Welcome to the May newsletter from the Alternative Funding Network. In this issue we have news of our next AFN seminar, in which we’re going to be looking at the convergence of alternative and mainstream finance – and in particular Landbay’s recent deal to secure a wholesale financing line that will fund up to £250m a year of buy-to-let mortgages originated via the platform. We also have a round-up of our April seminar on SIPPs and ISA eligibility for crowdfunding and P2P platforms, and the rest of the AFN news for the past month.

 

Regards

Andy Davis

 

 

At our next AFN seminar, on Thursday May 28^th, we’re going to be digging into the implications of a landmark deal for the UK’s P2P sector. Landbay, a relatively new P2P platform that specialises in funding buy-to-let mortgages for professional and semi-professional landlords, recently announced that it had secured a warehouse financing line from a UK bank and a European asset manager that would enable it to originate and fund far higher volumes of mortgages – potentially £20m a month or more by the end of this year.

 

We’re assembling an outstanding expert panel including Landbay's chief operating officer, Julian Cork, to help us explore this landmark deal for the UK’s P2P sector and explain what it says about the ways that mainstream and alternative finance are likely to work together in future. There are signs all around that alternative and conventional finance are becoming ever more entwined and complementary. It promises to be a fascinating session, so do come along if you can.

 

The seminar takes place on Thursday May 28th at 154 - 160 Fleet Street, EC4A 2DQ, starting with networking and drinks from 6.30pm.

 

If you haven’t already seen it, you can read my blog on the Landbay deal here 

 

For more information please contact the team on [email protected] you can register directly via .

 

The seminar is free for customers of the Workspace Group and full registered members of the Alternative Funding Network. 

 

Non-Alternative Funding Network members can attend this seminar for £50+VAT - to purchase a single AFN Seminar Ticket. 

 

At lunch with the CEOs of two alternative finance providers last week, conversation naturally turned to one of the most intriguing unknowns in the peer-to-peer world – how exactly is the nation’s favourite retail investment platform, Hargreaves Lansdown, planning to enter the P2P lending market and what will happen if and when it does?

 

There’s no doubt that the FTSE-100 listed HL (market capitalisation £5.5bn) is planning an assault. It said as much in its most recent results announcement in early February and as if to confirm its intentions, one of my lunch companions remarked that it had just tried (unsuccessfully) to poach one of his key staff. So P2P platforms have been put on notice: large-scale and well-funded competition is on the way.

 

The presentation that HL’s chief executive, Ian Gorham, gave to analysts in early February, which you can download from the investor relations section of its website, makes clear that in order to open a new avenue for growth, the company is planning a major assault on the £700bn UK savings market as a complement to its large (and possibly maturing) position as a retail investment funds supermarket. HL has about 675,000 active clients, perhaps six or seven times the number of individuals currently lending via P2P platforms in the UK. It says 45% of them have cash savings of £75,000 or more and 70% would use HL to manage their savings if the company entered this market – in theory, therefore, these people fit the profile of potential P2P lenders very nicely. HL has also talked of offering its investment customers the opportunity to borrow via its P2P platform and use their portfolios as security for their loans, presumably enabling them to pay lower rates of interest. That might turn out to be a neat trick that others would find hard to emulate, although how popular it would prove in practice is hard to say.

 

HL’s aim is to “become the preferred retail venue for managing cash savings in the UK, for existing clients and new savings clients, without needing a banking licence”. Partly, this is about creating a new growth area for the business. But it’s also a defensive reaction to the impact that the collapse in deposit rates has had on its profits. HL holds a lot of its clients’ cash that is either waiting to be invested or is the proceeds of investments they have sold. In the past, it used to make a decent chunk of its profits by depositing that cash in the bank and holding on to some of the interest it earned. In the six months to December 31, HL says that changing regulation along with falling deposit rates cut the spread between the interest it receives on client cash and the rate it passes on to its customers from 1% to 0.62%. That represents a £4.8m year-on-year drop in interest income – waving goodbye to that much “free money” has to hurt.

 

By creating a P2P lending platform, HL reckons it could earn a spread of at least 1% between the rate it would pay to lenders and the rate it would charge to borrowers. Given what’s happened to its interest margin on client cash deposits, you can see why this would make sense.

 

So the logic of HL creating a P2P platform is clear. It has lots of existing customers who are well off and looking for ways to create a better return on their cash savings. It has a popular and trusted brand that might well be enough to make those people feel safe to try P2P lending with HL. It’s already a huge ISA provider and P2P lending will soon be an ISA-eligible asset class. And it is a truly formidable marketing machine that could “mainstream” the idea of P2P lending with a ruthless efficiency that few could match. Describing the attractions of marketplace lending, one of the bullet points in its analyst presentation states with characteristic directness: “Good principle. Needs scale. HL has that scale.”

 

So what’s in store? Personally, I would expect HL to concentrate, at least initially, on consumer lending, possibly including property loans, because credit data in this market is plentiful and underwriting tends to be a much more standardised process than in small business lending, for example. It might even decide an acquisition is the way forward, rather than building an operation from scratch.

 

But either way it won’t be plain sailing, not least because P2P lending differs in important respects from HL’s core business of selling investment funds. In that market, scale brings huge benefits because it allows HL to lean on fund managers to lower their charges, making its offer more competitive than others’ and allowing it to pass on the benefits to its customers in lower fees. But in P2P lending, scale is not necessarily such a benefit. The ability to bring a lot of money to the market will be an advantage only as long as HL can avoid driving down lending rates and/or accepting higher-risk borrowers with lower credit ratings in order to find enough homes for all that new money.

 

This probably explains why the company insists that any move is “at least 18-24 months” away. The P2P market is growing fast, but given HL’s scale it will need another couple of years at present growth rates before it will start to look big enough to accommodate the elephant in the P2P room.

 

are hosting an extended seminar related to Charities and Debt – “Should charities be borrowing to increase impact?”  

 

The Charity Leaders’ Exchange (CLE) is an experience-sharing network for forward-thinking Charity Leaders helping to drive positive change. The CLE provides intelligently selected guidance to help inform the decision-making of its members. Structured around topics that will challenge them to think differently, it facilitates connections between like-minded senior charity leaders and provides easy-to-access insights into their experiences.
 

 

The Charity Leaders’ Exchange is developing research into attitudes towards, and adoption of, different forms of funding, in particular social finance and debt.

 

The CLE's next event is an extended seminar and research related to Charities and Debt – “Should charities be borrowing to increase their impact?” As part of this project they are running a survey of charity leaders.

 

The seminar will run from 4pm - 7pm on the 21st May at Workspace, Fleet Street, 154 - 160 Fleet Street , EC4A 2DQ 

 

The informative seminar will consist of:

• Listen to case studies from charities that have taken on debt to increase impact
• There will be a presentation of preliminary results from the survey (and see below)
• There will be a short presentation from Andy Davis, our own AFN Programme Editor covering some of the new forms of Alternative Debt Finance that are appearing in the market

 

The Survey includes:

• Knowledge and, experience of, different forms of debt finance
• Mix of current funding
• Attitudes towards different types of debt finance
• Perceived and actual barriers towards using debt
• Use of reserves to lend to others

 

Initial results will be presented at the event on 21st May. A full report will be produced from this which will be available in mid-June.

 

How to Register: 

 

Full members of the Alternative Funding Network can access this seminar free of charge, spaces are limited. Please contact [email protected] to express your interest in attending. 

 

At our April seminar, we sat down with Stephen Cave of Evolution SIPP, Dan Kiernan, Research Director of Intelligent Partnership, James Sore, Investment Director of Syndicate Room, and  Brian Bartaby, CEO of Proplend, to look at how alternative finance platforms are becoming SIPP-eligible and getting ready to offer ISAs once the rules are in place, probably later this year.

 

Stephen Cave said that his company was currently meeting three P2P platforms a week to discuss SIPP eligibility and already had arrangements in place with nine that enable investors to lend within a SIPP wrapper, thereby gaining the benefit of tax relief on their contributions and tax-free gains. Kevin Caley, co-founder of Thincats, says that there is around £7m of SIPP money active on his platform (including his personal fund) mainly thanks to Thincats’ efforts from the beginning to find SIPP providers willing to partner with the platform.

 

However, as the discussion made clear, there is a long way to go before alternative investments are fully absorbed into the retail mainstream, not least because P2P SIPPs are still the preserve of Sophisticated Investors and High Net Worth Individuals. To open a P2P SIPP, an investor first has to be judged sufficiently experienced by the firm that provides the SIPP account, such as Evolution, rather than by the P2P platform itself. In practice, this means that most retail investors will not be considered sufficiently expert, although this is likely to change over time as the P2P industry develops a longer performance record – SIPPs themselves used to be the preserve of wealthy, sophisticated investors but are now mass-market products. But this will probably take a while. 

 

One big difference between ISAs and SIPPs, as far as alternative finance platforms are concerned, is that SIPPs already enable investors to spread their money across several platforms from the same account, whereas the new P2P ISAs are likely to be platform-specific – at least to begin with – thereby restricting the investor to lending via their ISA with just one platform per tax year. That may restrict take-up to some extent.

 

Another issue that the panel highlighted was that alternative investments such as P2P lending have gained very little traction among retail financial advisers, a crucial group that guide the decisions of millions of retail investors. Advisers are wary because, although they can clearly see the potential benefits of adding P2P investments to client portfolios, they are nervous about this young and relatively untried asset class and see huge potential downside for themselves if they recommend it and something goes wrong, with little upside if things go well. Some are also concerned that their professional indemnity insurance will not cover them for esoteric alternative investments such as P2P, leaving them uncomfortably exposed should problems arise.

 

So although there is great excitement about the ability to use tax-advantaged wrappers in conjunction with alternative finance platforms, progress is likely to be slower than some would like, but that doesn’t mean it will be insignificant. P2P may well continue to be dominated by relatively wealthy DIY investors, but they still account for a lot of money and even in this minority market, there is still a huge amount of headroom for alternative finance to grow.

 

The Alternative Funding Network is part of the recently launched Informed Funding who provides the widest choice of business funding in Britain.

 

Informed Funding is an online information resource designed to help growing businesses identify the range of options they have to raise finance. It provides not only bite-sized factual information and guidance and a direct shop window via funders microsites (of which there are currently over 80) but it also features self-service online tools that enable users to home in on the providers who might match their needs.

 

Not only does Informed Funding provide the broadest and largest range of funding options, but it also does not charge any brokerage fees.

 

If you are a funding provider and are interested in showcasing your products and services to a targeted and qualified audience via one of our microsites or via our next Funding Fair in September, please contact us at [email protected]

 

 

The funding landscape for growing businesses is changing radically, and provides both opportunity and risk for those seeking to be active in the market. The Alternative Funding Network (AFN) provides its members with intelligence and industry insight on the developing issues that really matter. This is achieved through a mix of exclusive industry seminars, regular commentary, research and secure peer-to-peer networking.

 

 

 

AFN Membership provides you with the following benefits:

o   Free attendance at 6 seminars during the year, chaired by Andy Davis and always featuring leading figures in the industry

o   Receipt of Andy’s weekly Blog, exclusive to subscribers to the AFN

o   Free receipt of our industry insight reports, built from the intelligence sharing at our seminar series

o   A personal listing on our AFN membership network, where members are able to contact each other (if agreed to) on a secure, one-to-one basis

o   Free attendance at the bi-annual Informed Funding “Finance Fairs”

o   Access to the AFN catalogue of specialist market research and video interviews with industry leaders

 

Membership Costs

•            Corporate Membership is an annual £595+VAT for up to 5 members of your team

•            Individual Membership is an annual £295+VAT

 

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