birkett, chief executive of P2P bridging lending platform, JustUs.

”

in Ukraine are all impacting supply chains and adding to rising inflation, while the price of building materials continues to climb. However, P2P bridging and development lending platform Invest & Fund says that these are mostly logistical issues and a good bridging product can provide practical help for developers to navigate these challenges.

“We believe the market is healthy, and we will continue to assist clients with these facilities at an ever-growing rate,” the spokesperson adds. Most P2P property lenders provide bridging loans. This includes all of the new ‘big three’ - Assetz Capital, which has lent £1.4bn to date, Folk2Folk, with cumulative lending of £536.5m and CrowdProperty, which has deployed £261.6m. In many ways, P2P and bridging finance make perfect sense together. Both specialise in offering shortterm asset-backed lending with a quick turnaround of capital. P2P platforms have excellent underwriting processes which can deliver quick credit decisions with minimal risk. The decision-making process can be made even faster when fintech solutions are deployed. JustUs uses open banking to better assess a borrower’s affordability, and Peer2Peer Finance News

BRIDGING FINANCE

understands that HNW Lending is currently looking at the datasharing initiative to view the track record of borrowers and make more informed credit decisions. Speed is of the essence for bridging borrowers and P2P platforms are quicker, nimbler and more flexible than traditional highstreet banks which can take up to six months to approve a short-term finance loan. “Platforms can take a commonsense view, not a credit score, whereas a bank will just have a ‘computer says no’ answer,” says Birkett. “P2P platforms are faster, better, more efficient, nimbler and more personal and flexible.” However, despite the P2P sector being well-placed to service bridging borrowers, the sector is becoming quite competitive. Assetz Capital’s chief executive Stuart Law says the cost of funding has “collapsed” for bridging while the number of lenders continues to rise. “The number of competitors has gone through the roof, and there’s more and more institutional demand wanting to invest in bridging and loan values are going up,” he says. “There’s too much money chasing too few investments and bridging is one of the big recipients of that money.” Ben Shaw, chief executive of HNW Lending, says that his P2P property lending platform has struggled to compete with many lenders offering cheap money and hence has not completed as many loans.

“It’s not easy at the moment, there’s a lot of money out there facing a limited number of deals and we pay commissions to our brokers, so they want to come back to us,” he says. “It’s a tricky market, we’ve not written as many deals this year as we would have liked. But we also have borrowers who used us before coming back to us. “We’re doing the best we can do, but it is a more competitive market. I think we’re pretty much managing

“ Most small- and medium-sized enterprise developers do some form of bridging”

to satisfy investor demand, but we’re not expanding the loanbook in a way I would have thought all things being equal.” In a saturated bridging market, platforms will be forced to adapt and carve out their niche. Some do this by working only with experienced developers to minimise risks, while others focus on offering lower-cost senior funding to their lender partners, and other platforms are opting to make their existing products more flexible and accessible. LandlordInvest’s co-founder Filip Karadaghi says that his platform differentiates itself from others by offering a whole suite of products,

BRIDGING FINANCE

“ Bridging will

become a more important segment in P2P over the coming year

”

from first charge bridging loans to mezzanine finance. “Most bridging lenders are restricted in what they do, such as residential, or commercial or loan size,” he says. Meanwhile, Kuflink’s Khattoare says that his platform does not compete on rates and instead is in it for the “long haul”. “We've never been the cheapest or the dearest, we always work on service and referrals,” he says. “We've always had a good presence. Unlike other lenders who become flush with funds, and lend out quickly without doing real due diligence, we're in it for the long haul.”

For savvy platforms, there are a number of emerging opportunities to build their presence in the UK’s bridging market. Traditional lenders are pulling back their funding and taking a lower risk approach due to the rise in interest rates and inflation meaning the risk of default is higher. JustUs’ Birkett believes that bridging lenders will not move into P2P lending because of “tight regulations” but he says that it makes “viable and perfect sense” for more P2P platforms to move into bridging. “We’re expecting an increase in demand as banks tighten their credit scores and the property market

remains buoyant still,” he says. “Bridging will become a more important segment in P2P over the coming year. We've already seen buy-to-let funding lines being tightened, bridging funding lines will start to tighten up so that gives an opportunity for more P2P platforms.” However, bridging is still not for every P2P property lending platform. Relendex is one such lender – it focuses on development finance and only does the odd “incidental” bridging deal. Executive chairman Paul Sonabend says that the platform works with professional developers and housebuilders and only provides bridging to create and maintain long-term relationships. “We will give an established client a bridge loan and might give one to a new client if we see it as a way to create a longer-term relationship, but that is the extent of our activity in the bridge market,” he adds. While there is no shortage of challenges, the fact remains that more than a third of all UK P2P platforms now offer some form of bridging finance. While for some it still remains a bridge too far, a rising number of P2P platforms are ready to capitalise on the significant opportunities available as the country gets back to work and starts building again.

PROFILE

Making an impact

Lendwise chief executive Rishi Zaveri explains how his education finance platform filled a gap in the market

ENDWISE LAUNCHED in 2018 as a peer-to-peer lending platform specialising in education loans. It was founded by Rishi Zaveri, Ioannis Georgiou, Kypros Mouzouros and Evangelos Skianis, all of whom wanted to use their experience working in banking and technology to improve access to education and help people fund graduate studies. More than four years on, the platform has also launched the first education-backed Innovative Finance ISA (IFISA). Zaveri explains the role the platform can play to Marc Shoffman. Marc Shoffman (MS): What have been your highlights since launch? Rishi Zaveri (RZ): The highlight has been the take-up from the borrower’s perspective, as well as the ability to bring this impact investment category to our lenders who are able to earn a positive return whilst making a real difference to people’s lives through the power of education. We exist to enable access to education and the rate at which our borrowers have increased has had a great impact. Individuals are able to improve their salary and career progression through education as a method of upskilling or even re-skilling. The way we have been accepted by borrowers and in educational institutions such as universities and business schools as well as other course providers speaks volumes for

our product, proposition and end-toend delivery. We couldn’t have that without the investors. This type of investment just isn’t available anywhere else on the retail side where you can invest in educational finance. Providing that access to the retail market has been a great thing, we have had a lot of positive feedback. MS: How did you spot the education funding gap in the market? RZ: All of the Lendwise founders had the influence of further education and understood the benefits it brought. Education can address a lot of issues in the world – it is no surprise that it is one of the UN’s sustainability measures. The higher you go in education, the better off you can be from an earnings perspective.

Banks were pulling out of unsecured lending, there wasn’t a product that was dedicated to a student, and furthermore, this type of investment exposure was not available in the retail market. Our investment process is different. We don’t just look at an applicant’s credit score, we also consider a range of education-related variables. We all have a background in finance and banking but we wanted to do something entrepreneurial as well and to find a way to make an impact. You can solve a lot of the world’s ailments through education. MS: Who are your typical borrowers? RZ: We have a big stable of UK borrowers. For certain universities we will look at overseas nationals both in the UK and abroad.

PROFILE

The dynamics of that question are based on where you get government funding and the need to fill any gaps. For example, a graduate diploma in law isn’t an MSC or masters so you can’t get a government loan on that. You also can’t get a second government loan if you want to do another MA after already completing one. It isn’t for us to say who should study what and we aren’t elitist. We are not funding undergraduate courses but we do professional qualifications and short training courses, which are becoming more popular. These can be expensive, ranging between £5,000 to £10,000, such as bootcamps that train you in areas such as IT and software coding. MS: Are you worried about dropouts? RZ: Dropouts happen but we aren’t particularly worried. Our process identifies individuals who are high achievers. Nobody takes a post grad course unless they want to so you are already ticking the driven box. MS: How has your loanbook grown this year? RZ: Our loanbook has already gone beyond the £25m mark. We have some loans that can be as high as £100,000. We have a strict policy of 90 days in arrears for defaults and have 1.6 per cent of the gross loanbook in default. Of that default number, a larger number are just behind and may still end up repaying. We find our borrowers are driven and want to repay but people can have problems. Nobody wants to be chasing or be chased so it is about engagement.

MS: Are you worried about the cost of living crisis hitting demand? RZ: I am not overly concerned but we are mindful of it. Statistically it can be seen that individuals with postgraduate education earn significantly more over their lifetime. There is an argument that now is a good time to increase your skills and move ahead in your career to cope with the higher costs. MS: How have you navigated the pandemic? RZ: We were very prudent in our approach and weren’t impacted too much. We allowed payment holidays, especially where courses were delayed, which meant people couldn’t graduate or get a job to repay the loan. MS: How are you sourcing borrowers? RZ: Our main areas are referrals – we do well from Trustpilot reviews. Our delivery end-to-end is something we pay a lot of attention to. We are becoming accepted into the academic community and can be found on noticeboards, in business schools and on university websites. We also have offline routes such as postgraduate fairs. MS: Are you worried about future Financial Conduct Authority (FCA) regulations? RZ: My view has always been that we want the right kind of investor on the platform and that is what the FCA is trying to do. We want to avoid the wrong type of investor who doesn’t understand the risks. The sector hasn’t been helped by bad operators but every industry has those who operate below the line. P2P holds a place in an investment portfolio. The rules should never

be so prohibitive that the industry cannot attract investors. MS: How was the reception to your IFISA launch? RZ: Our IFISA has been very popular. It’s early days, but uptake has been great. From a pooled loan exposure on our platform you are making, on average, up to nine per cent returns. Our platform is slightly different to other consumer loan platforms as you define your own risk pool. Each loan is shown individually and you can create your own portfolio and risk level. If you couple that with the different type of exposure and the impact investment, it is very attractive. MS: What is your view on Zopa’s and Funding Circle’s P2P exits? RZ: They left for their own business reasons. If the message that’s gone out is that it is something to do with the P2P lending concept then that's incorrect. It was a commercial decision. Only a small amount of Funding Circle’s lending was retail and Zopa was getting its money from retail deposits so it was a natural evolution for them. P2P lending has a vital role to play. It's important for us to make sure we fulfil our mission. We want to enable access to education. As long as we can convince people to do it through retail means then there is no need to go elsewhere. MS: What are your plans for the year ahead? RZ: Our plan for this year is to continue to grow, continue to provide market-beating returns and make more people aware of our offering.