Peer2Peer Finance News September 2020 by Alternative Credit Investor

UNDER DEVELOPMENT

New opportunities in the P2P property market

INSTITUTIONAL INTEREST

>> 26

City funding in the time of Covid-19

Invest & Fund’s David Turner on property and the pandemic >>

ISSUE 48 | SEPTEMBER 2020

P2P lenders seek City funding amid mini-bond clampdown PEER-TO-PEER lenders are being pushed towards institutional funding to boost liquidity, as the regulator’s crackdown on mini-bonds leads to caution among retail investors in the wider alternative finance industry. The Financial Conduct Authority (FCA) is planning to make a ban on the marketing of mini-bonds to retail investors permanent but has also extended the proposal to include speculative illiquid securities, which could hit crowd bond providers. There are hopes that crowdfunding platforms will be exempt from the ban as they are regulated, unlike mini-bond

providers, but the move has already resulted in property P2P lender CrowdLords ceasing regulated activity as it considers its options. It was also revealed last

month that the Financial Services Compensation Scheme believes that Basset & Gold mini-bonds marketed by regulated parent company B&G Finance before its collapse

were mis-sold. Mark Turner, managing director in Duff & Phelps' compliance and regulatory consulting practice, said the FCA’s clampdown on >> 4 mini-bonds and

RateSetter acquisition may have additional value THE ACQUISITION of RateSetter by Metro Bank could be more valuable than its headline sale price suggests, industry commentators claim. It was announced last month that Metro Bank had agreed, subject to regulatory approval, to

acquire RateSetter for an initial consideration of £2.5m, with up to £9.5m to be paid out after the completion of the deal. The sale price was met with surprise by some, due to the £25m to £50m valuation predicted when the sale was first mooted

and comes after RateSetter was valued at £200m during an equity funding round in 2017. However, industry sources have suggested that RateSetter’s price tag is not indicative of the company’s full value. The platform’s latest

annual accounts, for the 12 months to March 2019, showed that it had narrowed its losses to £4.2m from £27.5m the previous year and had attracted more than £200m into its Innovative Finance ISA, making it >> 4 one of the largest

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 UKâ&#x20AC;&#x2122;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 ÂŁ1.95 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 +44 (0) 7966 180299 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.

t’s fair to say that the government’s emergency loan schemes have dominated the headlines of late. The coronavirus business interruption loan scheme (CBILS) has been a boon for accredited lenders but has been accused of distorting the market. Those lenders who are unable to participate, most likely due to their lack of institutional funding, are now on an uneven playing field with those offering government-backed loans. This is unfortunate but probably unavoidable, as government intervention to support small businesses during the pandemic was essential. With the CBILS application deadline looming at the end of the month, the question is what the government will do next. Will it extend the scheme, or as some industry figures have suggested, transform it into another programme to support small businesses? Either way, it’s obvious that the benefits of governmentguaranteed funding would be hard to give up for accredited lenders, and the economy is absolutely not in a position to justify the removal of state support entirely. But for those who aren’t participating in the government’s schemes, the eventual return to a more level playing field will surely be a welcome relief.

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 top of page 1 the way it has lumped it together with warnings about the risks of Innovative Finance ISAs could deter retail investors from P2P lending. The coronavirus crisis has also made many retail investors more cautious, which Turner said means platforms are considering institutional funding to

manage liquidity and make withdrawals easier. “When everyday investors see what the FCA is saying and they see some of the less good behaviours and failures, that no doubt causes some of them to think twice before putting money into this sector,” he said. “There are definitely

providers looking at their business models and thinking we have been reliant on retail investment and are looking for alternative funding sources such as professional investors or institutional money. “We were already seeing a shift to institutional money before and the

speed has now increased. “For certain P2P lending firms, having a stickier funding base, which maybe comes from some institutional money in the mix, enables them to manage liquidity more effectively and ride out stresses which better protects all types of investors.”

useful as it continues as an independent brand for existing users. “At a consumer level, I suspect the reaction of RateSetter customers will be largely neutral and they’ll wait and see what happens next,” Edwards said. “If there are good

amounts of cash available for investment, this provides the run time for Metro and RateSetter to consider their next steps carefully. “Product development needs more than cash, it needs good ideas and the management ability to deliver what customers really want. “RateSetter does P2P well and there is an obvious opportunity to leverage its brand and customer franchise with cross sales of Metro products or even diversification, by offering insurance or investment products, for example.” Edwards did, however, warn that “the risk of diversification is distraction” and said management must do their due diligence before “going into areas that could end up damaging the brand, not enhancing it.”

cont. from bottom of page 1 providers. The accounts also revealed that RateSetter had £18.7m of cash in the bank. Another asset is RateSetter’s 14 per cent stake in its Australian subsidiary, worth £13.7m, which could be boosted if it floats as planned. Sources cited in Australian news reports have suggested that the platform – recently rebranded as Plenti – could be valued at AUS$300m (£165m) when it goes public, which would value RateSetter’s stake at AUS$42m. John Cronin, analyst at brokerage Goodbody, said a RateSetter Australia listing or even a sale of the business could be “a source of upside for shareholders.” There could also be benefits for RateSetter’s peer-to-peer investors, although any new

unsecured loans will be solely funded by Metro Bank going forward. Neil Edwards, chief executive and founder of The Marketing Eye, an alternative finance and fintech-focused marketing agency, said RateSetter has a large and loyal customer base, which could be

NEWS

FCA under fire as investors gather new evidence of Lendy fraud THE FINANCIAL Conduct Authority (FCA) missed crucial signs that something was amiss at Lendy before the platform collapsed, investors have claimed. Members of the Lendy Action Group (LAG) have shared their anger at the regulator, after they learned that the FCA was aware of alleged selfdealing and mis-selling at the peer-to-peer property lending platform. “Throughout Lendy’s life cycle, they consistently changed their terms and conditions,” Lisa Taylor, a spokesperson for the LAG, told Peer2Peer Finance News. “People were making investments based on one set of rules and then Lendy would go back and change the rules and apply them retrospectively.” Before the platform went into administration, Lendy made a “dramatic change to the terms and conditions” regarding the way that people would get paid in the event of a wind down, according to Taylor. “Aside from the fact that Lendy should not have been able to change the rules retrospectively – the net effect was that Lendy’s closure put into effect a waterfall that would strip as much as half of all the anticipated cash recovered before it got to investors,” she said.

The LAG also believes that Lendy was selfdealing and hid details of the notes which allowed it to collect double-digit interest rates on late payments from borrowers. These payments were collected as interest, but classified as ‘third party fees’ which were not passed on to the investors who had initially funded the loans, Taylor said. “We think that we can show that what they’ve done is not legal,” said Taylor. “They did not share this information with any investors and they applied it against investors retrospectively so we couldn’t have had known that they were going to defraud us. “The truth is that the regulator should have known that the charging

of interest by a P2P firm was not permitted under their regulations, especially since the FCA had previously ordered Lendy to pay restitution for mis-selling and incorrectly structuring several loans outside of guidance.” The LAG believes that when the FCA was made aware of this fact, it mandated Lendy to make restitution to investors that were impacted. However, Lendy was allowed to select those investors who would be eligible for repayment. “The first failing was that the FCA allowed Lendy to selectively decide who they can pay,” said Taylor. “The next issue was that any lenders who accepted the restitution had to sign a

confidentiality agreement, so new investors would have had no knowledge of this fraud. “The FCA should have known that Lendy had proposed terms within their notes that said Lendy was going to collect penalty interest payments in violation of the regulations. “We believe the FCA was negligent and should have known what was going on – and could have known. “The regulator should have known that people were being defrauded. The regulator should have stepped in.” The allegations of misselling and self-dealing at Lendy are the subject of an ongoing legal action which has been funded by LAG members and a crowdfunding campaign. The LAG hopes that a successful outcome will allow investors to recoup more of their capital from the administration process, while holding Lendy’s directors – and the regulator – to account. Earlier this year, Damian Webb, lead administrator at RSM, told Peer2Peer Finance News that he supports the LAG’s attempts to gain legal clarity on the position of investors, but warned that the legal costs could become prohibitively high.

JOINT VENTURE

A day in the life of an independent monitoring surveyor Richard Sharpe, associate director at Dalbergia Group, describes a typical day working with Wellesley Finance

HEN HE IS ON A Wellesleybacked property development, Richard Sharpe, associate director at Dalbergia Group, is Wellesley Finance’s eyes and ears on the ground. As an independent monitoring surveyor, Sharpe understands the importance of on-the-ground due diligence. So, it is no surprise that just weeks after the Covid lockdown restrictions were eased, it was business as usual for both Wellesley and Dalbergia Group. This means monthly visits to construction sites and property developments, as well as frequently-updated reports, conversations with lawyers, costing assessments, and – now – enhanced health and safety checks. “As a business, we weren’t visiting sites in April or May,” he says. “So that was quite a difficult adjustment for us. Obviously funders expect us to be on site so we did a lot more on the borrower side, making sure they were sending videos and looking at everything so we could value the works. Obviously that wasn’t an ideal situation for us or the lenders as we were releasing money and nobody could be sure about the progress. “But from the middle of May we started to visit sites again, to give the lenders comfort that we are assessing and certifying what's happened on site.” As soon as construction sites were re-opened in May, Dalbergia re-commenced site visits whilst

implementing new Covid safety measures. “For the first couple of months of lockdown, there remained several key site team members on furlough – such as architects and engineers – and this slowed down the process of design development and sign off,” Sharpe says. “But sites appear to be back up to speed now. It’s back to where we were before Covid. “We’ve put a whole new risk assessment in place. We ask questions to ensure there have been no recent cases on site and to confirm safe distancing measures are in place. “That’s been the biggest change for us, because before every site visit you have to update the Covid risk assessment to align with current lockdown measures and procedures. It’s just a matter of adapting to it – it’s a new process.” Sharpe currently manages two sites for Wellesley and describes the property-backed lender as being “very hands on”.

“They like to get involved, which is quite a useful approach from our point of view because you get instant feedback,” he adds. “Everyone that we work with in the industry is committed to improving processes on site, making sure that everyone’s safe and that ultimately they can carry on working. Everyone’s putting the steps in place to make sure that we maintain a good balance of safety and progress.” Post-Covid, Sharpe expects to see a bigger emphasis on health and safety on construction sites, and this will likely slow down certain processes, at least initially. “We will also need to update the risk assessment as the schemes progress, because as the building changes, new risks develop,” says Sharpe. This new normal will keep monitoring surveyors such as Sharpe busier than ever before, while ensuring safe working conditions and protecting investors and borrowers alike.

NEWS

Investors gear up for legal action against failed Estonian platforms MORE than 2,000 investors are set to take legal action against collapsed Estonian peerto-peer lenders Envestio and Kuetzal. Both platforms have been declared bankrupt and are the subject of a fraud investigation by Estonian police. European law firm Magnusson is now representing investors in efforts to recoup up to €15m (£13.5m). “The people behind Envestio and Kuetzal have made big efforts to hide the money trail, used various shell companies in and outside of the EU, converted it to cryptocurrency and then back,” Denis Piskunov, a lawyer for Magnusson who is leading the claims, said. “It can be assumed that attempts will also

be made to obstruct or otherwise torpedo the court proceedings with fictitious claims. “Getting the money back won’t be a walk in the park, but we remain optimistic.” The legal action group is made up of 600 Kuetzal investors aiming to recoup €4m and more than 2,000 Envestio victims with €11m in

outstanding funds. Investors raised the alarm on Envestio in January after it seemingly shut down while still holding €33m (£27.87m) of their funds. Meanwhile, concerns emerged over who owns Kuetzal and who its borrowers really are. The Estonian police force has since launched a fraud investigation into the platforms. Piskunov added that the lack of harmonised crowdfunding regulation in the EU was giving rise to scammers. “At present there is no bespoke regulation in Estonia, as well as many other EU countries, pertaining to crowdfunding beyond existing law,” he said. “This has allowed crowdfunding to develop into a successful investment model, but

as the crowdfunding market has grown and more people see this as a good way to invest their savings, a need for harmonised regulation and better protection for investors has grown as well. “The lack of such regulation has definitely allowed scammers to take advantage but we don’t see crowdfunding as being especially more prone to scams. “People will always need to remain critical about with whom they trust their money and where they invest.” Harmonised regulations that introduce investor limits and appropriateness tests for investors as well as rules on who can run crowdfunding platforms are expected to be introduced in the EU next year.

Assetz Capital set to review lender fee this month ASSETZ Capital chief Stuart Law has said the platform is set to review the 0.9 per cent annual investor fee this month and aims to remove it as soon as possible. The peer-to-peer property and business lender introduced the fee at the start of May, after experiencing a substantial drop in its income as a

result of Covid-19. In June it announced that it was extending the fee for at least three months. Law told Peer2Peer Finance News that Assetz is reviewing the fee and making a decision later this month. “There’s a plan to reduce it,” Law said. “We wish to remove

it where possible and as soon as we can. “We’ll have made a decision during September and have something to announce then.” The aim is to reduce the fee – which is equivalent to 0.07 per cent per month – once the platform scales up from lending under the coronavirus business interruption loan scheme.

The fee is calculated throughout the month based on investors’ funds under management and is taken as a reduction of the actual interest received. Assetz was accredited to deliver CBILS in May, which provides government-backed loans to small businesses struggling during the pandemic, through approved lenders.

We see and do things differently

Unique, niche banking & financial services talent recruitment

This is what we do

Contact Tracy Fletcher on 07852 150953 or email at tracy@cfrecruitment.co.uk Call: 0161 932 1722 Visit: www.cfrecruitment.co.uk

CAMPBELL & FLETCHER BANKING & FINANCIAL SERVICES RECRUITMENT

JOINT VENTURE

P2P can benefit from diverse recruitment opportunities Tracy Elizabeth Fletcher, managing director of Campbell and Fletcher, explains why peerto-peer lending platforms should act now to build out their teams and improve diversity

HE COVID-19 PANDEMIC has created a great opportunity for alternative finance companies to hire new staff and improve their diversity in line with the Women in Finance Charter (WIFC). A rolling wave of redundancies has created a glut of talent in financial services recruitment, while many peer-to-peer lending platforms and other alternative lenders are simultaneously experiencing increased levels of activity due to the demand for government-backed business loans and other business funding. This means that “now is the ideal time to recruit,” says Tracy Elizabeth Fletcher, managing director of Campbell and Fletcher Recruitment. “The candidates in the marketplace are genuinely really good candidates, because it's the situation that put them there and not their own performance,” she adds. “If P2P lending platforms are experiencing high volumes of lending now, that’s not going to go away any time soon so now’s a good time to bolster their teams and balance out that diversity gap.” Campbell and Fletcher Recruitment is one of the few recruitment firms that have signed up to the WIFC to date, and Fletcher is passionate about female representation in the financial services sector. Fletcher herself was a banker for 20 years, while her business partner Alison Campbell spent 19 years working at a major bank. Their experience inspired them to branch

out and establish the first femaleled financial services recruitment firm in the UK. “Alison and I know what it’s like to be female in the financial services sector,” says Fletcher. “When we’ve thrived, it's been because we had specific support and when we’ve not thrived it's been because we felt lonely. “There are times when you feel you’re being patronised as a woman. And even in recruitment I still feel a bit patronized. We found the ‘old boys’ network in financial services recruitment to be quite difficult to break down until we were able to produce a track record.” This track record includes

launching a business in 2008 – at the peak of the last financial crisis – and weathering that storm while working closely with major banks such as HSBC, Lloyds, and Santander, before expanding to include challenger banks such as Shawbrook and Metro, and alternative finance providers. Over the past few years, Fletcher has “absolutely” noticed an improvement in female representation in the financial services sector. However, there is still a long way to go. For a start, all firms should be committed to accepting only the most diverse groups of candidates from their recruiters, she says. “Statistically, good candidates are more likely to join a company that's got a diverse workplace and has a diverse workplace policy,” says Fletcher. “Set your diversity shortlist, be mindful of the gender pay gap when hiring, and regularly review your diversity statistics so that they are not creeping away from you. “And in an interview process, make sure that the interview panel has female and male representation, but not token female representation. “Be genuine about being committed to the WIFC, if you are a member. “We have a wealth of talent now available,” she adds. “And P2P platforms have a unique opportunity to prioritise gender diversity while building up highly skilled teams, ready to lead the post-Covid financial recovery.”

NEWS

What next for the shrinking P2P investment trust space? UNTIL Funding Circle went public, alternative lending-focused investment trusts were the only way to access peer-to-peer loans on the stock exchange. The first P2P-linked investment trust – P2P Global Investments (P2PGI) – was launched in 2014, promising inflation-beating returns by investing across a diverse portfolio of P2P loans from the likes of Zopa and Funding Circle. But over the past six years, P2P investment trusts have faced challenges. P2PGI struggled to meet its target returns and shifted its focus towards balance sheet and secured lending, and then rebranded to

Pollen Street Secured Lending (PSSL) to reflect its new strategy. Last month, Honeycomb Investment Trust offered to merge with PSSL, creating a £1.5bn entity that could qualify for inclusion on the FTSE 250. Honeycomb's initial takeover bid was rejected, and Waterfall Asset Management has been named as PSSL's preferred successor, with the asset manager

offering to wind down the trust instead. This would leave just three major players in the P2P investment trust space: VPC Specialty Lending (VSL), GLI Finance, and Honeycomb. Just a couple of years ago there were twice as many alternative financefocused trusts on the market, but the market has changed considerably in a short period of time. RDL Realisation (formerly Ranger Direct Lending) and Funding Circle SME Income have both gone into wind-down, while VSL has been fielding shareholder concerns around the long-term viability of the trust. By the end of June 2020, PSSL had delivered

0.73 per cent net asset value (NAV) for the year to date, but a faltering share price and uncertain management future has made it the target of several takeover attempts. Only Honeycomb has been able to maintain steady NAV returns this year by investing in a range of consumer, property and SME loans. There is a very real possibility that there could be just one P2P investment trust left on the market within the coming year. Perhaps this reflects the growing popularity of direct P2P investments among retail and institutional investors alike. Or maybe the investment trust model has simply outlived its use.

Top three platforms cut target rates by up to 1.2pc over past year FUNDING Circle, RateSetter and Zopa have cut their projected returns by as much as 1.2 per cent over the course of the past year, although they are still comfortably beating the current rate of inflation and bank savings rates. Last year, Funding Circle was projecting target returns of between 4.9 per cent and 5.2 per cent on its conservative product and between 5.5 per cent and 6.5 per cent on its balanced account.

According to the most recent data available from the platform, the conservative account is now estimating returns of between 4.3 per cent and 4.7 per cent, while the balanced account now projects an annualised return of between 4.5 per cent and 6.5 per cent. On the lower end of the returns range, this represents a drop of 0.6 per cent for conservative account holders, and one per cent for those investors

with a balanced account. In 2019, RateSetter’s actual annual return to investors was 4.4 per cent, versus a 3.7 per cent average return between January and July 2020 – a drop of 0.7 per cent. However, since 4 May 2020, half of all lender returns have been diverted to RateSetter’s provision fund. Therefore, an investor earning 3.7 per cent in interest between January and May would see their actual returns

halved to 1.85 per cent. By August 2020, Zopa had revised its projected returns to between 3.4 per cent and five per cent for Zopa Core – versus 4.5 per cent in 2019 – and between four and six per cent for Zopa Plus – compared with 5.2 per cent last year. Again, taking the lower figures as a guide, this represents a drop of 0.9 per cent for Zopa Core lenders, and 1.2 per cent for Zopa Plus.

NEWS

Mixed views on the future of CBILS PEER-TO-PEER lending industry stakeholders have mixed opinions on whether the government should extend the coronavirus business interruption loan scheme (CBILS) beyond its current application deadline of 30 September. Several P2P platform chiefs have called for an extension to the emergency loan scheme, which provides a government guarantee on 80 per cent of the value of loans delivered by accredited lenders to small- and mediumsized enterprises (SMEs) impacted by Covid-19. But Peer2Peer Finance News understands that other industry participants are against a straight CBILS extension and would prefer the scheme to be adapted into another one, more akin to the Enterprise Finance Guarantee (EFG). Last month, the British Business Bank granted accredited lenders until 30 November to consider and process applications they receive by the end of September, although the application deadline itself had not been extended at the time of going to press. Roy Warren, managing director of Folk2Folk, which was accredited to deliver CBILS at the start of

July, is one of the P2P executives calling for an extension to the scheme, which he said is likely to happen. “Any extension of the scheme would be a big positive for businesses which are continuing to see the impact of Covid-19,” he said. “Not least, those businesses which were able to weather the short-term impacts of the pandemic but need funding over the months ahead and are only now deciding they need a CBILS loan to sustain their business during this time.” It is understood that some industry stakeholders think the calls for a straight CBILS extension are providing unhelpful noise at a time when the government is assessing what to do with the scheme. It has been suggested

that the adaptation of CBILS into a scheme more similar to EFG could be better for the industry and a shrewder political decision for the government at a time when the financial impact of its emergency loan schemes are being scrutinised. A new scheme could take advantage of all the recent accreditations that have brought together the lending industry whilst ensuring the Business Interruption Payment is dropped, which is said to be stopping lenders from doing any core lending at the moment. Stuart Law, chief executive of Assetz Capital, another CBILS accredited lender, believes the scheme might change its name but will be extended “in some form” into next year.

“There will be plenty of economic trouble to come that businesses will need support to face,” he said. “The government wants to see the full extent of the economic impact and can only do that later in September.” Trade bodies Innovate Finance and UK Finance are thought to have been working to align the industry on a position going forward regarding the future make-up of the scheme. The British Business Bank said any extension to the scheme is a matter for government. A Treasury spokesperson said: “We’ve backed businesses from the start of the outbreak – paying billions in governmentbacked loans and grants, protecting jobs by paying workers’ wages and deferring billions of pounds in tax. “But we’ve been clear these schemes are temporary and it would not be sustainable for them to continue indefinitely. “Our plan for jobs will ensure we continue to support businesses, including cutting VAT for tourism and hospitality by 15 per cent, a £2bn Kickstart Scheme and investing nearly £9bn in new infrastructure, decarbonisation and maintenance projects.”

GOOD GOVERNANCE. TRANSPARENCY. TRUST. Some things can’t be bought, sold or traded. Duff & Phelps and Kroll help clients protect, restore and maximise these ideals and mitigate risk. As peer-to-peer platforms find themselves navigating a new reality, addressing issues from financial stress and regulatory compliance to valuations and fundraising, our multi-disciplinary team of experts can help you assess and manage the risks to your business and address your most complex challenges. Our services include: •

Regulatory advice including wind-down planning

•

Implementing sound governance and robust risk management processes

•

Liquidity and capital management planning

•

Assisting with borrower defaults and loan enforcement recoveries

•

Assessing collateral security including property valuations

Learn more at www.duffandphelps.co.uk.

JOINT VENTURE

Property lenders need to take a more prudent approach post-Covid-19 James Liddiment, managing director in the real estate advisory group in Duff & Phelps’ London office, on how property lenders can survive the Covid-19 crisis

ROPERTY DEVELOPMENT lenders will need to take a more prudent approach to property and development loans, both existing and new, in order to weather the Covid-19-linked economic recession. According to James Liddiment, managing director in the real estate advisory group in Duff & Phelps’ London office, this may involve lenders deploying a range of strategies from reducing loan-tovalue (LTV) ratios, reviewing debt recovery procedures, and giving greater weight to stress testing scenarios including sensitivities within the development cash flow. “In simple terms, there are two obvious drivers to a problematic development from a lender’s perspective – cost overruns and subdued sales values,” says Liddiment. “Whilst there isn’t yet a body of evidence in the residential sector to support a reduction in value tone due to Covid-19, the pandemic has substantially impacted costs across the majority of sites due to construction delays and, in many cases, materials shortages.” He points out that delays not only lead to increased costs in direct construction, but additional debt service costs, which can materially impact profit margins and give rise to default triggers under loan agreements. In turn, developers will hope for increased sales volumes to offset the elongated development

programme and, potentially, value improvement. Whilst valuations in the residential sector appear to be stable at this point, this is largely due to the absorption of pent-up demand and government stimulus in the temporary suspension of the stamp duty land tax (SDLT) up to £500,000. But Liddiment believes that further stimulus may well be needed. “I believe there's going to have to be something, otherwise as we approach the end of 2020 with increasing unemployment and the tapering of the government furlough scheme, by the time we reach the end of the SDLT stimulus, we could well arrive at a cliff edge, which may have a seismic impact on the market,” he says. “As things stand, I think there'll be a flurry of activity in the lead up to 31 March 2021, where home buyers try to transact in the absence

of any extension to the stamp duty exemption. And we'll really know where the medium-term residential market is at the end of the first quarter or start of the second quarter of next year.” Across the board, Liddiment has seen development lenders reigning in their LTV ratios on property developments. Where a senior lender may have once offered a loan based on a 75 per cent LTV preCovid-19, now they may be capping LTVs at 65 per cent in anticipation of market turbulence. “From a credit perspective it’s a prudent approach,” he says. “Particularly for projects which won’t reach practical completion until 2021 and beyond, where decisions to lend are underwritten on present day valuations.” Since the easing of lockdown, Duff & Phelps has been appointed to deal with a rising number of restructuring and recovery scenarios “because lenders, particularly alternative lenders, need to proactively deal with problems due to their own funding structures – they can't sit and wait,” explains Liddiment. In order to survive the next year, Liddiment says that propertybacked peer-to-peer lending platforms need to do a “full review” of their loanbooks, while having conversations with borrowers at early signs of distress. Detailed stress testing is also necessary for all property-backed P2P lenders and robust recovery solutions should be put in place with support from the correct professional teams. Liddiment adds: “Ultimately lenders and borrowers need to be alive to the fact that, although strong opportunities still exist and the world will keep turning, we remain in very uncertain times.”

PROPERTY

New foundations

Peer-to-peer property lenders have managed to find new opportunities amid the Covid-19 crisis. Michael Lloyd reports

N THE EVENING OF 23 March, when Boris Johnson addressed the nation to announce a Covid-19-induced lockdown, executives of propertybacked peer-to-peer lenders were waiting with bated breath to discover how this ‘new normal’ would affect them and the market in which they operate. They knew that this announcement would bring the housing market to a sudden halt, with people unable to view properties and move home, and

construction projects all but abandoned. They were right to be concerned. Lockdown led to an unprecedent slump in housing transactions, while house prices dropped. According to the Nationwide house price index, annual house price growth slowed from 1.8 per cent in May to -0.1 per cent in June, the first time that annual house price growth was in negative territory since December 2012. By the end of April, most major housebuilders were resuming

building activities, and by mid-May, socially distanced property viewings were permitted. Most remaining restrictions were lifted on 23 June, but regional lockdowns, consumer caution and financing issues have changed the face of the property sector – at least in the short term. “During the initial stages of the pandemic and the lockdown everything kind of froze because there was so much uncertainty,” says Yann Murciano, chief executive of property-backed P2P lending platform Blend Network.

PROPERTY

Platforms like Blend have adapted to the best of their ability and some have even been able to identify new opportunities amidst the crisis. Some have reviewed their business models and tightened their lending criteria, while many

In March, Octopus Investments froze all transactions at its propertybacked P2P lending platform, Octopus Choice, including investments and withdrawals. The platform said this was to protect investors after seeing a higher

“ Property has enduring value, especially residential which is a secure asset class”

platforms threw their support behind small- and mediumsized enterprise (SME) property developers, carrying on lending and offering payment holidays during construction delays. Despite the economic uncertainty, some property lenders thrived during the lockdown months. By the end of June, CapitalStackers had repaid £1.4m to investors, while Blend Network returned more than £2m to its lenders after it achieved a record May, June and July. Meanwhile, Nexa Finance recorded its busiest few months since its launch in August 2019, and CrowdProperty surpassed £80m lent to SME developers. These platforms have filled the gap left by the more mainstream property lenders, as they pulled back or tightened their lending criteria. In fact, some of these alternative property lenders believe it’s a safer market to operate in, especially in this uncertain time. “In my view property is safer,” says Mike Bristow, chief executive of CrowdProperty. “Property has enduring value, especially residential which is a secure asset class.” But not all property-backed P2P lenders have been so optimistic about the new opportunities in the property market.

volume of lenders trying to sell down or liquidate their investments. At the start of May, RateSetter – which originates some residential property development loans alongside unsecured consumer finance – halved interest rates for all investment accounts for the rest of the year, in response to the economic uncertainty caused by the coronavirus. Buy-to-let and bridging lender LandlordInvest experienced a spike in the number of lenders looking to

sell loans in its secondary market in March, and in response, the platform added a discount option so lenders could sell loan parts at up to 20 per cent below par value. In March, Assetz Capital closed its platform to new retail money for a few months because of market uncertainty and in May it introduced a temporary fee of 0.9 per cent per annum for all of its investors to help plug a drop in its income due to the pandemic. This fee was extended in June, and the interest rates were cut on its three auto-invest accounts. “It’s working to a great degree,” says Stuart Law, chief executive of Assetz Capital. “We were expecting a big economic impact to arrive for the past few years, so in a way although it’s worse than we thought, we’re getting there and the team is resisting the reality of the virus and attempting to return as quickly as possible to business as usual.”

PROPERTY

It is worth pointing out that the above-mentioned platforms tend to focus on residential property loans, which are relatively robust. Commercial properties are a different story. Commercial property landlords have been badly affected by the temporary collapse of the retail and hospitality industries, as well as the remote working revolution which has seen the majority of companies working from home, rather than in offices. According to an August investor update, commercial property P2P lending platform Proplend saw its defaults rise in July with four loans in realisation due to exits through refinance or sales taking longer under current market conditions. However, Proplend’s chief executive Brian Bartaby says his platform has plenty of good loans – some by luck and some by judgement – and the lender was proactive in talking with its at-risk borrowers early and throughout the crisis. “Other platforms have stopped lending, closed their secondary markets, gated lenders withdrawing cash, added different fees to borrowers or lenders and halved interest rates for investors,” Bartaby says. “That’s not great. We haven't and we kept on doing what we said we were doing.” While there are still concerns about the commercial property sector, new opportunities are also beginning to emerge. Some industry stakeholders have pointed to the rising need for warehousing for online deliveries, which could create a new source of revenue for commercial property lenders. And the government could soon intervene with grants for the retail,

“ There has been a marked improvement in

activity in the past three months with many buyers looking to buy new houses post lockdown hospitality and leisure sectors. Trade associations have been in talks with ministers for a property bounceback grant whereby the government would pay up to 50 per cent of the rent and service charges owed by businesses in these sectors for the six months between March and September. This could retroactively mitigate some of the losses experienced by commercial property platforms during an extraordinary and unpredictable period.

”

Overall, P2P property lending platforms have had to adapt as best they can, assessing the risks and how to mitigate them. The results of their strategies are already being seen. When lockdown restrictions were lifted on 4 July, those platforms that were able to weather the previous few months were rewarded with some much-needed good news. Figures from Nationwide’s house price index for July showed the pentup demand being unleashed into the marketplace. House prices rose

PROPERTY

“

The overall market is performing a lot better than it had been

”

by 1.7 per cent in July, following the 1.6 per cent fall in June, and annual house price growth recovered from -0.1 per cent the previous month to 1.5 per cent in July. At least half a dozen platforms reported a rise in enquiries following the easing of restrictions. “There has been a marked improvement in activity in the past three months with many buyers looking to buy new houses post lockdown,” says Neal Moy, head of property finance at RateSetter. “The general sentiment is that this is a combination of the pentup demand from earlier in the year, and people reassessing their housing requirements having been in lockdown or working from home.” Property P2P lending platforms

received another boost from the government with a cut in stamp duty. Chancellor Rishi Sunak raised the tax’s threshold on the purchase of homes up to £500,000 in England and Northern Ireland until 31 March 2021. “That has certainly helped,” says Stuart Law. “The overall market is performing a lot better than it had been.” Perhaps this is the time for property-backed P2P lenders to truly carve out their share of the property market. High street banks are busy with Covid-19 and distributing emergency loans to firms that need them. An EY Item Club Interim Bank Lending Forecast has predicted bank lending to reach a 13-year high this year. With banks busy elsewhere, they may not have the money and lending appetite for as much property lending as they previously did and are likely to reduce their share of this market, to the benefit of P2P lending platforms. “Banks will do some property lending, but it will be down significantly,” predicts Law. “The opportunity to fund property will be a lot greater going forward and I think those that do will have a field day over the next few years.” There will also be opportunities to acquire properties and loan portfolios at a significant discount, compared to pre-Covid-19 levels.

“There’s still a substantial opportunity in property,” says Atuksha Poonwassie, managing director of Simple Crowdfunding. “I think P2P property lending will increase and the opportunities will rise substantially too.” Permitted development changes were introduced by the government on 31 August, which make it easier to extend existing properties or knock down commercial properties and build residential homes in their place. Making the planning process easier will be of great benefit to SME developers – and the P2P lending platforms that back them. “We’re expecting a lot more sales and development to take place under permitted development,” says Poonwassie. The pandemic has also brought upon the opportunity for platforms to recruit more investors. With stock market volatility and an all-time low base rate hitting the traditional savings and investment markets, P2P property lenders stand apart by offering stable, fixed returns. Ultimately, pandemic or no pandemic, the country is still suffering from a housing crisis, with a huge undersupply of homes. The need for new housing is unlikely to go away any time soon, even if the property market experiences a few dips along the way. For property-backed platforms, the economic downturn represents a huge test. But for those platforms which are savvy enough to spot new opportunities in the market, the benefits are clear. If platforms can maintain investor confidence, a strong credit policy and a steady flow of high-quality borrowers during the current economic crisis, the future of property lending will belong to the brave.

Expertise where you need it Whatever direction the pendulum swings At Quantuma we provide a comprehensive range of advisory services to assist peer-to-peer lenders in: - Platform Management - Portfolio Management From business as usual scenarios, to stressed and distressed situations our team are able to advise.

Our team Frank Wessely Partner

 +44 (0)7770 210628  frank.wessely@quantuma.com

Paul Zalkin Partner

+44 (0)7469 850972

Mark Hendrick Director

  paul.zalkin@quantuma.com

 +44 (0)7818 354802  mark.hendrick@quantuma.com

Frank Ofonagoro

Sarah Balsom

Director

+44 (0)7469 859111

  frank.ofonagoro@quantuma.com

Senior Manager

 +44 (0)7774 700934  sarah.balsom@quantuma.com

www.quantuma.com

linkedin.com/company/quantuma

@quantuma1

JOINT VENTURE

The new rules for P2P M&A Frank Wessely, managing director at Quantuma, shares his insights on postCovid M&A activity in the peer-to-peer lending sector

EER-TO-PEER LENDING platforms seeking acquisition may have to adapt to performance-based valuations, an increased focus on technology and a new cadre of institutional investors, as M&A trends evolve in the postCovid world. According to Frank Wessely, managing director at business advisory firm Quantuma, P2P lending platforms still represent a great opportunity for investment, but he points out that potential acquirers may be more interested in assets such as credit-checking technology or its online lending capabilities rather than the historical value of a loanbook. “There are clearly institutions that want to invest in technology and improve their distribution channels,” says Wessely. “P2P lending platforms represent an off-piste area where these investors could diversify their income streams. “Technology or what I call the ‘lending engine’ would be of great interest,” he adds. “Clearly some platforms have had success in terms of scaling up the effectiveness of their technology and digital competences. And it gives acquirers the opportunity to modernise their own distribution capabilities and minimise distribution costs.” Quantuma has had plenty of experience with M&A activity in the financial services world – most recently, when the company

was itself acquired in a £26.95m deal with the Aim-listed K3 Capital Group. The newly-merged company now boasts an extended corporate finance team with many decades of experience. Wessely says that he expects to see a “big uptick” in the volume levels of M&A work that Quantuma does alongside K3. This is particularly timely given a clutch of high-profile acquisitions in the alternative finance community. In July, Lending Works sold 100 per cent of its equity to Intriva Capital – a fund manager which focuses on special situations and distressed investment strategies across Western Europe. Then just a few weeks later, ‘big three’ P2P lending platform RateSetter was acquired by Metro Bank in a deal worth up to £12m over three years. Like many industry stakeholders, Wessely was surprised at the relatively low value attached to the RateSetter deal. “Obviously, the details of the transaction are confidential, but given that valuations were

£200m historically, and the initial payment is just one per cent of that, it is an incredibly large reduction,” he says. “And the vast bulk of it is performance based, not based on the immediate quality of the loanbook. “I think that reflects the likelihood that any P2P deals that might happen in the foreseeable future will not be at high values. If you look at the levels of profitability on platforms, there are very few that have been attracting levels of profitability.” Values can also vary depending on the position of platform itself, he adds. A distressed or disorderly sale will attract a lower price, and the acquirer could opt to cherry-pick certain items from the loanbook, rather than buying out the entire platform. But as for a wave of consolidation across the P2P sector – Wessely doesn’t think it’s likely. “We can help to source potential suitors for a platform sale,” says Wessely. “Or for those who are interested in acquiring, we have many years’ experience in sourcing strategic acquisitions for investors. “But I don't expect there to be a sudden flurry of consolidation or M&A activity. “Clearly, if there's a need on the side of the platforms for a deal to be done then it’s likely to happen quite quickly. But if not, we may see some private equity firms or other institutions enter the market.”

PROFILE

Property development during the pandemic David Turner, chief executive of Invest & Fund, explains to Marc Shoffman why surviving Covid-19 has made the platform feel healthy enough to rise to other challenges

T CAN BE CHALLENGING to be a property lender during most environments but there have been plenty of hurdles for peer-topeer development finance provider Invest & Fund in recent months. The property market was effectively closed for two months between March and May, so it was harder to sell units, while building sites had to close at the height of lockdown which impacted completion dates. Now developers must take steps to ensure staff can work safely and projects can be completed and units have to sell with the UK in recession, albeit with the help of a stamp duty holiday and pent-up demand from before the pandemic. But David Turner, chief executive of Invest & Fund, remains positive after managing to keep his platform operating and maintaining loan repayments throughout the outbreak and even successfully rolling out its Innovative Finance ISA to new investors mid-pandemic. Marc Shoffman: How has the platform responded to the pandemic? David Turner: Invest & Fund is going to come out of the pandemic with clean books and everything repaid. We didnâ&#x20AC;&#x2122;t have to give payment breaks but instead quickly spoke to all our borrowers and explored their plans. The main task was making sure all the drawdowns for our existing customers were 100 per cent guaranteed.

We got that done in a fairly short amount of time and then started to explore if our developers needed new funding for other projects. A few sites were mothballed but every site is now pretty much back on track and we have started to see a number of sales come through. We are also seeing a decent level of enquiries coming through from new borrowers. The lending terms are pretty much as they were pre-Covid.

They were initially tightened to lower loan-to-gross development values of 50 to 55 per cent and are now back up to 65 per cent. We did initially slow down lending during the lockdown period as there wasnâ&#x20AC;&#x2122;t the demand coming in from borrowers until they worked out how they could work safely on site and what the situation was. The government incentives

PROFILE

around the “build, build, build” scheme – allowing existing commercial properties, including newly vacant shops, to be converted into residential housing more easily – have provided a boost. We have seen sales prices above where we would expect to see them – units have been selling for an average 106 per cent of their original valuation. New borrowers are getting more confident about the market and our experience shows there is a bright future for development. MS: Are your staff still working from home? DT: We did have to furlough a number of staff and are now starting to bring those back as volumes pick up. Hopefully we can bring everyone back in the coming weeks. There will be a mixture of working patterns. We are not insisting that people come back to the office and we have systems in place for working remotely that are working well. Technology, as long as you have reasonable internet, means you can do a lot of what you do in the office at home. Working patterns will change – we will see people doing a mix of working from home and working in the office. MS: How has the recently announced stamp duty holiday helped you? DT: We are seeing the benefit. Sales are happening a lot quicker. There will be a spike in activity while the holiday is in place and there is all the pent-up demand from pre-lockdown. There is also a lot of talk about redundancies. What should be

remembered in all this is that while jobs may be lost in some areas, they are being created in others such as logistics and technology. MS: What type of loans are you seeing more demand for from borrowers? DT: Most borrowers are asking for development loans. Pent-up demand, combined with the stamp duty holiday, has helped

our model. We have had people put in their whole annual allowance and transfer their holdings from stocks and shares and cash ISAs. They are comfortable with our governance and credit risk surrounding the loans. MS: How important are institutional investors to Invest & Fund?

“ We are seeing a decent level of enquiries coming through from new borrowers”

developers get more comfortable as they can see their last project has finished and sold as they expected. This gives them confidence about moving onto the next one.

MS: How have investors reacted? DT: Our investors, like the developers, wanted to see how things would settle down at the start of the pandemic. They have also seen a rally in the equity market so there is now an opportunity to rebalance their portfolios. We saw a number of investors wanting to make sure they had a steady income through choppy waters, which we can provide. There was initially more demand on the secondary market during the height of the pandemic and we kept it open. Some sellers were trying to test demand and others were keen to buy so they could rebalance their portfolio. Our Innovative Finance ISA launched in November for existing clients and then for everybody else in June this year. There has been a humbling response that shows people trust

DT: We are looking for our retail and institutional funding to be 50/50. The figure is closer to 80/20 currently. It is still important for us to stick to the core of P2P. A number of our competitors have moved away from that. We have a lot of high-net-worth individuals who invest with us and there is space for both. Our most recent institutional lender will fund whole loans, while our other institutional partners will do so alongside retail investors. MS: What impact will Brexit have on your platform? DT: Brexit is very much on our radar. It has taken a backseat and is moving further forward. It has been interesting how Covid-19 has played out and how behaviour patterns have worked through this pandemic. I would suggest this outbreak has been far more dramatic. If your business model survives a pandemic, then Brexit, although important, won’t have the impact that the coronavirus crunch has had.

Back the next generation of leaders by investing in their education. Samuel

Future Engineer Make a difference whilst earning a return Lendwise loans offer an attractive financial return by funding the postgraduate education and professional training of aspiring individuals looking to enhance their career and salary prospects with additional skills and knowledge.

Open your account today at www.lendwise.com/invest

As with all investing, your capital is at risk.

Scan Me

+44 (0)20 3890 7270 | lenders@lendwise.com This financial promotion is issued by Lendwise Ltd, which is authorised and regulated by the Financial Conduct Authority under firm registration number 782496. Lendwise Ltd is not covered by the Financial Services Compensation Scheme. Our products place capital at risk and you may not get back the full amount you lend and/ or the interest you expect. You should consider seeking independent tax and financial advice before making a peer-to-peer loan.

JOINT VENTURE

Lendwise calls for government-backed student finance amid pandemic Rishi Zaveri, chief executive and co-founder of Lendwise, explains why there is a real need for government-guaranteed student finance

NIVERSITY STUDENTS should be able to access government-backed loans in the same way that businesses can utilise the coronavirus business interruption loan scheme (CBILS), it has been claimed. Rishi Zaveri, chief executive and co-founder of education finance platform Lendwise, says that students are being left out of the government’s coronavirus relief packages, and this could lead to a looming student financial crisis. “I feel very strongly that what was done for CBILS and the bounce back loans should have been done for students on a relative basis,” he says. “Especially for students who are key workers. There have been many nurses and NHS workers who have really felt the strain, but they’ve had nothing like this to turn to.” Lendwise is the only UK-based peer-to-peer lending platform that offers competitively-priced loans to post-graduate students. In recent months, Zaveri has been inundated with new loan requests, and he says that his platform is ready to scale up its efforts to get funding to creditworthy students who are seeking to better themselves through education. This funding gap is particularly pronounced at the moment, amid an economic recession which has claimed many of the part-time hospitality jobs that students rely on to help pay their way through university.

“I'm sure a lot of students have had to resort to borrowing at higher rates and some may not have been able to access any form of finance,” says Zaveri. “That sits at odds with the fact that government-backed financing is available to so many employees and business-owners.” If a CBILS-style student financing scheme was to be launched, Lendwise’s distribution model is primed and ready to get much-needed funds into student accounts.

Applying for a Lendwise loan is simple. The application process is fully online and takes around six minutes from start to end. “It comprises of three steps,” explains Zaveri. “Step one, you enter your personal details. Step two is your educational history and any work experience you may have, and step three is a budget calculator which you use to figure out how much you need to borrow from Lendwise – this takes into account your tuition fee costs, your living expenses and other personal expenses, as well as details such as how much funding you have, whether through a government loan, whether you are contributing any of your own savings towards the course, and so on. “Then you submit your application and we will revert back within – at most – two business days.” For successful applications, Lendwise will offer the applicant a personalised loan proposal, with an interest rate which reflects the applicant’s profile and a repayment term which takes into account their own financial circumstances. The average borrower rate is around 10 per cent, and the first repayment is not due until after the completion of the course. “If students need funds, we can provide them,” says Zaveri. “We have borrowers who get their government loans and use us for the top up. And the feedback we have is overwhelming – we are far more efficient than others.” Amid rising unemployment, A-level results confusion and frustration around newly-online university courses, there has never been a better time to be in the business of student loans – with or without government backing.

Providing practical and targeted advice for P2P platforms Corporates, investors and regulators trust us to support them through challenging periods of change and uncertainty Support with underperforming loan portfolios

Strategy and execution in relation to restructuring or disposal of loan portfolios

Solvent restructuring and wind-down support

Advice and implementation of insolvency appointments to restructure firms or trace and enforce on assets to maximise returns to stakeholders

Regulatory expertise and data enablement with our financial services regulatory team

To find out how we can help your business mitigate risk and realise its potential, contact: Chris Laverty Partner, Head of Financial Services Restructuring and Insolvency T +44 (0)20 7865 2302 E chris.m.laverty@uk.gt.com

Andrew Charters Partner T +44 (0)20 7865 2321 E andrew.charters@uk.gt.com

ÂŠ 2020 Grant Thornton UK. All rights reserved. Grant Thornton UK is a member firm of Grant Thornton International Limited (GTIL). GTIL and the member firms are not a worldwide partnership. Services are delivered by the member firms. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one anotherâ&#x20AC;&#x2122;s acts or omissions. Please see grantthornton.co.uk for further details DS1875

JOINT VENTURE

Platforms warned on borrower eligibility criteria for government-backed loans Christopher McLean, head of debt advisory in Grant Thornton’s London office, explains why platforms must ensure that new borrowers are fully compliant with the British Business Bank’s loan eligibility requirements to ensure the validity of the guarantee

EER-TO-PEER LENDING platforms which are authorised to offer the coronavirus business interruption loan scheme (CBILS) should take extra care to ensure that new borrowers meet the scheme’s eligibility criteria, so that the government guarantee is valid should it ever need to be called upon in the future. Christopher McLean, head of debt advisory in Grant Thornton’s London office, has noted that lenders are taking different approaches towards the eligibility criteria, with traditional lenders such as high street banks taking a more conservative approach towards CBILS loan approvals. He has warned CBILS-approved P2P lending platforms should think two years ahead when assessing new borrowers, as their investors could wind up bearing the cost of any mass defaults. “In two years’ time when there may be defaults, there are recovery shortfalls and hence the guarantees need to be called upon, it is likely that lenders will be asked to demonstrate that such loans advanced to borrowers were fully compliant with all the criteria at the outset,” he says. “Lenders need to take care that

they’re applying the criteria correctly so that the guarantee is valid whenever they might need to use it.” Lenders will be seeing a wave of new applications as the CBILS closing date approaches, possibly from borrowers who have already been rejected elsewhere, so thorough due diligence is essential, McLean says. P2P lending platforms should also be aware of a predicted spike in unemployment towards the end of the year, as the government furlough scheme comes to an end. “We are seeing a lot of businesses forecasting further liquidity pressures towards the end of the year,” McLean says. “And for a lot of companies, there may be a liquidity gap there.” Applicants also need to be able to demonstrate and self-certify

that they have been impacted by Covid-19, and that they have a good prospect of being able to trade out of these difficulties with funding support. “It's important to really test the borrower's ability to meet those criteria,” says McLean. “What we're seeing in the market at the moment is that different lenders are interpreting the criteria differently. “Traditional lenders such as high street banks are probably taking a more prudent interpretation of the criteria, while alternative lenders and challenger banks maybe have a slightly wider interpretation as to who's eligible for the scheme and who's not.” If there is any doubt as to the eligibility of a particular borrower or the criteria in general, platforms should communicate directly with the British Business Bank. “If you're a P2P lender, you need to make sure that how you apply the criteria to your borrowers is in accordance with the British Business Bank guidance,” he says. “And to the extent you have any uncertainty, speak with the British Business Bank and make sure you ask questions; other lenders that we've been speaking to have spent a large amount of time on the phone or video calls with the British Business Bank, making sure that they are interpreting the criteria correctly.” This added due diligence is likely to require more time and resources from platforms, but McLean points out that this is not necessarily a bad thing. Amid tightening regulations and an uncertain economy, P2P lending platforms will be under additional pressure to demonstrate that they have what it takes to compete with traditional lenders at every level.

INSTITUTIONAL INVESTMENT

Caution or confidence? Institutions were playing an increasingly large role in the peer-to-peer lending sector, and then Covid-19 hit. Michael Lloyd explores the changing role of City funding in P2P

EER-TO-PEER LENDING platforms have historically sought institutional investment as a means of scaling up quickly, while institutions have used the platforms to diversify their own portfolios. But in the midst of a global pandemic and a deep economic recession, some institutions are showing caution, meaning that P2P lenders who expected to secure more funding lines this year may be disappointed.

Some institutional funds are still available, but others have opted to take a step back while reviewing the market. According to Carl Davies, chief operating officer at The House Crowd, some of the institutions he and his colleagues have been in discussions with are aggressively prowling the market looking for “distressed” opportunities, while others are sitting on the side-lines appraising the opportunities in a more considered way. “I think generally they are all

cautiously optimistic, but I don’t think we will see a feeding frenzy,” Davies comments. “Most will appraise the situation from now until the end of 2020. Then in the New Year, depending on how the market reacts to the easing of the lockdown, we may see significant activity.” Outside of P2P, many traditional property development lenders have been forced to tighten their lending heavily or to stop lending entirely, due to a contraction in institutional

INSTITUTIONAL INVESTMENT

funding. This created a funding gap for small- and mediumsized enterprise (SME) property developers – many of whom then turned to alternative lenders to seek funding from the crowd. “Institutions are cautious, but this could be an opportunity for P2P,” says Atuksha Poonwassie, managing director of Simple Crowdfunding. “It’s why there are more SME developers going to P2P and

inevitable rise in defaults. “As the sector gets through this economic downturn, the well managed platforms will pull through and institutions will see how they performed during the crisis and become more familiar and interested in P2P,” says Daniel Rajkumar, managing director of Rebuildingsociety. “So far, compared to other markets, P2P has done well, performing better

“ Institutions are cautious, but this could be an opportunity for P2P”

crowdfunding platforms.” Varengold Bank, which backs some P2P lending platforms, is still focused on helping alternative and fintech lenders, including those operating a P2P model. “[The pandemic] has of course resulted in a reduced capacity for new originations, but we continue to have appetite to make new investments,” says Alison Harwood, chartered alternative investment analyst and head of the London branch at Varengold Bank. “Of course, where new investments are focused, it has been affected by the pandemic and the government-backed loan schemes have been interesting to us in a dynamic credit environment.” Despite the short-term caution, the consensus view appears to be that Covid-19 will lead to more institutional interest in P2P. Institutions will notice the platforms that have performed well during the crisis, onlookers suggest, riding out the storm by offering attractive returns whilst mitigating their risks, and demonstrating robust internal systems when fighting the

than the stock market, which took a tumble, and cash savings, which offer low returns.” The P2P sector has also benefitted from the introduction of government-backed emergency loan schemes such as the coronavirus business interruption loan scheme (CBILS). A handful of P2P lending platforms have already been accredited to deliver CBILS, including Funding Circle,

Assetz Capital, Folk2Folk and LendingCrowd. Under the rules, only institutions can fund CBILS loans. For institutional investors, accredited P2P platforms offer a great opportunity to access governmentbacked loans during a period of economic uncertainty. However, this also means that the value of having friendly institutional partners has become even more pronounced for P2P lending platforms. Peer2Peer Finance News knows of several platforms that are working hard to try and obtain the institutional relationships they need in order to qualify for accreditation. Funding Circle’s UK managing director Lisa Jacobs recently told Peer2Peer Finance News that it was its existing relationships that were first to step up to fund its CBILS loans. “We’ve re-engaged with our existing investors or investors who we were already in conversation with, so we’ve built on relationships that we’d had before,” she said. “These are investors that have already done due diligence on our

INSTITUTIONAL INVESTMENT

product to date and had been close to or were already lending through the platform.” However, Jacobs added that there are also new institutional investors that Funding Circle has not had a relationship with before, who are now expressing interest in funding its CBILS loans. This suggests that the government’s emergency loan schemes could have a positive effect on the wider industry, by boosting institutions’ awareness of the benefits of P2P. CBILS-accredited rural business lender Folk2Folk says that the platform hasn’t seen a decline in investing appetite from its existing institutional lenders during the pandemic, while Simple Crowdfunding’s Poonwassie affirms that institutions are becoming more interested in P2P as a direct result of the government lending schemes. However, it should be noted that the government only guarantees CBILS loans up to 80 per cent of their value, meaning that the lender still has some exposure, albeit diminished, and must take the first loss on defaulted loans. Some analysts have suggested that more than half of these government-backed loans could result in a default, distorting the marketplace and testing the resilience of P2P lending platforms – and their backers. According to Varengold Bank’s Harwood, feedback from the industry seems to indicate that the government underwriting of loans has not been sufficient to draw as much investment into the industry as would be needed to meet borrower demand. “My own perspective on why this has been the case is that the number of experienced

“ I don’t think we will see a feeding frenzy”

institutional investors able to confidently quantify and price risks associated with P2P originated loans outside of the credit risk of the relevant portfolio is limited, and the environment is too uncertain for new players to enter confidently,” she says. Before Covid-19 arrived, there was a noticeable rise in the number of institutional investors paying attention to the P2P sector. More and more P2P platforms revealed that they had secured City funding lines, including Assetz Capital and Relendex, allowing them to scale up their lending more quickly.

Furthermore, partnerships between banks and P2P lending platforms have also been growing in popularity – Funding Circle had a pre-Covid referral arrangement with Santander, while Zopa announced a partnership with Metro Bank way back in 2015. And in the Covid era, we have now seen a partnership between Starling Bank and Funding Circle. By the end of July, the challenger bank had lent £227.75m to small businesses via Funding Circle, as part of a £300m CBILS funding agreement. Nic Conner, research consultant for business finance experts Rangewell, predicts that there will be many more deals between neo-banks and platform lenders going forward. “As such banks start to ramp up

INSTITUTIONAL INVESTMENT

“ As the sector gets through this economic

downturn, the well managed platforms will pull through and institutions will see how they performed during the crisis

their in-house lending (to efficiently use the funds they have on deposit), they will look to P2P partners with proven origination and credit models,” he says. “Institutional funds, as well as other lender pools, see significant opportunities in SME lending over the next five years.” Another huge deal was announced in August of this year, when Metro Bank acquired RateSetter. This suggests that there is increasing interest in the sector from banks that are seeking to expand their lending. “P2P lending platforms are definitely in the spotlight and attracting a lot of interest as a possible source of high return, high volume investment opportunities,” says Davies.

As fintech pioneers, P2P lending platforms are always innovating, and new technology is making it as easy as possible for institutional investors to dip their toes into the sector. When blockchain-based secondary market platform ASMX launches, it will offer greater liquidity for institutional investors, and platforms will be incentivised to adhere to the standardisation of the secondary market, by filing their paperwork and structuring loans in the same way. David Bradley-Ward, chief executive of ASMX and P2P lender Ablrate, says smaller platforms that lend about £10m to £15m a month will then be able to gain access to institutional capital through the standardisation of the secondary market platform. “It’s the standardisation of platforms that will allow aggregation of platform loans,” he says. “I guarantee platforms will change their legal structures to get their hands on institutional money.” The promise of ongoing innovation, as well as the mainstreaming of P2P lending through government-backed loan schemes and bank partnerships, should inspire more institutions to back P2P loans. The question is whether this will be at the expense of retail. As they have scaled up their institutional funding, some platforms have opted to stop retail

”

investment entirely. Both ThinCats and Landbay exited the retail space in favour of institutional investors in December last year, and both cited the fact that it’s difficult to scale via retail lenders only. Although more platforms could exit from P2P, platforms and analysts tend to agree that retail has a future. After all, some of the largest platforms still successfully combine institutional and retail investments. And the binary nature of institutional funding – which has come into focus as the credit cycle turns – should further bolster the case for the diversification of retail money. “We’re open for retail business, definitely want retail lenders and won’t leave retail investment,” says Stuart Law, chief executive of Assetz Capital. “A lot of savvy retail investors will carry on with this part of their portfolio for a long time.” Most industry stakeholders agree that the future of the industry will see both institutional and retail investors playing a role. Despite their caution, more and more institutional investors are waking up to the benefits of P2P lending as a dynamic part of their portfolio. And as more and more P2P lending platforms prove their worth by delivering stable returns amid a recession of historic proportions, that caution will surely soon give way to confidence.