On Wednesday I flew to Manchester on invitation of p2p lending service Assetz Capital and met with Managing Director Andrew Holgate and his team. I learned how they operate and we spent the day discussing various aspects of p2p lending.
Assetz Capital does p2p lending to businesses secured by assets – mostly property. While the loans are big (usually the minimum loan size is 100,000 GBP), investors can lend starting with amounts of just 20 GBP. But typical investments are higher. In fact their first loan, which was for the amount of 1.5M GBP was funded by just 150 investors. Andrew Holgate pointed out that since each loan is backed by a security there is not as much need for investors to diversify to spread risk as with other p2p lending platforms.
Assetz Capital went live in April 2012. The founders and the management have extensive experience in finance, especially SME funding. One of the founders, Stuart Law, is the CEO of Assetz Group which has a 15 years track record in property investments. Assetz Capital could utilise the huge existing database of over 65,000 customers of Assetz Group when it started marketing its loan offers to investors.
Initially the main task at hand was to build trust. Trust not only on the investor side, but also from brokers, the main source of loan requests. Brokers wanted to be able to rely on the referred, approved loan requested getting funded within reasonable time (e.g. 2 weeks). While this was challenging in the beginning, Holgate says Assetz Capital has no problem now of getting multiple large loans funded simultaneously. Some of the loans fill as fast as 4 to 5 hours. To get there Assetz Capital integrated underwriters into the process.
After Assetz Capital has thoroughly vetted the applying business and the underlying security – in fact every business is visited in person by an employee of Assetz Capital, it is presented to large investors which will then check the offer themselves and underwrite it – effectively saying they are prepared to finance large chunks of the offer.
Once the loan is on the marketplace, investors bid on it. Investors do see all documentation available on the loan and Assetz Capital says investor scrutiny and feedback is very valuable. Each loan request has a Q&A section where investors can comment. Between funding and drawdown it usually takes a few weeks, depending on circumstances. In this time all documentation required is completed (e.g. first or second charges).
Assetz Capital is 100% owned by the management. Even so the business is very young it already turned profitable.
Broader product range
Assetz Capital started p2p lending with loans backed by real estate. Gradually they are now moving in financing a broader range of loan purposes, but always backed by asset securities. Assetz Capital wants to become the single access point for SME finance needs, as banks are no longer fulfilling that role. A surprising point in the talks for me was, when Holgate said, that actually their interest rates are higher than those charged by the banks, which is possible since many SMEs don’t get the funding they need from the banks any more.
On the investor side Assetz Capital will take steps to reduce the average time-span between funding and drawdown for investors. The company also considers in the medium term to grade loans into risks classes. At the moment different risks perceived by the risk manager at Assetz Capital are priced into the interest rates of the loans. So far Assetz Capital has refrained from assigning risk grades as it might be seen as giving investment advice to investors, which Assetz Capital does not do. Assetz Capital might also make it easier for investors to automatically invest into loans of a given risk/interest range. So far this was not necessary as the majority of investors enjoyed the process of the individual selection of loans.
Assetz Capital did aim at the audience of brokers through marketing at events at trade organisation, thereby reaching 1,000 brokerage firms, consisting of 5,000 individual brokers.
Andrew Holgate stressed the importance Assetz Capital puts on customer service and listening to the needs of investors. So far all loans have been financed solely by retail investors.
Also he stressed the importance of know-how and experience in lending. ‘Anybody can start lending, the hard part is to get the money back’. Assetz Capital built a management team of experienced professionals and considers it vital the decisions are made by them rather than computers.
Industry focused too much on defaults not enough focussed on avoiding losses
Assetz Capital defines a loan to be a default after one missed payment. When I interjected that this very much differs from the way that other p2p lending companies define a default, Andrew Holgate expressed his frustration that the figures are not compareable and that there is ‘too much focus on defaults – not enough focus on avoiding losses’. The most important metric should not be the default rate, but rather what is lost after recovery.
Naturally an important point to make, as each loan made at Assetz Capital is backed by security and a loss can only occur if the realized value of the security should by less than the outstanding principal of the loan.
So far the loan volume funded at Assetz Capital has been 28.6 million GBP. Assetz Capital aims to take that to 100 million GBP by the end of this year, a demanding goal which will require 20% month on month growth. At the moment Assetz Capital has about 5,000 registered investors, about 2,000 of which are currently active lending.
The industry as whole will get a boost in the UK by the planned ISA tax advantages, though details on the implementation of the ISA inclusion have yet to be announced by the UK tax authorities.
I would like to thank Andrew Holgate and his team for taking the time to show me around, answer my questions and explaining how they operate.