PEER-TO-PEER LENDING STATE OF THE MARKET ANNUAL REPORT 2019 | WWW.ALTFI.COM

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INTRODUCTION PEER-TO-PEER LENDING: STATE OF THE UK MARKET

After rapid growth from the ashes of the financial crisis, the alternative finance sector appears to be maturing. However, it faces internal and external challenges that will dictate the industry’s long-term viability and success. The successful listing of Funding Circle is a clear example of what can be achieved, the company’s development from a small retail platform to an institutionally backed SME lender illustrates the opportunity for others. With all emerging sectors, especially those dependent on technology, there tend to be clear winners and losers. Hence during a period in which we have seen the IPO of Funding Circle and other major platforms accessing institutional funds, we have also seen platforms close and others fail. This appears to reflect a bifurcation of the industry, with investors (retail and institutional) increasingly focusing on the more established and successful platforms, with less successful operators struggling to access finance and remain competitive. Closer regulatory oversight, combined with an increasingly competitive environment for retail deposits, has resulted in lenders becoming more dependent on institutional funding. For their part, some institutions are actively seeking exposure to direct lending assets. Their lending parameters and reporting requirements, alongside with the themes articulated in the FCA’s consultation paper on crowdfunding, have been important drivers in improving corporate governance and accountability across the sector. However, the benign credit conditions that have supported the growth of the alternative finance market appear to be changing: global economic uncertainty compounded by the UK’s Brexit issues present an increasingly challenging environment for lenders. How some of these platforms will weather an inevitable downturn in the broader economy is really the key question for investors and the industry in general. Perhaps more to the point, investors will need to gauge how net returns from online lending are likely to evolve. That implies a realistic assessment not only of headline returns but also of likely losses from defaults and arrears. Other questions, such as ease of access to invested funds and the secondary liquidity of invested assets will also become increasingly important considerations. This report from AltFi is a deep dive into this new asset class and we think complements RSM’s engagement in the space – hopefully both institutional and retail investors will find much to think about in the pages that follow.

Damian Webb Partner, RSM

INTRODUCTION 4

PREFACE WELCOME FROM THE EDITOR

In 2011 investors put £92m to work across the United Kingdom’s budding peer-to-peer lending market. By 2018 that had mushroomed to £6.1bn being invested over the course of a year. The seven-year period saw annual volumes swell beyond all belief. Why? Today the peer-to-peer (P2P) lending industry has been given the go-ahead by the Financial Conduct Authority (FCA), it has official governmental support in the form of its own Individual Savings Account (ISA), one P2P platform is a member of the FTSE 250 (Funding Circle) and a gaggle of investment trusts are specifically and regularly allocating permanent capital to online lending platforms. Has peer-to-peer lending finally arrived? A bullish analysis is somewhat not quite right for AltFi’s first annual State of the Market Report. There is no doubt that peer-to-peer lending has seen explosive growth and some establishment in more mainstream financial circles, but annual increases in volumes are slowing. Some investment trusts have begun to wind down or pivot strategies. Equity investors have been hard convinced, at the time of writing, to back Funding Circle’s valuation at its Initial Public Offering (IPO) price and many industry observers are preparing for an anticipated regulatory crackdown. In the nearly six years since AltFi began covering this market, whose name increasingly jumps around from ‘peer-to-peer’ to ‘online’ or ‘marketplace lending’, the industry has been a definitive UK success story, but still remains in a niche with a long way to go until it’s seen as mainstream by many investors. What will drive future growth and adoption? In this report, you will find the answers to some of these questions as well as at a comprehensive market snapshot, all the key numbers and exclusive interviews with some of the industry’s key players and thinkers. Enjoy!

Daniel Lanyon Editor, AltFi

PREFACE 5

CONTENTS: THE STATE OF THE ALTERNATIVE LENDING MARKET IN THE UK AND EUROPE

Since its emergence following the Global Financial Crisis, the online alternative lending market, dominated by the big names of peer-to-peer (P2P) lending, has experienced turbo-charged growth in volumes. In the UK, Europe’s first and largest P2P market, more than £6bn was advanced to consumers, small businesses and property developers during 2018, and the ‘big four’ lenders now have around £5bn of loans outstanding. This report takes the reader behind the headline numbers to analyse the factors that matter to investors in this emerging asset class – what is the pattern of growth across the market? How are returns and loss rates evolving? What level of return can investors reasonably expect to achieve while taking moderate levels of risk? How do professional investors go about assessing these assets? The report analyses the market in a series of snapshots: David Stevenson Editor-in-chief, AltFi

SECTION 1: A SNAPSHOT OF UK MARKETPLACE LENDING P8 SECTION 5: THE FINTEX WAY P22 The UK P2P sector’s period of growth is slowing as demand Specialist alternative credit investor Fintex Capital explains slips. The big four platforms have entrenched their leadership its ‘Four Cubes’ template for portfolio construction and risk with few signs of serious challengers emerging. management of P2P loan assets. SECTION 2: ONLINE LENDING IN EUROPE – A MARKET OVERVIEW P12 SECTION 6: THE WORLD OF LISTED DIRECT LENDING P25 The European market for P2P continues to expand but again The investment trust research team at Numis Securities at a slower pace. Growth of almost 50% is predicted for 2019 – analyse the performance of the UK’s listed alternative half the rate of the previous year. credit funds. SECTION 3: WHAT HAVE RETURNS ACTUALLY BEEN LIKE? P18 SECTION 7: LOAN IMPAIRMENTS, DEFAULTS AND RECOVERIES P30 Returns from P2P loans have been trending downwards for the Damian Webb of insolvency specialists RSM gives an past two years as loss rates head higher – a sign that loan books insider’s view of the outlook for loan impairments and that grew quickly in 2016 and 2017 are starting to mature. defaults in the P2P market. SECTION 4: LENDING PLATFORMS’ ADVERTISED RETURNS P21 APPENDIX – ALTFI’S PLATFORM SURVEY P32 A table comparing advertised returns across property, A database of each UK and continental Europe platform’s consumer, business and receivables marketplaces in the UK offerings, including investment minimums, fees and and continental Europe. interest details.

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ALTFI PROVIDES MARKET-LEADING NEWS, OPINION, INSIGHTS AND EVENTS FOR THE RAPIDLY-GROWING ALTERNATIVE FINANCE AND FINTECH COMMUNITY. SUBSCRIBE TO OUR NEWSLETTERS Visit AltFi.com to recieve a daily, weekly & dedicated alternative credit newsletter

ALTFI PROVIDES MARKET-LEADING NEWS, OPINION, INSIGHTS AND EVENTS FOR THE RAPIDLY-GROWING ALTERNATIVE FINANCE AND FINTECH COMMUNITY. 8

SECTION 1: VOLUMES AND MARKET SHARES SNAPSHOT OF UK MARKETPLACE LENDING MARKET

he law of big numbers is starting forms’ ability to get investors’ money back lending volumes would grow 43 per cent for to catch up with the UK’s market- and deliver consistent returns. the year, hitting £7.5bn. The sector’s earlier place lenders. Growth in market- Gross new lending topped £6bn for the breakneck expansion – when annual lending T place lending in the UK – by far first time in 2018, reaching £6.055bn ac- quadrupled between 2013 and 2015 – is quick- Europe’s largest market – is slowing and loss cording to figures from specialist data pro- ly becoming a distant memory. rates are edging up. Even though returns vider Brismo. That represents a 20 per cent Brismo is forecasting another year of 20 still look good against other fixed-income increase on the 2017 total of £5.034bn in per cent growth in originations for 2019, options, net yields are falling and most list- Europe’s biggest online lending market – a which would lift the annual new lending fig- ed funds that target online lending have punchy rate of growth by most standards, but ure to £7.27bn. But even in announcing this mostly failed to live up to their promise. after two years of 40 per cent year-on-year number in early February, it suggested 20 Now that the marketplace lending sector is expansion in volumes, 20 per cent represents per cent might be a stretch: “Before consid- maturing, scrutiny will focus more than a sharp slowdown in growth. As recently as ering any change to the macro picture, e.g. ever on lending standards and the plat- January 2018, Brismo was predicting gross that thing that starts with a B and ends with

SECTION 1: VOLUMES AND MARKET SHARES 9

sult for the UK’s marketplace lenders. That said, the marketplace sector is still tiny and clearly has ample room to grow: the stock of “Marketplace lenders cannot remain bank lending to small businesses, which has been shrinking for years, still stands at just immune to influences from the wider over £100bn, according to figures from UK economy, however, and here the picture is Finance, while the value of outstanding con- sumer credit is around £216bn, according to one of rapidly cooling demand for credit the Bank of England. from consumers and small businesses.” WIDER ECONOMY Marketplace lenders cannot remain immune to influences from the wider economy, how- ever, and here the picture is one of rapidly an EXIT, there is already a warning sign that totalled £280m in Q4, up from £248m a year cooling demand for credit from consum- our extrapolations may prove optimistic. earlier for a growth rate of 12.9 per cent. ers and small businesses. According to the This is because Q4, which has historically This is impressive but, as the report points Bank of England’s most recent Money and been very strong, ended rather meekly in out, it illustrates one of the challenges that Credit bulletin, published 1 March borrow- 2018. Our seasonal adjustment will capture increasing scale brings with it: as the sector’s ing appetite among consumers weakened that, but only with a diluted impact, as part stock of existing loans grows so the value again in January. “The annual growth rate of the average of a three-year look back.” of repayments increases rapidly each year of consumer credit has continued to slow. making it progressively harder to generate It was at 6.5 per cent in January, well below NEW RECORD growth in net new lending. A further slow- its peak of 10.9 per cent in November 2016.” Although underwhelming by historical down in gross lending volumes would ex- Within this, the growth rate of credit card standards, the final three months of 2018 acerbate this problem. The ‘big four’s’ stock lending fell to 6.7 per cent (against 7.1 per nevertheless set a record for quarterly new of outstanding loans has more than doubled cent in December), whilst the rate of other gross lending, at £1.6bn, up 13.9 per cent on since the start of 2016 and stood at £4.5bn by loans and advances was at 6.4 per cent, level the same quarter in 2017, according to the the end of last year, out of an estimated total month-on-month. This final figure has the new biannual Link Asset Services (LAS) Mar- of around £6.3bn for the entire marketplace clearest read-across to those marketplace ketplace Lending Index, produced in part- sector in the UK. lenders that focus on consumer lending since nership with Brismo. Among the ‘big four’ Against the background of uncertainties it excludes growth in credit card advances, a UK lenders, Funding Circle, Zopa, RateSet- facing businesses and consumers, another market they do not address. ter and MarketInvoice, the LAS report says year of 20 per cent growth in originations By way of comparison, Brismo’s data net new lending (new loans less repayments) would, therefore, be a commendable re- show that in 2018, marketplace lenders

Overall UK volume growth (£) Relative UK volume growth (%)

2005 £1.5m 2006 346% £6.7m 2006 2007 37% £9.2m 2007 2008 2008 £12.7m 38% 2009 £33.1m 2009 161% 2010 £52.8m 2010 60% 2011 £92.2m 2011 75% 2012 £220.3m 2012 139% 2013 £604.4m 2013 174% £1.47bn 2014 2014 143% 2015 £2.60bn % Growth year-on-year % Growth 2015 77% Volume Growth in £ Growth Volume 2016 £3.78bn 2017 £5.26bn 2016 45% 2018 £6.39bn 2017 39% 2019 £1.49bn (Volume for January-April only) 2018 22%

£0.0bn £1.0bn £2.0bn £3.0bn £4.0bn £5.0bn £6.0bn £7.0bn £8.0bn 0% 50% 100% 150% 200% 250% 300% 350%

SECTION 1: VOLUMES AND MARKET SHARES 10

lending is forecast for this year, with total new originations expected to reach £2.57bn. “A key question for marketplace loan investors A key question for marketplace loan inves- this year will be how far the divergence in volume tors this year will be how far the divergence in volume growth between banks and online growth between banks and online platforms platforms reflects weakening risk appetite among banks on the one hand, and resilient reflects weakening risk appetite among banks on risk appetite among marketplace lenders on the other. In this context, it is worth noting the one hand, and resilient risk appetite among that Funding Circle recently reduced its fore- marketplace lenders on the other.” cast returns for investors, a move that sug- gests loan losses are likely to edge up further. This would continue a trend of increasing loss rates that Brismo’s data, covering the big four UK platforms (Funding Circle, Market- focused on consumer loans achieved vol- Exchange – is set to outpace the banking Invoice, RateSetter and Zopa) show has been ume growth of 4.01 per cent, with the rate market. The Bank of England’s seasonally running for more than two years. predicted to drop to 3.85 per cent this year. adjusted data shows that lending to SMEs Volume growth in property lending – The slightly slower rate of growth among (defined as companies with a turnover of comprising bridging loans, longer-term marketplace lenders, compared with the £25m or less) grew 0.5 per cent year-on-year mortgages and development finance – all but mainstream banking market, may reflect in January, up from 0.1 per cent in Decem- ground to a halt in 2018, rising just 2.12 per greater concentration on prime borrowers ber 2018, having been negative in Septem- cent from 2017 to reach £960.8m and reg- and therefore lower exposure to higher-risk ber, October and November. Marketplace istering a year-on-year drop during the first groups where demand for credit may have lending to small companies was far strong- half. However, this sharp apparent slowdown held up better. er in 2018, growing by almost 21 per cent was the result of several special factors, in- If growth in consumer marketplace lend- to £2.13bn, the first time the annual total cluding the disappearance of Wellesley from ing is set to trail the wider market, the fore- has topped £2bn. Its growth rate, however, Brismo’s data in 2018 (Wellesley had report- casts suggest that growth in online small cooled significantly from 2017, when gross ed more than £90m of lending in 2017) as business lending – dominated by Funding lending grew just over 50 per cent. Another well as the widely publicised problems with Circle, now listed on the London Stock year of 20 per cent plus growth in business late payments at Lendy, which again sharply

Originations and forecasted originations by volume and growth rate

Numbers in £ 2019 projected 2018 2017 2016 2015 2014 Business 2,569647,918 2,130,092,503 1,762,276,870 1,171,530,683 712,236,338 408,086,854 Property 1,102,038 960,862,925 940,881,699 703,156,790 536,719,712 309,215,540 Consumer 1,939,427,350 1,867,492,343 1,795,557,337 1,443,011,165 1,079,550,210 564,804,061 Invoice 1,657,030,385 1,096,150,461 535,290,537 310,391,616 252,234,044 170,954,172 Total 7,268,143,866 6,054,608,233 5,034,006,442 3,628,090,253 2,580,740,305 1,453,060,626

Growth rates y-o-y 2019 projected 2018 2017 2016 2015 2014 Business 20.64% 20.87% 50.53% 64.49% 74.53% 102.53% Property 14.69% 2.12% 33.81% 31.01% 73.57% 512.04% Consumer 3.85% 4.01% 24.43% 33.67% 91.14% 97.79% Invoice 51.17% 104.78% 72.46% 23.06% 47.54% 205.98% Total 20.04% 20.27% 38.75% 40.58% 77.61% 144.85%

SECTION 1: VOLUMES AND MARKET SHARES 11

slowed that platform’s originations. Others registered strong growth, with the dominant property platform LendInvest reporting that it set a new monthly origination record, at Market shares by sector 2019 Others 6.0% £83m, in December 2018. Brismo predicts a Others 0.2% Folk2Folk 14.69 per cent jump in property lending vol- 3.5% umes for 2019. Within invoice finance, MarketInvoice now represents 99.8 per cent of the market, ThinCats 5.2% according to Brismo’s figures and in 2018 it advanced approximately £1.1bn, roughly INVOICE BUSINESS double its total for the previous year. During 2018 MarketInvoice announced that Bar- clays Bank had taken a strategic stake in the Assetz Capital 13.7% business and would be using the MarketIn- Funding Circle 71.6 voice platform to fund invoices for its SME MarketInvoice 98.8% customer base from its own balance sheet. The agreement represents probably the most Lending significant alliance to date between a mar- LendInvest 62.7% Works Others 0.2% Others 5.0% ketplace lender and a traditional bank. 3.3%

MARKET SHARES Octopus Choice 10.8% As you would expect, the market share fig- Lendy 6.3% ures are dominated by the big four platforms CONSUMER Lendy 6.3% PROPERTY – nowhere more so than MarketInvoice’s 99.8 per cent share in receivables finance. In small business lending, Funding Cir- cle claimed 71.6 per cent of the market in Landbay 15.2% Ratesetter 38.0% Zopa 54.0% 2018, with Assetz Capital on 13.7 per cent and ThinCats on 5.2 per cent. These top three lenders were the only platforms to originate more than £100m of gross new lending over 90 per cent of the market between them. Zo- problems with overdue loans in the second the 12 months. Add in the fourth-placed op- pa’s 2018 share is 54 per cent vs 55 per cent in half of 2018, Lendy’s share halved from 12.5 erator, Folk2Folk, with a 3.5 per cent market 2017, while RateSetter was on 38 per cent in per cent in 2017 to 6.3 per cent last year. Final- share and you have accounted for 94 per cent 2018, up 2 percentage points on its 2017 lev- ly, Octopus Choice, an offshoot of the lead- of the small business lending market. el. Third-placed Funding Secure is seeing ing retail-focused alternative asset manager, There has been no change in their re- its market share shrink rapidly, from 6.6 per took 10.8 per cent of the market in 2018, a spective places since 2017 when Funding cent in 2017 to 4.5 per cent a year later, while slight dip from its 12.3 per cent share the year Circle’s share was 72.1 per cent, Assetz was Lending Works climbed from 2.4 per cent in before. Again, one of the smaller platforms, on 12 per cent, ThinCats was on 3.5 per cent 2017 to 3.3 per cent last year. CrowdProperty, is reporting rapid growth in with Folk2Folk just behind on 3.45 per cent. Property lending, consisting mainly of gross originations, but across all main mar- The one notable change is the sizeable jump bridging and development loans, is a more ketplace lending categories, a small number in ThinCats’ origination volumes, which en- complex picture. LendInvest is the clear of major platforms are well entrenched and abled it to increase its share by 1.7 percent- leader in this space and lifted its market look increasingly difficult to dislodge. age points between 2017 and 2018. In effect, share between 2017 and 2018 from 57.3 per Finally, Octopus Choice, an offshoot of the ThinCats expanded its market share by 50 cent to 62.7 per cent. In second place, buy-to- leading retail-focused alternative asset man- per cent year-on-year, in an overall market let mortgage specialist Landbay is growing ager, took 10.8 per cent of the market in 2018, that grew by 20 per cent. Among the small- quickly and claimed 15.2 per cent of volumes a slight dip from its 12.3 per cent share the year er plays, Lending Crowd stands out for its in 2018 – a huge jump from its 4.4 per cent before. Again, one of the smaller platforms, trend of rapidly increasing gross origina- share in 2017 – as regulations on lending to CrowdProperty, is reporting rapid growth in tions, although in absolute terms they re- portfolio landlords reduced bank activity gross originations, but across all main mar- main modest. in this market. Wellesley, which had 9.9 per ketplace lending categories, a small number of In consumer lending, the big two, Zopa cent of the market in 2017 is absent from the major platforms are well entrenched and look and RateSetter, continue to claim more than 2018 total, while following widely publicised increasingly difficult to dislodge. ◆

SECTION 1: VOLUMES AND MARKET SHARES 12

SECTION 2: ONLINE LENDING IN EUROPE – A MARKET OVERVIEW KEY THEMES IN EUROPEAN PEER-TO-PEER LENDING

SECTION 2: ONLINE LENDING IN EUROPE – A MARKET OVERVIEW 13

t is difficult to easily understand prospect that could further quicken the pace that are often called ‘the big three’. These are the investor experience across of consolidation as larger platforms spread Zopa, RateSetter and Funding Circle. European peer-to-peer lending. into smaller markets. We already have ex- Zopa is a consumer loan specialist that has I The types of investment opportu- amples (October, Fellow Finance and Spot- lent a little shy of £4bn to UK consumers cu- nities offered by platforms across the conti- cap, to name a few) of platforms growing mulatively, all funded by a mix of retail and nent are diverse, and always the onus seems beyond their country of origin, but these are institutional investor capital. Together with to be on the platforms themselves to reflect few and far between. The proposed pan-Eu- Funding Circle, Zopa was instrumental in the performance of their loan books. The in- ropean licence – part of the European Com- lobbying for a dedicated regulatory frame- terest rates advertised by platforms are rarely mission’s 23-step Fintech Action Plan – will work for peer-to-peer lenders in the UK, pre- helpful. How can investors be expected to allow a platform licenced in one country to sided over by the Financial Conduct Authority trust that platforms will deliver on their operate across the EU. (FCA). That framework came into existence promises, or that they have in the past? What The Commission acknowledged when in 2014, initially as an interim regime, with is sorely missing from most of the market is unveiling the plan that it is, at present, dif- most major platforms being fully authorised an independent, standardised view of perfor- ficult for European platforms to expand in 2017. The rules are currently under review mance. There are of course certain compa- into neighbouring countries, and pointed by the FCA, which is considering, among oth- nies seeking to address this problem – one is to this as a key reason that the European er things, limiting retail investors to attribut- Brismo. Such analytics specialists have made market is ‘underdeveloped’ and ‘fragment- ing just 10 per cent of their net investable as- encouraging progress in the UK market. The ed’ compared to other major world econ- sets to peer-to-peer platforms. This proposal majority of the UK market’s biggest beasts omies. Founders were overwhelmingly has proven controversial within the industry, are now allowing their track records to be positive about the Action Plan when it was and the regulator has yet to reveal the final scrutinised by third-party verification spe- announced in March of 2018, but little has outcomes of its review. Brismo puts Zopa’s cialists. There remains significant progress happened since. Will we see the first pan-Eu- 1-year net return at 4.2 per cent. to be made in continental Europe. ropean licences handed out this year? Funding Circle is the biggest online lend- It is possible that the adoption of inde- er in Europe and one of the largest globally pendent verification will increase the pace of UK by most measures. It is also the only major a consolidation process that is clearly already KEY PLATFORMS: ZOPA, RATESETTER, FUNDING CIRCLE, UK platform to have gone public, success- underway. Europe’s very largest platforms MARKETINVOICE, LENDINVEST fully raising around £300m at a valuation of continue to grow apace, pushing into the bil- The UK is the best known of Europe’s online £1.5bn in September 2018 by floating on the lions lent territory, rather than millions. Yet lending markets. It is home to Zopa, the firm London Stock Exchange. Solely focused on many of the platforms at the smaller end of that pioneered the concept of peer-to-peer arranging loans for small businesses, Fund- the spectrum appear to be struggling to scale lending in 2005, as well as being home to ing Circle has to-date originated £6.3bn their operations; it is striking how many of Europe’s biggest business lending, property globally. It is active across the UK, US, The these firms have made a slow start (if they lending and invoice finance platforms by vol- Netherlands and Germany. Like Zopa, can be said to have started at all) in 2019, ac- ume. The UK’s prized peer-to-peer lending Funding Circle funds loans using a mix of cording to Brismo’s volume metrics. sector is spearheaded by a trio of platforms retail and institutional capital. It also cur- That slow start may well have contribut- ed to a general slowdown in growth in conti- nental Europe. Brismo projects that growth in continental Europe’s marketplace lend- ing industry will almost half in the coming “It is possible that the adoption of independent year, from 90.2 per cent in 2018 to 47.49 per cent in 2019, keyed by slower growth in the verification will increase the pace of a consumer lending sector – which represents consolidation process that is clearly already the largest proportion of the online lending market as a whole. Continental Europe’s underway. Europe’s very largest platforms online lenders disbursed roughly €3.32bn in 2018; Brismo projects them lending €4.9bn continue to grow apace, pushing into the this year. Finally, there is the promise of pan-Eu- billions lent territory rather than millions.” ropean passporting for ‘crowdfunders’ – a

SECTION 2: ONLINE LENDING IN EUROPE – A MARKET OVERVIEW 14

rently operates an independently-managed tive loan selection to passive exposure, with al investors, and its own Luxembourg-based investment trust – again listed on the London Funding Circle the last big domino to fall funds. MarketInvoice, a short-term business Stock Exchange – named the Funding Circle when it withdrew its manual bidding process funding specialist which has lent almost SME Income Fund, offering investors a pas- in the Summer of 2017. It is now only small £2.6bn cumulatively, takes its funding from sive allocation to its loans. This closed-ended and mid-sized platforms that allow retail in- sophisticated and institutional investors. portfolio is currently being wound down af- vestors to handpick their loans. Beyond these firms there are a number of ter investors agreed that it was the best way Behind the ‘big three’ are a number of significantly-sized direct lending platforms, forward after a fall in return expectations. mid-sized players looking to close the gap specialising in a range of funding types. The third member of the ‘big three’, Rate- on the market leaders. The business-focused These include Liberis, a merchant cash ad- Setter, has originated approximately £3.1bn P2P sector, in particular, boasts some larger vance provider; Iwoca and Spotcap, which in loans to UK consumers, small businesses mid-sized platforms. These include Assetz offer credit facilities; and Growth Street with and property developers to date. Unlike its Capital, ThinCats and Folk2Folk, which to its business overdraft. rivals, RateSetter has funded almost all its date have lent £729m, £385.7m and £275.3m Brismo puts the UK’s cumulative lending loans using retail money, with only limited respectively. All three platforms are differen- total at £15.74bn. With the sector’s major flirtations with institutional capital. tiated from Funding Circle in that they focus players now well beyond the start-up phase, A key weapon for RateSetter and others on secured business loans, and Folk2Folk is three intriguing new sources of competition in the market is the ability to offer ISA-eligi- unique among peer-to-peer lenders for oper- have emerged. The first comes from incum- ble investments, courtesy of the Innovative ating a branch-based network. bent banks, which have launched a number Finance ISA, which came into existence in Outside of peer-to-peer lending, the UK of ‘flanker brands’: standalone platforms 2016 but which in reality took some time to boasts a number of well-known online lend- that are optimised to deliver services digital- make an impact on the market, as platforms ers. LendInvest, which has lent roughly £2.1bn ly. Several of these have been launched into had to achieve full authorisation prior to to date, specialises in loans to property devel- the business loans sector, the best-known launching a tax-wrapped version of their opers and buy-to-let landlords. It no longer being Esme (owned by NatWest). The sec- investment products. According to Brismo, operates a peer-to-peer platform. Instead, it ond emerging source of competition is the RateSetter offers investors a 1-year net re- funds loans using a mix of sources, including digital-only banks, or ‘neo-banks’, such as turn of 4.2 per cent. a private investment portal for sophisticated Monzo, Revolut and Starling Bank. These Generally speaking, the UK peer-to-peer investors, retail bonds listed on the London fintech darlings have been able to attract industry has seen a shift over time from ac- Stock Exchange, credit lines from institution- UK customers in their millions with mobile-

An emerging source of competition are digital-only banks, or ‘neo-banks’, such as Monzo, Revolut and Starling Bank whose attempts to win customers from peer-to-peer and other types of online lending platforms could become a key battleground in the UK market over the next few years.

SECTION 2: ONLINE LENDING IN EUROPE – A MARKET OVERVIEW 15

optimised current account offerings and al- ternatives, and while they were originally viewed as a potential source of origination for “A key weapon for RateSetter and others in existing online lenders, they are increasingly the market is the ability to offer ISA-eligible moving into lending themselves (both in the consumer and business loan markets). Their investments, courtesy of the Innovative attempts to win customers from peer-to-peer and other types of online lending platforms Finance ISA, which came into existence in could become a key battleground in the UK market over the next few years. 2016 but which in reality took some time to A third fast-growing but still nascent area make an impact on the market.” in online lending involves tech giants, most prominently Amazon and PayPal. The latter launched PayPal Working Capital in 2014 and saw eye-catching rapid growth last year ing market of approximately 28 per cent. Johnen has previously told AltFi that he sees of 60 per cent with total financing to SMEs A French platform, October is also active pan-European licensing for online lenders as reaching £1bn. Amazon’s own foray into fi- in Spain, Italy and The Netherlands. Since a “very positive development”. nancial services has been similarly stealthy 2017, the European Investment Bank (EIB) A key feature of the German market is that but the firm has been less forthcoming on has partnered with October to channel its online lenders cannot originate loans on volumes. Joining the scene soon in the con- funds to European SMEs, most recently their own – they must do so via an authorised sumer lending market, Apple recently re- committing to lend another €200m via the partner bank. North America’s online lend- vealed its tie-up with Goldman Sachs in the platform at the start of 2018. October effec- ers face a similar situation. form of a credit card. tively took over from Funding Circle as the Creditshelf recently announced that it had EIB’s distribution partner of choice follow- fielded €1bn in loan requests (demand having FRANCE ing the result of the Brexit vote in 2016. doubled in 2018) since launching in 2014. The KEY PLATFORMS: OCTOBER, YOUNITED CREDIT, In early 2018, the European Commission lender has carved out an interesting niche in FINEXKAP set out its Fintech Action Plan, which among the market serving the German Mittelstand France is among the largest online lending other things sought to help ‘crowdfunding’ (SMEs). Creditshelf tends to target larger markets in continental Europe by lending vol- platforms (primarily marketplace lenders) loans than the average online lender, with ume and is dominated by three key players. operate across the Single Market. October’s ticket sizes ranging from €100k to €5m. Younited Credit is a consumer lend- COO Patrick de Nonneville, while generally These loans are funded using institutional ing platform that has lent €874.2m to date. optimistic about the proposals, warned that capital. It has lent over €100m to date. The Younited operates what it calls a hybrid the proposed pan-EU licences must not con- platform took the unusual step of going pub- funding model; it allows individuals to lend form “to the lowest common denominator of lic at a fairly early stage in its development, money to other individuals via Special Pur- what each country thinks is appropriate”. raising €16.5m in July 2018 by listing on the pose Vehicles (SPVs), and it raises lending Finexkap is an invoice finance platform Prime Standard of the Frankfurt Stock Ex- capital in the form of deposits, both from that has disbursed a cumulative total of change. Creditshelf was in fact the first of a institutions and individuals. Younited is per- €258.1m in funding to French businesses, number of small to mid-sized European plat- haps the only ‘marketplace lender’ in Europe with €13.9m coming in the past 90 days (be- forms to opt for an early listing, with Finnish to have access to this latter source of capital. tween 9 December 2018 to 8 March 2019). firm Fellow Finance and Portuguese lender It is licensed as a European credit institution, RAIZE subsequently following suit. meaning it must hold a minimum of €5m in GERMANY Funding Circle’s Registration Docu- regulatory capital. This licence can be pass- KEY PLATFORMS: AUXMONEY, FUNDING CIRCLE, ment, published shortly before its IPO in ported to all EU countries, including the UK, CREDITSHELF, SMAVA, IWOCA September 2018, revealed that the firm sees subject to the approval of the European Cen- Germany is home to continental Europe’s Germany as its largest European market in tral Bank. Younited is also noteworthy for largest peer-to-peer/marketplace lender terms of addressable originations. The lend- its strategy of teaming up with banks (both by cumulative output: Auxmoney. Since its er calculated €55bn of addressable origina- digital and incumbent) to offer its loans as a 2007 launch, Auxmoney has lent more than tion in Germany, versus £35bn in the UK, service to their customers. €1.2bn to German consumers to date. Like and €10bn in The Netherlands. October (the artist formerly known as Younited Credit in France, it hitched its wag- Smava is a rather unusual player in the Lendix) is one of the largest small business on to a digital bank (N26) in 2017 in an effort German market. There is some debate lenders in Europe. It has lent €264.5m to to boost originations. The firm announced in around whether it should be viewed as an date, with a 90-day market share in con- early 2018 that it had hit profitability for the online lender or credit brokerage platform – tinental Europe’s online business lend- first time in the previous year. Its boss Raffael some would say it’s a case of splitting hairs.

SECTION 2: ONLINE LENDING IN EUROPE – A MARKET OVERVIEW 16

The supranational entity has recently been increasing its activities supporting equity in- “Major online lenders from Germany (Spotcap), vestments in Europe’s online lenders. France (October) and the UK (Funding Circle) Workinvoice has lent €180.6m cumula- tively, with over €10.4m coming in the last have expanded into the Dutch market – 90 days (between 9 December 2018 to 8 March 2019). Unlike Credimi, Workinvoice suggesting also that it is a particularly attractive funds unpaid invoices using qualified inves- tor money, via a peer-to-peer platform. destination for small business lenders.” Borsa del Credito is a more straightfor- ward SME loan-focused peer-to-peer lender. It has lent €56m to date with €7m coming in the last 90 days (between 9 December 2018 Either way, the company raised $34m in an Circle Netherlands, as part of its Guarantee to 8 March 2019). equity investment round led by Runa Capital SME Credit (BKMB) scheme. This scheme In March 2018, a new working group in 2016 and is a force within the market. Its has traditionally targeted banks, but Fund- named ItaliaFintech was founded with a focus is on connecting consumer borrow- ing Circle Netherlands’ managing director view to transforming the Italian market’s po- ers with a broad base of investors, spanning Jeroen Broekema told AltFi, in an interview tential for growth into tangible development. from banks to private investors. The Ber- at the time, that he hopes the inclusion of In announcing its launch, the group admitted lin-based outfit has been around since 2007 online lenders will boost lending to smaller that the growth of fintech in Italy had been and in late 2016 claimed to have facilitated businesses. Funding Circle Netherlands had taking place “with a slight delay compared to over $1.75bn in lending. Compeon is a simi- lent a cumulative total of around €75m to other European countries”. lar platform but one focused on business fi- Dutch businesses at the time. The companies involved in the group span nancing solutions; in late 2017 it claimed to Funding Circle’s IPO Registration Docu- a wide range of fintech niches. They are: Bor- have facilitated over €100m in funding since ment, published September 2018, highlight- sadelCredito.it, Conio, Credimi, Epic, Fifty, launching in 2013. ed projected annualised investor returns for Housers, Lendix, Modefinance, Money- loans originated in 2017 across all four of its Farm, N26, Oval Money, Let’s Lose, Raisin, THE NETHERLANDS markets ranging between 4.6 and 7.6 per Satispay, Soldo, Virtualb, Workinvoice and KEY PLATFORMS: GELDVOORELKAAR, SPOTCAP, cent, with returns a little higher in the US and Younited Credit. At the time of ItaliaFin- OCTOBER, FUNDING CIRCLE, LENDAHAND Netherlands. Those higher returns are driv- tech’s launch, these firms collectively ac- Geldvoorelkaar is one of the oldest peer-to- en by commensurately higher risk. Projected counted for 920,000 European customers, peer lenders in the Dutch market, and one bad debt for loans originated in the same pe- of which some 425,000 were located in Italy. of its biggest by volume. The firm, which ar- riod are 4.1-6.1 per cent in the US and 2.3-4.2 ranges loans for businesses and against prop- per cent in the Netherlands. This compares LATVIA erty, has lent a cumulative total of €162.4m, to projected bad debt rates of 2.4-3.3 per cent KEY PLATFORMS: MINTOS, TWINO, VIVENTOR, SWAPER, with €12.4m coming in the last 90 days (be- in the UK and 1.9-3.9 per cent in Germany. Latvia is best-known for pioneering a ver- tween 9 December 2018 to 8 March 2019). sion of the peer-to-peer/marketplace lending The Dutch market has proven a major ITALY model that involves one platform channel- lure for foreign entrants. Major online lend- KEY PLATFORMS: BORSA DEL CREDITO, CREDIMI, ling investor funds into loans sourced by a ers from Germany (Spotcap), France (Oc- WORKINVOICE, OCTOBER, SMARTIKA wide range of originators. This has allowed tober) and the UK (Funding Circle) have The Italian online lending market is dominat- several platforms to scale their operations expanded into the market – suggesting also ed by a pair of large invoice finance special- at a rapid rate. Mintos has met with more that it is a particularly attractive destination ists, Credimi and Workinvoice. The former success than any other platform operating for small business lenders. Further boosting has lent a cumulative total of €338.2m to Ital- this model. The firm has now facilitated ap- the nation’s attractiveness is Amsterdam’s ian SMEs since launching in late 2015, making proximately €1.83bn in loans for businesses, status as an emerging ‘fintech hub’, one that it the largest invoice finance platform in con- consumers and even against property, with will no doubt be vying for any UK business- tinental Europe by volume. It is authorised by advertised returns of 11.70 per cent. It has es seeking to diversify their operations in the Bank of Italy as a financial intermediary. matched €460.7m in the last 90 days alone the shadow of Brexit. Credimi recently scooped €10m in a (between 9 December 2018 to 8 March 2019). Moreover, the Dutch government seems fundraise supported by the European In- The platform has over 100,000 registered to be giving strong backing to its online lend- vestment Fund, through InnovFin Equity, investors, hailing from 70 countries. Mintos ers. In September 2018, news broke that the with the support of European Union (EU) operates a ‘buyback guarantee’ (common- government would guarantee up to 75 per programmes Horizon 2020 and the Europe- place among these sorts of platforms) which cent of certain loans originated by Funding an Fund for Strategic Investments (EFSI). operates a little like the provision fund model

SECTION 2: ONLINE LENDING IN EUROPE – A MARKET OVERVIEW 17

Further boosting cap. Local peer-to-peer lending pioneer Co- The Netherlands’ munitae suspended its activities indefinitely attractiveness is in late 2017 after discovering a case of fraud Amsterdam’s status involving false promissory notes. It had lent as an emerging a cumulative total of €44.8m by the time it ‘fintech hub’, one that closed. Active business lending platforms will no doubt be vying for any UK businesses include LoanBook and MytripleA, which to seeking to diversify date have lent €53.6m and €51.8m respec- their operations in the tively. By the broader context of the Europe- shadow of Brexit an market, these may be described as small to medium-sized lenders. Both are peer-to- peer platforms. LoanBook operates an auc- tion-based investment system, with headline rates ranging from approximately 4 to 9.5 per cent depending on the risk grade of a loan. MytripleA advertises returns of 7.0 per cent.

FINLAND KEY PLATFORMS: FIXURA, FELLOW FINANCE Finland boasts a pair of sizeable consumer lending platforms in Fellow Finance and Fix- ura. The former has lent a cumulative total of €400.3m, lending €54.8m over the past 90 days (between 9 December 2018 to 8 March 2019). Fixura has lent a cumulative total of €99.8m, and €5.4m in the last 90 days (be- tween 9 December 2018 to 8 March 2019). Also active in Sweden and Denmark, Fellow Finance is one of a small number of mid-sized online lenders in Europe to go public in 2018. The platform raised €10m at a valuation of €55m in October. Both firms are peer-to-peer lenders. Fellow Finance advertises an ‘average interest income’ of 10 per cent. Fixura puts its that was pioneered by RateSetter in the UK – allowing investors from multiple countries average annual rate of return at 7.9 per cent. – except that it is not always clear how much to invest in its loans. EstateGuru is the other runway the buyback guarantee has. Mintos’ big fish in the market. It arranges peer-to-peer POLAND origination partners span 28 countries, rang- loans backed by property, advertising histori- KEY PLATFORMS: KOKOS, FINANSOWO, ZLTY MELON, ing from the UK, to Mexico, to Zambia. cal returns since its launch in 2014 of 12.23 per IWOCA, KREDITECH TWINO, Viventor and Swaper operate cent per annum. The platform has lent a little Poland is a busy online lending market char- similar models and have to date facilitated more than €100m to date, lending €12.6m in acterised by small (in the broader context €455.7m, €71.4m and €54.4m respectively. the last 90 days (between 9 December 2018 to of Europe) consumer lending peer-to-peer 8 March 2019). platforms. Finansowo, Zlty Melon and Kokos ESTONIA are the best-known local peer-to-peer lend- KEY PLATFORMS: BONDORA, ESTATEGURU, IUVO SPAIN ers, having cumulatively lent €25.8m, €12m Tallinn in Estonia is a well-known fintech hub KEY PLATFORMS: COMUNITAE, MYTRIPLEA, LOANBOOK, and €38.1m respectively. However, all three and is home to one of continental Europe’s KREDITECH firms have thus far lent less than €1m in 2019. best-known P2P platforms, Bondora. The The Spanish market has not been one to Kokos, in fact, is yet to lend any money at all peer-to-peer platform has facilitated €189.7m which Europe’s big beasts have expanded so this year. Finansowo advertises returns of in consumer loans to date, with around readily, with a number citing concerns over ‘over’ 10 per cent per annum, while Zlty Mel- €24.5m in loans matched over the past 90 days credit quality. Indeed, Funding Circle end- on offers a ‘yield’ of 7.9 per cent. (between 9 December 2018 to 8 March 2019). ed up pulling out of the market after initially Other noteworthy platforms: Linked Fi- Bondora was among the first European online entering it (alongside The Netherlands and nance (Ireland), Lendify (Sweden), 4Finance lenders to push towards ‘pan-European’ status Germany) through the acquisition of Zen- (multiple), ID Finance (multiple). ◆

SECTION 2: ONLINE LENDING IN EUROPE – A MARKET OVERVIEW 18

SECTION 3: INVESTOR RETURNS WHAT HAVE RETURNS ACTUALLY BEEN LIKE?

n investor with a perfectly diversi- Marketplace Lending Index published in per cent in the third quarter of 2017 and 4.5 fied portfolio of loans originated March. This net figure, calculated after loss- per cent in the second quarter of last year. by the UK’s big-four P2P lending es and fees, has been falling steadily for three Despite its steady decline, the net return A platforms – Zopa, RateSetter, years, from a recent high of 6.4 per cent in from P2P loans as a broad asset class still Funding Circle and MarketInvoice – is earn- the second quarter of 2016. The twice-yearly looks healthy compared with readily avail- ing a net return of about 4.1 per cent, accord- LAS Marketplace Lending Index, which uses able alternatives. For a start, 4.1 per cent is ing to the first Link Asset Services (LAS) data from Brismo, reports that it stood at 5.4 significantly positive in real terms – taking

SECTION 3: INVESTOR RETURNS 19

into account consumer price inflation, which stood at 1.8 per cent in March. A 2.2 per cent “Net returns have declined by about 100bps a year real return with modest volatility is attrac- tive in the current interest rate environment. over the past couple of years for a mix of reasons Assuming the average duration of the in- dex’s basket of P2P loans is about 3.5 years it’s including competitive pressure on headline rates also possible to compare the P2P asset class’ returns with more conventional fixed-in- for some types of lending, platforms’ margin come investments. Not surprisingly, in the requirements and rising loan losses.” aftermath of massive Quantitative Easing by the Bank of England, P2P returns are also well above the risk-free rate on three-year UK government bonds, which stands at about 0.7 per cent. P2P loans also provide a higher returns. Findlay suggest net returns have loan book cycles – which is not the same as return than baskets of investment grade ster- shrunk by about 100bps a year over the past an economic cycle – and we’re getting a feel ling corporate bonds and high yield bonds of couple of years for a mix of reasons including for what impairments look like across the life similar tenor. competitive pressure on headline rates for of a loan book. There’s no hiding place at that The main reason for the decline we have some types of lending, platforms’ margin re- point because if the loan’s gone bad and the witnessed in P2P’s net returns over the past quirements and rising loan losses. borrower’s gone bust, you have to recognise three years is clear. While the asset class’s He argues that a maturing of loan books it.” He points to the disclosure late last year gross yield has been remarkably stable over across the sector is a major part of the reason by Funding Circle’s listed investment trust that period, hovering at just over 7 per cent for the increase in loss rates rise and decline that it expected to recognise more losses and climbing slightly to 7.2 per cent current- in net returns. Given that the loan books now over the next year or two as an example of ly as platforms nudge up credit risk, the loss reaching maturity were originated in 2016 this process. “I’d suggest that’s a Funding rate has increased much more rapidly. At the and 2017 – a period of very strong P2P volume Circle loan book situation, not an economic end of 2016, net losses after recoveries cut growth accompanied by somewhat higher cycle situation, and I think the market has investor returns by just 90 basis points (bps). credit risk appetite – it is not altogether sur- perceived that too: their investment trust In the latest figures, they wipe out 290bps of prising that a couple of years down the line, share price has dropped around 10 per cent, returns, or 2.9 percentage points. loss rates start to edge up. pricing in some of those concerns.” The short message is: yields are up a little, “Platforms are generally going through There are various more technical fac- losses are up a lot. Stephan Findlay, CEO of a full term-cycle of their loan book,” says tors that can also affect the headline rate of BondMason, recently announced his compa- Findlay. “Funding Circle’s average loan is net return that the Brismo data produces. ny would wind down its marketplace lending about 3.5 years so we’re now getting to a po- For example, the figures include returns activities due to concerns about declining sition where we’re coming through those from various discontinued products, mostly

Net annual returns Net Loss vs Yield (Graph 3.2)

9% 10% 8% 8% 7% 6% 6% 5% 4% 4% 2% 3% 0% 2% 1% -2% 0% -4% 2011 2012 2013 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018 Source:Link Asset Services Marketplace Lending Index: Issue 1 2019 n Yields n Loss

SECTION 3: INVESTOR RETURNS 20

Range of Outcomes - Distribution of Annual Returns to Investors Using Fellow Finance

20%

15%

10%

5%

0% -7% -5% -3% -1% 1% 3% 5% 7% 9% 11% 13% 15% 17% 25%

achievable today at acceptable levels of risk. “I still think there “That’s arguably where the market is matur- ing to – that’s a low to medium-risk spectrum. are some good I still think there are some good opportuni- ties to earn attractive risk-adjusted returns opportunities to but probably at the more conservative end of the market. earn attractive risk- “You can’t chase higher returns when adjusted returns but you’re getting towards the end of the cycle – high gross yields are all very well, but people probably at the more forget that you haven’t got your return until you’ve got your money back.” conservative end of He argues that one of the key indicators investors should watch for in a good quality the market.” lending operation is its willingness to rec- STEPHEN FINDLAY, CEO OF BONDMASON ognise problem loans and manage them ac- tively. “If you’re trying to do the right thing and write good loans, and you’ve got good credit expertise, the speed to recognise im- aimed at institutional investors, that proved reflect the market-wide return available in pairments is important because you can pull unsuccessful due to their disappointing net reality to retail investors because it includes levers quickly to try and get a recovery. If you returns. These will tend to depress the over- platforms, notably MarketInvoice, that ac- leave it too long and let it fester, that’s where all net return figure slightly. Also, some plat- cept funding only from very wealthy individ- you can lose value because you’re not acting forms, notably Zopa, used to run a provision uals or institutions. Similarly, it offers no in- quickly enough.” fund to cover investor losses that has since dication of the dispersion of returns achieved As loan books mature, he says, the actu- been withdrawn. As a result, some of the by individual investors. al rate of impairments – and how effective- platform’s loans are covered by the provision All that said, the net return figure of 4.1 ly they have been managed – will start to fund while more recent cohorts are not. The per cent provided by the LAS report does pro- emerge. “Platforms at the margin can mas- effect of the provision fund is to flatter the vide a useful yardstick to compare with other sage that by extending loans and providing overall loss rate on Zopa’s book. indicators of likely P2P returns. refinancing – and I’m sure that goes on – but More generally, the headline net return Stephen Findlay suggests that net re- you’re beginning to get a clearer view of plat- rate published in the LAS report does not turns in the 3 per cent to 6 per cent range are form performance.” ◆

SECTION 3: INVESTOR RETURNS 21

SECTION 4: UK AND CONTINENTAL EUROPE RETURNS LENDING PLATFORMS’ ADVERTISED RETURNS

UK PLATFORMS ADVERTISED RETURNS:

PLATFORM SECTOR ADVERTISED RETURN

LendInvest Property 4%-7% gross

FundingSecure Property/Valuables Up to 16% gross

Zopa Consumer 4.5%-5.2% net pre-tax

Octopus Choice Property 4% gross

Landbay BTL mortgages 3.25%

MarketInvoice Invoice Finance 4%-6%

Conservative – 4.9%-5.2% net, pre-tax Funding Circle Business loans Balanced – 5.5%-6.5% net, pre-tax

RateSetter Consumer/business 3%-6%

Assetz Capital Property/Business 4.1%-15.15%

Folk2Folk Property/Business Up to 9%

Relendex Property Up to 10% gross

CrowdProperty Property Up to 8%

Proplend Property 5%-12%

CONTINENTAL EUROPEAN PLATFORM ADVERTISED RETURNS:

PLATFORM SECTOR ADVERTISED RETURN

Fellow Finance (Fin) Consumer/business 7%-10% net, pre-tax

WorkInvoice (It) Receivables Not advertised

Younited Credit (Fr) Consumer 2%-11%

4.64% net, pre-tax since inception, October (Fr) Business 6.7% for 2019 to date

Mintos (Lat) Consumer/business 11.7% net, pre-tax

Auxmoney (Ger) Consumer 2.5%-8%

Finexkap (Fr) Receivables Not advertised

Credimi (It) Receivables Not advertised

Lendify (Swe) Consumer 3.5%-4.8% net, pre-tax

Twinio (Lat etc) Consumer 8.8%-10.4%

*All advertised figures as of May 2019

SECTION 4: UK AND CONTINENTAL EUROPE RETURNS 22

SECTION 5: THE FINTEX WAY PORTFOLIO CONSTRUCTION AND RISK MANAGEMENT

Fintex Capital is a specialist alternative credit investor based in London and active across multiple asset classes within alternative credit, including German and US consumer loans, as well as UK real estate loans and other forms of secured finance in the UK. Having launched in 2016, the firm now manages assets of c.$150m for institutional investors and large family offices, operating several segre- gated capital pools (managed accounts) as program manager, and other capital pools (discretionary mandates) as investment manag- er. Here Fintex explains its ‘Four Cubes’ template for portfolio construction and risk management of P2P loan assets.

recent BNY Mellon survey among lending, an integral part of direct lending, day, we consider this to be significantly less im- institutional investors showed that produced attractive returns for a variety of portant than we did at the outset. Interestingly, for 96 per cent of respondents, pri- investors. And yet, the number of institutions in the nascent days of marketplace lending, A vate credit performed better than who have embraced marketplace lending re- platforms like Lending Club and Prosper did their expectations or in line with it. As an asset mains relatively small, particularly in Europe. offer their investors the ability to pick loans. class, private debt is a rising star for institutions, The question is why. Meanwhile, many in- Having discussed this topic at length with other having experienced remarkable growth since stitutions thus far remained on the sidelines. veteran investors in the industry – and having the financial crisis. According to Preqin, private Most likely, this has to do with the fact that analysed several loan books from investors who debt assets totalled $147bn in 2006; today, this marketplace lending is very different from other had the privilege of picking loans – it became is believed to be well in excess of $800bn. This fixed-income strategies. Having invested in apparent that investors who tried their best is not surprising: the long-term decline in glob- this space for well over a decade – a lifetime at outperforming the index often picked less al interest rates led investors to search for yield. in this relatively young industry – our team well than the marketplace itself, thus ending Performing private debt assets deliver yield. experienced first-hand all the unique chal- up underperforming against the index. They can also offer a consistent income with lenges that confront institutional investors in As the industry matured, most lending plat- low expected volatility and short durations. marketplace loans. We experienced several key forms also (in our view, correctly) concluded And they tend to protect against the risks of hurdles when entering the marketplace lend- that offering choice was not as attractive as it rising interest rates, either by producing high ing arena. One of them is the fact that, by and seemed – and nowadays most sophisticated enough returns or by being structured with a large, marketplaces do not grant investors much marketplaces around the world offer inves- floating rate. Within private credit, asset allo- choice as to which loans to buy and which to tors limited choice in allocations. A mature cations have grown particularly in four sub- reject. Many institutions wish it were possible approach to investing in this asset class, there- sectors: real estate debt, direct lending, syn- to pick loans, to generate alpha and outperform fore, begins by recognising that marketplaces dicated corporate loans and infrastructure the ‘index’, the platform’s overall origination. are the most viable, i.e. the most stable for the debt. Over the past five years, marketplace We felt the same when we first started. To- long term when the process of loan allocations is relatively passive for its investors. This, however, does not mean that the best way to invest via marketplaces is to be passive. In our experience, the contrary is true. Sep- “Our approach to portfolio risk management arately, the absence of data standardisation begins with the recognition that, aside from among marketplace lenders, in particular in Europe, creates another important hurdle. Ask costs and fees, only four factors (Four Drivers) two platforms to provide you with loan level data and you will receive very different data- ultimately determine the investment returns of sets. To operate with clear analytics requires clear data to be provided. And this means the any marketplace lending portfolio.” investor must know exactly what it requires and in what format. Fine-tuning data provi-

SECTION 5: THE FINTEX WAY 23

sion with a marketplace is crucial, and knowing ultimately determine the investment returns years. With an average loan amount of, say, what data one needs, and what data is merely of any marketplace lending portfolio. $7,500 and assuming one invests in whole loans a nice-to have, requires thorough marketplace These Four Drivers are: only, as we do, this $100m portfolio would com- lending experience. • Defaults and delinquencies prise more than 13,000 loans originated over a Over years of successful investing in mar- • Recoveries 36-month period. Assuming the marketplace ketplace lending, Fintex Capital has developed • Prepayments operator assigned five different score classes its own investment philosophy for this asset • Portfolio mix to its borrowers (e.g. A – E) and that loan ma- class, one that is specifically adapted to these A portfolio’s cash flows, and its investment turities range from 1 to 5 years, this cube would peculiarities. The Fintex Way is passive, but returns, are a direct function of the Four Driv- result in a segmentation of 900 sub-cohorts, only in as far as initial loan allocations are ers and we discuss each of the Four Drivers in comprising: 36 vintages, Five score classes and concerned. With the many other aspects in- more detail below. Fintex developed a clear and Five maturities. volved in investing in marketplace lending detailed methodology of how to analyse each To understand how healthy the overall port- portfolios, we are anything but passive. We of the Four Drivers. We apply this methodology folio is, we look at how each of these sub-cohorts no longer believe that long-term investment consistently to each of the loan portfolios we perform in comparison to our predetermined success within marketplace lending requires manage. Moreover, we have concluded that forecast for those sub-cohorts, and we do so an ability to select loans. analysing the Four Drivers of a portfolio as a for each of the Four Drivers. This means we Rather, the creation of stable investment whole is insufficient; the key is to break down analyse four ‘cubes’ of 900 sub-cohorts each, portfolios requires the ability to constantly each portfolio into its component parts and to thus performing 3,600 individual comparisons monitor and manage the risk inherent in the then methodically analyse each cohort and of actual to benchmarks. loan portfolio and all its sub-cohorts over time. sub-cohort against each of the Four Drivers. This is, of course, an enormous task, tran- To achieve strong and lasting credit integrity In our view, this is the only way to obtain an scending – by a multiple – the capabilities of at a portfolio level, our investment approach accurate picture of the credit health of the rel- humans equipped with ordinary Excel sheets. involves a very active approach in all aspects evant portfolio at any given time. To achieve For this reason, we created LISA. LISA is a pro- other than initial loan selection. Our experi- this, we segment the portfolio into cohorts and prietary Fintex technology capable of analysing ence shows that the key to ensuring proper sub-cohorts, according to three parameters: and visualising large loan pools, resulting in a investment stability for the long term is the • By loan maturity; clear and granular analysis for each loan portfo- following combination: • By credit score; and lio. Fintex developed LISA in-house, in response • A granular, active and methodical approach • By vintage. to the absence of any existing software that towards risk management; Every loan has one of each, hence this seg- met our needs for deep, versatile data analyt- • Clarity of data and communication; and mentation produces a ‘cube’, a three-dimen- ics and credit monitoring infrastructure. LISA • The ability to foster strong long-term rela- sional matrix, where every loan sits in one of performs a difficult and diverse set of tasks: tionships with the marketplace operator. the sub-cohorts. In other words, we slice and digesting and visualising enormous data pools; With this in mind, our investment phi- dice the portfolio into sub-cohorts according highlighting the most relevant data subsets; losophy for marketplace lending, rests on 3 to these three parameters. We then analyse forecasting portfolio cashflows; conducting pillars – methodology, technology and team. each of these many sub-cohorts for each of our sensitivity analysis and predicting future re- Our approach to portfolio risk management Four Drivers. Essentially, we look at what we turns. Notably, it provides an instant diagnosis begins with the recognition that, aside from call ‘Four Cubes’. Imagine one invests $100m of the portfolio’s credit health – with accuracy costs and fees, only four factors (Four Drivers) in unsecured consumer loans for 3 consecutive and efficiency. This enables our trained credit

SECTION 5: THE FINTEX WAY 24

analysts to identify which cohorts or sub-co- taken, the portfolio will quickly be brought back clear judgment as to what is and what isn’t sta- horts deserve further scrutiny at any one time. on track. As further set out below, underper- tistically significant. In an age where restaurant And if parts of the portfolio need special atten- formance almost always arises at a sub-cohort customers like to know every ingredient in their tion, our task is then to perform, as best we can level and does not initially affect wide parts of salad, we apply the same scrutiny to our loan and in close co-operation with the marketplace, the portfolio. As such, constructive, targeted portfolios. Not less important is prevention. ‘credit micro-surgery’. action is often the best remedy. With this in mind, we constantly run a series A crucial aspect of LISA is its nuanced ca- Separately, working with Fintex to invest of scenarios and stress tests, and actively chal- pabilities of risk and data visualisation. LISA’s via platforms on which our firm is already lenge a platform’s proposed changes to score- dynamic visualisation output delivers heatmaps live comes with immense advantages for all cards and underwriting policies. and clear infographics that provide deep but participants, including institutional investors, In doing so, we provide constructive input easy-to-read insights into the credit health of especially with regards to onboarding and time into what changes would be met with our sup- each loan portfolio. LISA performs a critical role to market. It also materially reduces legal and port, where we feel too much risk is involved, or in helping our team to quickly spot any worry- operating costs, not only for smaller institutions where risk/reward metrics seem mismatched. ing areas of the portfolio that more traditional but also for the larger ones. The mutual success of the partnership between methods would fail to identify. If and when this So what then happens when investor action capital and platform requires the reliable, happens, the value of our strong relationship is required? The answer depends, of course, timely supply of capital to the marketplace. with the marketplace operator becomes more how grave the situation is and where exactly In return, it requires transparency and solid, relevant than ever. the problem(s) lie(s). Naturally, capital providers ongoing data supply to the investor. Knowing Fintex was created by marketplace lend- like to know that there is a ‘nuclear’ button, an which data is needed (and which isn’t), and how ing veterans who understand the dynamics ability to stop investing with immediate effect if best to segment data to draw pertinent conclu- of marketplaces not only from the investors’ meaningful underperformance is encountered. sions requires thorough market experience. perspective, but also from the perspective of the Of course, this last resort forms part of the Fintex Marketplaces operators understand how crucial marketplace. Having been involved for years arsenal, but in most cases other tools are more a role data plays. on both sides of the table, our team knows relevant at addressing the actual problem. The Having taken a close look at many credit first-hand how important it is to foster strong first thing to remember is that strong and proven marketplaces, but having chosen to invest only and lasting relationships with the marketplace platforms with years of experience in credit will on a few, we learned that the willingness to pro- operator. Our team spends time to understand not suddenly become bad at credit underwriting. vide this transparency varies widely between their strategy, requirements and constraints. Conversely, it can happen that – for example, platforms. With all of the above in mind, we Our mantra, ‘the platform is your friend’, has due to its desire to grow – a platform over-ex- could not emphasise more the value and im- many practical ramifications: tends itself into what may be unchartered portance of fostering strong long-term rela- • For a marketplace, it is critical to know capital territory. This can adversely affect a subset of tionships for mutual benefit. This is another supply remains reliable when investments go the portfolio. However, this will normally only reason why, as a matter of principle, platform to plan; and that if the going gets a bit tough, affect a subset of its origination. selection is so much more important to us than the capital tap won’t be switched off abruptly. Furthermore, prudent portfolio construction loan selection. The Fintex Way recognises that, • Marketplaces also need to work with part- results in portfolios that are comprised of loans aside from costs and fees, it is the Four Drivers ners who can be onboarded quickly. Many from many different vintages, meaning that a that determine the investment returns of any institutions fail this test as a result of their relatively recent change in underwriting policy marketplace lending portfolio. cumbersome internal investment procedures. will only affect some of the younger loans. Ac- By utilising the ‘Four Cubes’ methodology, • As investment managers, we need to remain cordingly, in most cases credit issues that are our finger is constantly on the pulse of all our comfortable that the going won’t get tough. spotted early will only have affected certain portfolios. Having devised this methodology Hence, we remain constantly vigilant using vintages, and normally only subsets thereof. and built the technology that systematically our unique analytics to provide us with gen- The key is, therefore, to be highly vigilant, applies it, we are uniquely positioned to offer a uine comfort that we will see the warning to develop the tools required to detect early comprehensive and deep understanding of each signs early on. warning signs in advance, and as soon as the loan portfolio, enabling us to perform credit Set against all of that, we need to have all data starts showing, in a reliable manner, the microsurgery where necessary. Marketplace relevant rights and tools in our kit to actually beginning of adverse trends, to take sensible loans are a complex asset class, but our unique manage the risk in the event we do start seeing action with an appropriate sense of urgency. We approach – combining methodology, technolo- a deterioration in portfolio performance. Strik- work closely with the marketplace to identify and gy and team – provides accurate visibility and ing this balance in a mutually beneficial way undo those underwriting changes that seemingly confidence with regards to originations, allo- requires a strong and transparent relationship have not worked as planned, or to change the cations, performance and risk. This synthesis between investor and marketplace, and one that way this segment is underwritten or classified. of traditional financial analysis and modern is, to the extent possible, mindful of the plat- We stay close to emerging data over time to technology adds tremendous value to ensure form’s requirements. When the problem areas ensure the portfolio starts moving in the right strong credit integrity prevails throughout the can be isolated and if the correct measures are direction. This requires attention to detail and investment’s life. ◆

SECTION 5: THE FINTEX WAY 25

SECTION 6: LISTED DIRECT LENDING INVESTMENT COMPANIES THE WORLD OF LISTED DIRECT LENDING

The top-rated fund’s research team at nomad Numis, dig into recent listed fund returns to analyze asset class returns. By Ewan Lovett Turner

he London-listed Direct Lending into Sterling became an increasing drag (as P2P, RDL Realisation (formerly Ranger Direct Investment Companies (ICs) sec- US interest rates moved significantly above Lending) and Funding Circle SME Income have tor consists of ten funds with a Sterling rates). For instance, P2P GI, Funding portfolios that are diversified by lender with T combined market cap of £2.84bn. Circle SME Income and SQN Asset Finance exposure to 1,000s of individual loans, with The sector has its origins in 2014 with the IPO Income have all reduced US exposure in fa- underwriting that relies on technology-enabled of P2P Global Investments which raised vour of the UK. statistical analysis to inform the credit process. £200m to purchase loans originated via peer- The drivers of returns for the Listed ICs vary These loans are typically fixed rate, short to-peer platforms. The sector grew rapidly depending on the underlying credit exposure. A duration, amortising loans which naturally through further IPOs of new funds and sec- number of funds solely focus on corporate cred- de-risk over time as the balance is repaid. In ondary issuance by existing funds, fuelled by it, particularly SME lending, including Funding comparison, lenders to larger corporate enti- investor appetite for yield and returns uncor- Circle SME Income, Hadrian’s Wall Secured ties have more concentrated portfolios, and related to traditional equity and bond markets, and RM Secured Direct Lending. Corporate use bespoke, manual underwriting processes with targeted returns of c.10% pa via amor- credit exposure also dominates the portfolios to inform credit decisions, such as Hadrian’s tising loans with a short duration. The oppor- of SQN Asset Finance Income and GCP Asset Wall, GCP Asset Backed Income and SQN As- tunity set was created by the withdrawal of Backed, but they also have substantial expo- set Finance Income. These are a mixture of banks from the direct lending sector follow- sures to other asset classes such as Renewable amortising loans and bullet repayment. Bullet ing more restrictive capital requirements Energy and Property. In contrast, VPC Speci- repayment leads to higher refinancing risk, but following the global financial crisis. ality Lending is focused on consumer lending, also potentially benefiting from prepayment while P2P Global Investments and Honeycomb fees if loans are repaid early. WHAT ASSET CLASS EXPOSURE? IT are largely consumer lending, along with The Listed ICs offer a range of exposure by property development finance. SECURITY/LOSS PROTECTION geography and asset class. Most funds now The focus of the sector was initially on unse- have a significant bias towards UK assets, re- LOAN SIZE AND DURATION cured consumer lending through P2P GI and flecting their objective to generate a Sterling The average size of loans in the portfolio high- VPC Speciality Lending. In addition, Funding dividend yield. Historically, there was a greater lights the different nature of lending strategies. Circle SME Income loans are unsecured, al- focus on the US, which had a more mature Loans originated by fintech platforms to con- though, where possible, it does obtain personal direct lending market, but performance dis- sumer or micro-SMEs have very low average guarantees from directors. Over time there has appointed and the cost of hedging returns loan sizes. For example: Honeycomb, VPC, been an increasing focus on secured lending

SECTION 6: LISTED DIRECT LENDING INVESTMENT COMPANIES 26

Listed Direct Lending ICs by Market Cap (£m) Growth of Listed Direct Lending ICs

■ P2P GI: 632 3.0 ■ P2P GI: 632 3.0 P2P GI ■ ■ SQN Asset: 463 P2P GI P2P■ GSQI: N63 A2sset: 463 3.0 ) 2.5 SQN Sec ■ P2P GI: 632 n 3.0 ) P2P GISQN Sec ■ Honeycomb: 446 2.5 b n

■ £ P2P GI Handrian

SQ■N Asset: 463 b Honeycomb: 446 (

■ ) SQN Asset: 463 £ SQN HandrianSec e ■ 2.5 (

GCP Asset: 412 n ) 2.0 SQN Sec 2.5 u SQN Asset b ■ l n Hone■ GyCcoPm Abss: 446et: 412 e 2.0 £ a b ■ Honeycomb: 446 u HandrianSQN Asset l (

■ £

FundingCircle: 276 V Handrian a ( Funding Circle e

■ GC■P Asset: 412 2.0 t FundingCircle: 276 V 1.5 u e e ■ SQN FundingAsset Circle GCP Asset: 412 l

2.0 t k ■ u

VPC: 250 a 1.5 SQN Asset l RM r ■ e a k V Fu■nd VinPgCC: ir25cle0 : 276 a

RM

r Funding Circle

■ t

FundingCircle: 276 V M a ■ 1.5 Funding Circle Hadrians Wall: 139 e t 1.0 VPC

1.5 k M ■ VP■C : 250 e RM Hadrians Wall: 139 r 1.0 VPC ■ VPC: 250 k

a RM ■ RMSecured: 114 r Honeycomb a ■ Had■r RiaMnsS eWall:cured 139: 114 M 1.0 0.5 VPC Honeycomb ■ Hadrians Wall: 139■ RD L: 60 M 1.0 VPC ■ 0.5 RDL ■ RM■S RDecuLr:ed 60: 114 HoneycombRDL RMSecured: 114■ SQN: Secured, 48 0.5 0.0 Honeycomb GCP ■ RD■L :S 6Q0N: Secured, 48 0.5 0.0 RDL GCP ■ RDL: 60 06/14 12/14 06/15 12/15 06/16 12/16 06/17 RDL12/17 06/18 12/18 ■ SQN: Secured, 48 0.0 06/14 12/14 06/15 12/15 06/16 12/16 06/17 12/17 06/18 12/18GCP ■ SQN: Secured, 48 0.0 GCP 06/14 12/14 06/15 12/15 06/16 12/16 06/17 12/17 06/18 12/18 06/14 12/14 06/15 12/15 06/16 12/16 06/17 12/17 06/18 12/18 Direct Lending ICs – Geographic Exposure Direct Lending ICs - Portfolios by Asset Class 100% 100% 100% 100% 90% 90% 100%90% 100%90% 100% 80% 100% 80% 90% 80% 90% 90% 70% 90% 80%

o 70% i o 80% 70%l 80% i l o 70% o 80% i o l f

60% 80% o i t

l 60% f o r t

70%f

60% o r

o 70% t 60% f o i o

70% r t o l i o 50% 70% p r l i 50% o

o p o l i f o

f

60% o 50% l p f t

o 60%

f 50%

o p f r t 60% o f

o

t 60%

40% f r f 40% o r t o o r

o 50% %

p 40% o

50% 40% %

p o

50% f p

% 30% 50%

f p 30% % o f

o 40% 30% f o 40% 30%

40% o % 20% 40% 20% % % 30% 20% % 30% 20% 30% 10% 30% 10% 20% 10% 20% 10% 20% 0% 20% 0% 10% 0% 10% 0% e 10% 10% l c e l r i

0% VPC RDL VPC

0% c RDL r

0% C

0% i VPC

RDL VPC e RDL l C g e c

l n r i i g c VPC RDL VPC RDL r d n i VPC C RDL i VPC RDL GCP Asset

SQN Asset n GCP Asset SQN Asset P2P Global C d P2P Global g

u Honeycomb Honeycomb GCP Asset SQN Asset RM Secured n GCP Asset SQN Asset RM Secured P2P Global n g P2P Global F i SQN Secured u Honeycomb Honeycomb RM Secured n RM Secured d i F Funding Circle Hadrian's Wall SQN Secured Hadrian's Wall GCP Asset SQN Asset n GCP Asset d SQN Asset P2P Global P2P Global GCP Asset Funding Circle Hadrian's Wall SQN Asset u Honeycomb n GCP Asset Hadrian's Wall SQN Asset Honeycomb RM Secured P2P Global RM Secured P2P Global u Honeycomb F Honeycomb SQN Secured RM Secured UK/Europe US Other RM Secured SME Consumer Property Other Renewables F SQN Secured Funding Circle Hadrian's Wall UK/Europe US Other SMEHadrian's Wall Consumer Property Other Renewables Funding Circle Hadrian's Wall Hadrian's Wall UK/Europe US Other SME Consumer Property Other Renewables UK/Europe US Other SME Consumer Property Other Renewables

with through loans backed by property, physical Pollen Street which has established origina- across the portfolio. In particular, it had signif- 10 10 assets and/or contracted cash flows. In addi- tion relationships with specialist lenders and9 icant exposure to Argon Credit, a platform that 12 10 9 ) tion, numerous 1ICs2 have focused on structured made attractively£10.6m priced£11.0m portfolio10 acquisitions. went bankrupt in December 2016, and RDL is s 8 r ) £10.6m £11.0m y 9 s 8 ( r

lending facilities12 ) where10 the originator incurs In 2018, Honeycomb’s portfolio9 generated a now in a protracted litigation to seek to recover y ) e 7 12 ( £10.6m £11.0m f

) m s 10 i )

£10.6m £11.0m 8 r e £ 7 L £8.0m s f m ( y

the first loss, providing some insulation for the gross yield of 11.6% with relatively8 lowi bad debt value. Initially, P2P Global Investments had

r (

£ 6 e L £8.0m

) y e 10 (

( 8 g

e 7 z

) 6 i e f

10 m e i a Listed ICs against8 higher loss rates in unsecured rate of 1.6%. SQN Assete Finance7 Income has a focus on US unsecured consumer lending, g £ r z f S m 5 L £8.0m i i (

a e

£ L £8.0m 6 r n S

( 5 e v

e

e 8 a 6

lending. What returns have been delivered? delivered NAV total returns of 6.5%g pa since which proved to be a drag on returns, but the z e

6 A n e 4 i v

8 o a g z a r i d S L 6 5 A 4 a

o e e r S 5 t d n e

Most ListedL Direct Lending ICs have deliv- March 2015, despite some high profile issues in Board moved the management to Pollen Street

v 3 e

h e a g n v t 6 A e 4 3 £3.0m 4 g o a a i h g A 6 r 4 d L

eredo solid, but unspectacular NAV total returns the portfolio the level of impairments has been and the fund is now refocusing on more spe- e

4 £3.0m g 2

a e i e £2.2m d L r t e v 3 e 2 e W e k h £2.2m g t e A 3 v 5 4 £3.0m g a since launch. However, shareholders have been relatively low, reflectingh the secured nature1 cialist lending assets with greater exposure g 2 W k i r A

4 £3.0m g a e 5 i 2

e 1 r 2 £2.2m e v 2 £69 k £56 k £48 k e £8 . £5k £2.2m W 0 hit by a derating of sharek prices, given returns of lending. The manager has been clear that to the UK. The Board of Funding Circle SME v A l t t £69 k £56 k £48 k W £8 . £5k 5 k d d

1 ll 2 0 C A a le e 0 e l t t 5 t t e e 2 1 a d d d d ll P ll c C C s s mb r disappointed versus inflated expectations, and given the return target of 8-10% pa it requires Income is proposingr a managed wind-down le a e e le e 0 e t t r e e £69 k £56 k e e £48 k a V a £8 . £5k s s RD L d d P o W i ll P c c C s s

0 u u s s mb mb r r lo b r r

le e e £69 k £56 k £48 k £8 . £5k l t t r c r A A e e V a V s s c s 0 s RD L RD L d d C o W P o i ll W i c

C s u u s s u u mb G

r lobal r

l a lo b le

t t e most Direct0 Lending ICs are trading on dis- an active approach to taking risk and there will after investors considered the lowerede return e

t t c A A r d d e c e A A ll a V c c C s s c RD L d d C P C o ll P W i

c C s g a

le s s s u u e 0 e mb G G r r

le lobal

t t e e Se c S e e P a e e

e

r d d e c e A A ll P a V c

C c c s s s s RD L P mb C P o P W i an ' c r r Q N

le s s s g u u e e mb G 2 r r lo b

i S S r e e Se c S a P V P e s s e

RD L r counts. To date, the strongest performer has always be a portion of the portfolio, currently outlook of c.4% in 2019 too one y low. c A A P o V W

i c s s c G C

s s u u RD L S C mb M o P W an ' i r r Q N an ' lo b

s Q N u u

P G 2

2 lobal

i i r S c S A A V P s s c e

RD L one y c H A A one y C o W i c

c Q N G C N

s nd i n u u G C S R S C M P M G an '

s lobal Q N g

P P G 2 e

i c Se c A A S P ad r c c e e

S H one y H C P Q

s Q N g G C

been Honeycomb IT which has delivered NAVN c.30%, working through issues. nd i n R S R P M G an ' Q N Se c S P P 2 e e

i S S F u ad r P H ad r

S S one y H unding P

an ' Q Q N G C S R M an ' 2 Q N i S S P P 2 i one y H F u

F ad r H G C S one y S H unding M an ' Q N Q N G C N nd i n S R P total returns of 7.7% pa since launch (includ-M The worst performer has been RDL Realisa-

2 WHAT HAS IMPACTED RETURNS? i P one y H ad r H Q N F G C N nd i n S S H R M Q R P ad r S H F u ad r Q H S R ing the deployment period) in Decemberunding 2015, tion (previously Ranger Direct Lending) which There are a number of key issues that have led to F u ad r H S unding H F H benefiting from an experiencedF credit team at is now in realisation mode after write downs lower than expected returns across the sector.

SECTION 6: LISTED DIRECT LENDING INVESTMENT COMPANIES ■ P2P■ P2P GI: 63GI:2 632 3.0 3.0 P2PP2P GI GI ■ S■QN S QANss Aet:ss 463et: 463 ) 2.5) SQNSQN Sec Sec

n 2.5 n

■ b H■one Honeycomycbo:m 446b: 446 b £ £ HandrianHandrian ( (

e ■ G■CP G ACssP Aet:ss 412et: 412 2.0e 2.0 u

u SQN Asset l SQN Asset l a ■ a

F■und ingCircle: 276 V

FundingCircle: 276 V

Funding Circle

Funding Circle t 1.5t 1.5 e e k ■ V■PC V:P 25C0: 250 k RM r RM r a a M ■ H■ad Hriaadnrsia Wall:ns Wall: 139 139 1.0M 1.0 VPCVPC ■ R■M SReMcSueredcu:r ed114: 114 HoneycombHoneycomb 0.5 0.5 ■ RD■ LRD: 6L0: 60 RDLRDL ■ S■QN: SQ SN:ec Sueredcu,r 4ed8 , 48 0.0 0.0 GCPGCP 06/1406/1412/1412/1406/1506/1512/1512/1506/1606/1612/1612/1606/1706/1712/1712/1706/1806/1812/1812/18

100%100% 100%100% 90%90% 90%90% 80%80% 80%80% 70%70%

o 70%

o 70% i i o o l l i i l l o o f

60% o f

60% o

t 60% f

t 60% f r t r t r r o o o

50% o p 50% p 50%

50% p

p f

f

f f o o

o

40%40% o

40%

40% % % % 30%30% 30%% 30% 20%20% 20%20% 10%10% 10%10% 0% 0% 0% 0% e

27 e l l c c r r i VPC i VPC RDL VPC RDL VPC RDL RDL C C

g g n n i i d d GCP Asset SQN Asset n GCP Asset GCP Asset SQN Asset SQN Asset n GCP Asset SQN Asset P2P Global P2P Global P2P Global P2P Global u Honeycomb u Honeycomb Honeycomb RM Secured Honeycomb RM Secured RM Secured RM Secured F F SQN Secured SQN Secured Funding Circle Hadrian's Wall Funding Circle Hadrian's Wall Hadrian's Wall Hadrian's Wall UK/EuropeUK/EuropeUS USOtherOther SMESMEConsumerConsumerPropertyPropertyOtherOtherRenewablesRenewables Direct Lending ICs - Average Loan Size Direct Lending ICs – Weighted Ave. Loan Life

10 10 12 12 9 9 ) ) £10.6m £11.0m £10.6m £11.0m s 8s

r 8 r y y ( (

)

10 ) 10

e 7

e 7 f m f m i i £ £ L £8.0m L £8.0m ( (

6 6 e e e 8 e

8 g z g z i i a a r S

5r S 5

e e n n v v a a

6 A 6 4A 4

o

o d L d L

e e t e t e 3 3 h g h g

4 £3.0m g a

4 £3.0m g a i i r r

e 2 e

e 2 e £2.2m £2.2m v v W k W k A A 5 2 2 5 1 1 £69 k £56 k £48 k £8 . £5k £69 k £56 k £48 k £8 . £5k 0 0 l t t l t t d d ll d d C ll C a le e 0 e a le e 0 e t t e e t t a e e a d d ll P d c d C s s ll P c C mb s s r r le mb e e r r le e e r e e a V r e e s s a RD L V s s P o W i RD L c s s P o u u W i c mb s s u u r r lo b mb

r r lo b

r c A A V r c s s c A A RD L V s s c C o W RD L i

C s o u u W i

s u u G

lobal

G

lobal

e

c A A e

c c c A A c c C P

s g C P

s g G G Se c S P Se c e e S

P e e

P an ' Q N P an ' Q N 2 i S 2 S i P S S P one y

one y G C

S G C M an ' S Q N M an ' Q N P 2 P i 2 i one y H one y H Q N G C N nd i n S R Q N G C N M nd i n S R M P P ad r S H ad r Q S H Q R R F u ad r H S F u ad r H unding S unding H F H F

NAV Total Returns Since Launch Share Price Total Returns Since Launch

10%10% ) ) ) a a a p

10% ) p p 10% ) ) 15% a

10% )

10% % a a 8% ) ) % % 8% ( p a ( (

p p a a

15%p h p p % h h 8% % % 8% (

c 15% ( (

% c c 8% % % 8% ( 6%6% n h ( ( n n

h h

u c u u h

c c 10% h h a n c a a 6%6% n n c c L u n L L 6%

u u 6% n n 4%4% 10% a u e a a u u e e 10% L a c L L c c a a

4% L 4% n e n n i L L

e e i i 4%4% c

2% e

S 5%

c c 2% e e S S

n c

n n i c c n i i n n n r n n 2% i 2% S 5% r r i i S S

u

2% 2% S 5% u u 0% t S S n

0% t t n n

r e r r n e e I I ll ll t t t t n n d d u le le r d d C C u u R r r t a a

0% e e e e 0% G G 0% e e R R t t c c

u e e

P P

l mb mb u u e s s t r r s s

0% r r l l r r e e I 0% I I ll ll ll t t t t t t t t i i W W RD L RD L d d -2% d V V P P le le le a -2% o o d d d s s C C C s s e

u u a a R u u t a a a e e e e e I I ll ll e e e G G G

t t 0% e e t t e R R c c c c c t t C C 2 2 d d e e e le le c c d d

A A C C A A P P P

l c c mb mb mb

s s s R o r r s s r s

a a r r r e e l l

r r e e r G G 0% I e e o o ll R R t c c

t P P i i i W W W e e e e RD L RD L RD L

-2% d

V V V P P P le a o o o -2% e e d P P s s

s l mb mb C s s s

s s u u u T r r s s a a r r u u u l l t P P r r a e I e ll G T T t an s an s

e t i i W W c S S c c c t t C 2 C C 2 2 RD L RD L

-2% d e V V P P S S le a -2% o o c c c d

s s A A A

i i C s s A A A P

c c c u u mb

-4% s a a in g in g o

u u r s -4% t

a r e

r e G e Q N Q N e o o c c c t t C C 2 2 P P P i W e e e e RD L c c

A A V P one y one y o

e e -5% e A A P s V V c c mb

s d d

s u o T r s

c r M M u

P P P G C G C S S r N o o T T an s an s an s

i P P i S S S W e e c C 2 RD L V P S S S o e e c s A

i i i H H s A

A A c u

T -4% r in g in g in g

u

-4% ad r ad r P P

R R Q N Q N

T T e Q N Q N Q an s an s

S S c C 2 P e S S c A

i i one y one y -5% one y e A V V c

d -4% d d in g in g

N N -4% P

c S S M M M

P H H G C G C S S G C S e Q N Q N -6% N an s

i P

-6% S e Fu n Fu n S

one y one y -5% e V V i H H H d d A A r c in g

M M ad r ad r ad r P G C G C S S R R R Q N Q N Q N N e Q an s i S S i one y H H r A A d r in g

N N P ad r ad r R R S S S M Q N Q N H H H G C S -6% Q

-6% Fu n Fu n Fu n a one y H d N N P S S -10% M ad r H H G C S R -6% Q N e

-6% Fu n Fu n h H r ad r R S Q N H e Fu n S a r

-10% S H Fu n h a -10% h S S

Honycomb – Portfolio Yield and Bad Debt FCIF – Return on Assets (cashflow, unlevered)

12% 11.6% 10% 12% 11.6% -1.6% 10.2% 12% 11.6% 8% 10% -1.6% 10.2% 10% -1.6% 10.2% 8% 10% 6% 8% 6% 8% 4% 6% 4% 6% 2% 4% 2% 4% 2% 0% 0% 2% 0% Income yield Bad debt Risk adj yield Jan16 Jan17 Jan18 Jan19 Jul 16 Jul 17 Jul 18 Sep16 Sep17 Sep18 Nov16 Nov17 Nov18 Mar16 Mar17 Mar18 Mar19 0% May16 May17 May18 Income yield Bad debt Risk adj yield Income yield Bad debt Risk adj yield

SECTION 6: LISTED DIRECT LENDING INVESTMENT COMPANIES

12% 12% 12% 11.1% 12% 12% 11.1% 12% 11.1% 9.8% 10% 10% 9.2% 9.8% 10% 10% -1.3% 9.8% 10% 9.2% 10% 9.2% -1.3% 8% -1.3% 8% 8% 8% 8% 8% 6.1% 6% 6% - -6.1% 6% 6% 6.1% 6% 6% - 4% 4% 4% 4% 3.0% 4% 4% 3.0% 2% 2% 3.0% 2% 2% 2% 2% 0% 0% 0% Income yield Bad debt Risk adj yield 0% Income yield Bad debt Risk adj yield 0% 0% Income yield Bad debt Risk adj yield Income yield Bad debt Risk adj yield Income yield Bad debt Risk adj yield Income yield Bad debt Risk adj yield 10%10% ) ) ) 10%10% ) ) ) a a a a a a p p p p p p 15%

8% % 15% % % 8% % 8% ( % %

( ( 8%

(

( (

h h h h c h h c c c c c 6%6% n n n 6%6% n n n u u u u 10% u u a 10% a a a a a L L L

L

L L 4%4%

4%4% e e e e c e e c c c c c n n n i n i i n n i i i 2% 2% S 5%

S S 2%

2% S 5%

S S

n n n n r n n r r r r r u u u t 0%0% u t t u u 0%0% t t t e e e I I ll ll t t e t t d d le le d d e e I I ll ll C C t t t t d d R le le a a e e d d C C e e G G 0% e e R R c c

R e e a a e e

e e G G 0% P P

l e e mb mb R R c c

s s e e r r s s r r

l l r r P P

l I mb mb ll t s s t i i W W r r s s RD L RD L d -2% r r l l V V P P le r r a -2% o o d s s I ll C s s t

t u u i i W W RD L RD L d a -2a % u u V V t P P le a o o -2% a e d s s C e G s s

u u e c c c t t C C 2 2 a a u u e t a e c c

A A e G A A P c c e mb

c c c t t C C 2 2 s o e r s

r c c

A A

r A A P c c mb

o o s o P P i W e e r s RD L

r

V P r o e e s o o s

u P P i T W e e RD L u V P P P o e e s s T T

an s an s

u T S S c C 2 u S S P P c A

i i T T A an s an s

c

S S

-4% c C 2 in g in g

-4% S S

c A

i i A e Q N Q N c -4% in g in g P

-4% e

one y one y -5% e e Q N Q N V V d d P e c M M one y one y P G C G C S S -5% e N V V d d an s i S c M M S P G C G C S S N i H H an s A A i S r in g

ad r ad r S R R Q N Q N i H H Q A A r in g

ad r ad r R R Q N Q N one y Q d N N P S S M one y H H G C -6% S d

N N -6% P Fu n Fu n S S M H H G C -6% S H

-6% Fu n Fu n ad r R Q N H e ad r R Q N e r S H r Fu n S H a

-10% Fu n a

h -10% h S S

11.6% 12% 11.6% -1.6% 10.2% 10% 8% 6% 4% 2%

0% Income yield Bad debt Risk adj yield 28

P2P GI - Continuing Portfolio P2P GI - Legacy Portfolio

12% 12% 11.1%

10% 9.8% 10% 10% 9.2% -1.3% 8% 8%

-6.1% 6% 6% -

4% 4% 3.0%

2% 2%

0% 0% Income yield Bad debt Risk adj yield Income yield Bad debt Risk adj yield

• CURRENCY HEDGING COSTS: ICs investing in over- VPC Speciality Lending and P2P GI intro- nised a provision for the expected credit seas assets committed to hedge the return ducing 5% pa hurdles before performance losses over the next twelve months. This was profile into Sterling. This particularly im- fees are earned. In addition, numerous up to c.2% for unsecured lenders, but was pacted ICs investing in the US. From late funds experienced high operational costs, lower or had no impact for secured lenders. 2015, interest rates in the US rose, whilst including legal costs of arranging leverage they remained low in the UK/Europe. As a facilities in an asset class that is underserved LOAN PERFORMANCE result, the cost of hedging increased and the by traditional lenders. It is difficult to assess the underlying loan per- Sterling-hedged yield on US assets reduced. • SEASONING: Few loans tend to default early in formance of individual platforms and portfolios In addition, ICs experienced some cash drag their life, given borrowers have received a due to a combination of limited disclosure and from holding cash to cover margin calls on cash injection from the lender. Over time de- the factors above which have also impacted NAV hedging contracts. faults increase, as some lenders experience performance. A few funds give an indication of • HIGH COSTS: A number of funds were launched difficulties. The peak of defaults tends to be underlying portfolio returns and we have high- with high management fee structures that after around 18 months, which impacted lighted some of these opposite. Honeycomb has proved unsustainable given the nature of the listed ICs at a time when they were already experienced relatively low bad debt expense, assets class. Some funds had base manage- experiencing issues with lower returns. which has supported a portfolio yield over 10%. ment fees based on gross (leveraged) assets • IFRS 9 IMPLEMENTATION: Accounting rule chang- Funding Circle SME Income has seen its cash- and performance fees with no hurdle rate. es for financial years beginning on and after flow return on assets, net of defaults, decreasing Over time these have been reduced, with 1 January 2018 meant that ICs have recog- to c.5% due to seasoning and underperformance of loans the fund is exposed to. The charts above highlight the significant difference in the return profile of the continuing portfolio of P2P GI, which to date is performing “It is difficult to assess the underlying relatively well, and its legacy portfolio, which experienced relatively high levels of defaults. loan performance of individual Funds investing in the US have particularly platforms and portfolios due to a struggled to hit return targets due the currency hedging issues and US consumer loans expe- combination of limited disclosure and riencing some spread compression and higher than expected defaults. This hit VPC Speciality the factors above which have also Lending, particularly via exposure to Avant platform and P2P GI, through Lending Club. impacted NAV performance.” In addition, Funding Circle SME Income also experienced weaker than expected

SECTION 6: LISTED DIRECT LENDING INVESTMENT COMPANIES 29

performance as it ramped up exposure to US SME loans, and suffered from leveraged expo- Direct Lending ICs – Discounts/Premiums sure to an underperforming cohorts of loans from Funding Circle’s UK platform. RDL Realisation has experienced the worst 20 portfolio performance, including Argon Credit/ 10 %

Princeton, as well as various write downs in- ) - ( t cluding a Vehicles Services Contract platform, a n 0 u o

Canadian SME Lending platform and an Inter- c s i (10) national SME Platform. This raised significant D / ) + questions about the credit process and it was not ( (20) m u a surprise to see the fund move into managed i m wind-down. e (30) r P IS THERE A FUTURE FOR THE (40) LISTED SECTOR? (50) I ll t t d le d C a e e G e c e

The listed Direct Lending sector had a strong ion P mb s r s r r t i W V P o s s

u a u c C 2 c A A s c

start to life with a significant amount of capital

P e e P an s S S i in g

Q N raised. However, it has since suffered from some ea l i one y d M G C S R

H ad r R teething problems and several funds are trading Q N S H Fu n on significant discounts to NAV. The sector has RD L reacting by adjusting strategies and winding-up funds that are not delivering compared to ex- pectations. We believe there remains a place for believe a number of funds have the potential transactions, which can restrict the ability to the Direct Lending sector to generate returns to do this in the Investment Companies sector disclose names of borrowers. However, key to in areas of specialist lending that have been and favour GCP Asset Backed Income and SQN attracting new shareholders will be providing neglected by banks since the financial crisis. Asset Finance Income and also see recovery information for investors to assess the expect- We expect the surviving funds to be the potential in P2P GI. ed risk profile of funds, such as levels of debt ones run by management teams with a strong In future we expect shareholders to demand (loan-to-value/advance rates), subordination, credit background that demonstrate an ability higher level of transparency from listed funds. security, profitability, interest cover ratios, and to generate attractive risk-adjusted returns. We This is complicated by the private nature of bad debt levels. ◆

SECTION 6: LISTED DIRECT LENDING INVESTMENT COMPANIES 30

SECTION 7: LOAN IMPAIRMENTS AND DEFAULTS LOAN IMPAIRMENTS, DEFAULTS AND RECOVERIES

Damian Webb of RSM gives an insider’s view of the outlook for loan impairments and defaults in the P2P market.

amian Webb’s verdict on the cur- ness lending market are often characterised proved unable or unwilling to recognise the rent state of the online lending by limited data, which makes underwriting true level of impairments in their loan books market is stark: “The sector is inherently difficult or challenging.” In con- and that led to a crisis of confidence which D becoming more and more fraught versation, many established lenders have real made the problems worse and led directly with uncertainty.” concerns about the level of lending into certain to the financial crisis. Regrettably, I believe Webb, a restructuring and alternative fi- sectors and believe that alternative finance this could be a major issue for the alternative nance specialist at RSM, argues that alternative providers could face significant losses as credit finance sector, and it is vital that the sector lenders have been encouraged by benign credit conditions deteriorate – just as they suffered collectively recognises the importance of conditions to focus on increasing lending vol- in the financial crisis of 2008-09. transparency and accountability to ensure umes at the expense of detailed and prudent Webb highlights his recent experience in confidence is maintained. My real concern underwriting. “As credit conditions become several insolvencies, where a range of unse- is that the current level of defaults reported increasingly challenging, we are seeing an cured lenders are exposed to significant losses by platforms does not reflect the underlying increase in defaults.” when a business fails. “In my conversations loan performance.” As a result, he claims, the problems build- with lenders, they often report their level of He sees a particular cause for concern ing up in many platforms’ lending books could defaults at around 2% but this doesn’t compare in property lending. The secured nature of be bigger than currently thought. From his with what we’re seeing in practice.” lending in this sector has naturally attracted own experience of dealing with impaired It appears there is no consistent method of risk-averse investors. However, much depends business loan books, Webb says: “Many of measuring arrears or defaults. Many lenders on the conditions remaining favourable in the the alternative finance lenders have focused who are focused on attracting retail and in- UK property market, which has enjoyed a 10- on markets that are underserved by traditional stitutional funding are keen to improve their year bull run. The well-publicised issues with lenders or in spaces where traditional lenders arrears and default statistics to strengthen London residential property and the general do not operate. Banks and traditional lenders their chances of accessing funding, both to slowing of the market due to the uncertainty retreated from these areas due to the issues increase their loan book and with it their plat- around Brexit is presenting increasing chal- and losses they experienced during and after form valuation. “The financial crisis in 2008 lenges for lenders in this space. Webb argues the financial crisis and consequently regard was principally attributed to the late recogni- that property yields have fallen dangerously them as high risk. These parts of the busi- tion of impairments,” says Webb. “Lenders low during Britain’s long property boom (im- plying inflated capital values). London is the worst case – and also the market where much P2P property lending has taken place – but other parts of the country are not immune, “The benign credit conditions he argues. “In Birmingham, for example, five years ago it was possible to achieve residential appear to be ending and as yields of 7 per cent to 8 per cent. You would be Warren Buffet stated ‘only lucky now to get between 4 per cent and 5 per cent. People are investing in development pro- when the tide goes out do jects on the basis of these low yields. However, there appears to be a glut of supply that will you discover who has been hit the market over the next couple of years, this coupled with any form of downturn will swimming naked’.” have an impact on values.”

SECTION 7: LOAN IMPAIRMENTS AND DEFAULTS 31

“Based on my experience of the 2008 crisis for approval, which makes trading impaired swimming naked’. This will be true for the al- it will be the sectors that have been over-in- P2P loans particularly complex. ternative finance sector. The good operators vested or assets in peripheral locations that If loans cannot be sold to ensure some return will trade robustly through any downturn and will suffer most in any form of crisis. Key ar- of capital to investors, what about the recovery the weaker ones will be exposed.” eas I would have concerns over are student process? Here Webb highlights a range of issues, Against this background, private investor schemes outside the Russell Group of univer- in particular the potential lack of alignment be- interest in P2P business and property lending sities, and leisure and private rental schemes tween the interests of investors and the plat- is waning, he says. “The inflows from retail in peripheral locations.” Assets and develop- forms. Investors will principally be focused on money are slowing, partly because of the ments of this kind could see significant de- recovering their capital, whereas in many cases well-publicised problems in the sector recently. clines in value. Typically mainstream lenders the platform will be more concerned about their On the other side, stricter regulation of retail have refused to lend on projects of this sort, underlying growth strategy and equity story. investment coupled with the cost of attract- resulting in a high concentration of lending This divergence can undermine the recovery ing and onboarding retail investors mean that against these assets in the alternative finance strategy. In addition, he argues that in certain platforms do not feel it is viable today to build space. As a result, he suggests, the less mature sectors where there are minimal underlying a business based on retail funds. They are con- property platforms will experience defaults of assets, it quickly becomes uneconomic for a centrating on attracting institutional money, 20 per cent to 30 per cent with potential capital platform to fund ongoing recovery operations. which is increasingly focused on this sector.” losses after recovery of 5 per cent to 10 per Even where there is a property asset backing the Webb believes this can only be positive cent. However, he notes: “It really depends on loan, the assets may be impaired or of a type because institutional funders will prioritise the quantums platforms are lending by region that it is not readily realisable. Hence, there is well-run, well-regulated platforms with good and sector. There could be some big losses in a risk that the proceeds of any disposal will be corporate governance. Consequently, those certain sectors where the underlying business insufficient to provide a full return to investors that fall short of accepted best practice will be models of the developments are uneconomic”. after taking the costs of recovery into account. unable to access institutional capital, leaving He is also concerned about the level of Webb argues that the outlook for many on- them unable to compete. This Darwinian pro- transparency in the alternative finance sector, line lending platforms is deteriorating as the cess, combined with stricter regulation, should notably that platforms are reluctant to disclose economy moves into a more difficult phase. ensure that many of the growing pains cur- in full the underlying performance of their “The benign credit conditions appear to be rently affecting the alternative finance sector portfolio. In addition, he believes that abun- ending and as Warren Buffet said, ‘only when will be addressed. It should emerge stronger dant liquidity in the lending market means the tide goes out do you discover who’s been as a result. ◆ that lenders have not had to confront issues, with problem loans merely being refinanced by other lenders. He believes this could help ex- plain the relative lack of impairments to date. Given the demand among investors for loans Higher value lending: The next trend in P2P? and loan books, it is possible for portfolios of loans to be sold to specialist investors. How- Jonathan Segal, Partner, Fox Williams ever, sales such as these are rare, principally due to the nature of P2P lending structure. Having acted for a number of peer-to-peer platforms, including ThinCats, over the “It’s not easy,” argues Webb. “The plat- years, Fox Williams’ fintech team has recently observed an increase in the size of forms don’t own the assets so they can’t trade loans advanced to SME borrowers though peer-to-peer platforms, with loans in them as a bank could – if you’re true P2P the some cases breaking the £10m mark. The prevalence of higher-value lending is assets are owned by the lenders and the case in part due to an increase in institutional lenders using peer-to-peer platforms, law is very uncertain on how you actually including specialist debt funds and pension funds, who may lend the full amount of unwind loan books.” Effectively, investors a loan or co-lend together with retail lenders. operating under Section 36H of the FCA’s These institutional lenders are treating the lending platform as a distribution Regulated Activities Order on P2P lending partner, which has the automated processes, standardised documentation and are a syndicate, each member of which has marketing reach to streamline the distribution of credit to SMEs that have been an individual loan contract with the borrower. failed by mainstream bank finance. Retail investors, co-lending with larger institu- Therefore, they would all have to agree on the tional lenders, may also take comfort that the transaction, including due diligence, terms of any sale of that loan. has been approved by the institutional lenders who bring the experience, analysis However, there is no process for reaching and criteria required to make prudent investing decisions. As alternative finance such an agreement set out in typical 36H loan evolves, we expect both high-value lending or co-lending to continue, in direct documentation and no minimum threshold challenge to traditional bank lending.

SECTION 7: LOAN IMPAIRMENTS AND DEFAULTS Turn information into insight.

To make confident decisions about the future, an entrepreneurial growing business needs a different kind of adviser who understands the Alternative Finance sector.P34: Experience the power of being understood. Experience RSM | rsmuk.com FITZROVIA FINANCE AD

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APPENDIX ALTFI’S PLATFORM SURVEY

In the boxes below we breakdown each UK and Continental European peer-to-peer lending platform key investment criteria, fees and lending information.

ASSETZ CAPITAL Who do you mainly lend to? SMEs and Property Domicile of platform? UK In what year did you start offering loans to investors i.e. formally open for business? 2013 Who is your national regulator? FCA Are you formally regulated by your local regulator? Yes Are your investments available in a tax wrapper structure? Yes Do you have a lock in structure which penalises early exit for investors? No Yes. A provision fund on all accounts except Do you offer a contingency fund of some sort? Please specify. manual investing Do you offer an auto invest facility? Yes What is the minimum investment for ordinary investors? £1 What is the maximum investment for ordinary investors? No limit bar availability of loans Can businesses lend money on your platform? Yes Do you offer cashback for ordinary investors? Yes Are your loans predominantly bullet or amortising? Amortising What are your fees for investors? None directly as we charge the borrower What are your fees for borrowers? An arrangement and a loan servicing fee When is interest paid? Monthly on most, sometimes bullet

APPENDIX 34

FELLOW FINANCE Who do you mainly lend to? Consumers and businesses Domicile of platform? Finland In what year did you start offering loans to investors i.e. formally open for business? 2014 Who is your national regulator? Fin-FSA Are you formally regulated by your local regulator? Yes Are your investments available in a tax wrapper structure? No Do you have a lock in structure which penalises early exit for investors? No No – but the delinquent loans are sold to Do you offer a contingency fund of some sort? Please specify. collection agencies when 90 days due Do you offer an auto invest facility? Yes What is the minimum investment for ordinary investors? 25 What is the maximum investment for ordinary investors? N/A Can businesses lend money on your platform? Yes Do you offer cashback for ordinary investors? No Are your loans predominantly bullet or amortising? Amortising What are your fees for investors? 0 Opening fee and monthly account What are your fees for borrowers? management fee When is interest paid? Monthly

FINEXCAP Who do you mainly lend to? SMEs Domicile of platform? France In what year did you start offering loans to investors i.e. formally open for business? 2015 Who is your national regulator? AMF Are you formally regulated by your local regulator? Yes Are your investments available in a tax wrapper structure? No Do you have a lock in structure which penalises early exit for investors? No Yes, Finexcap hold the first loss piece of Do you offer a contingency fund of some sort? Please specify. Finexcap fund (5% equity tranche) Do you offer an auto invest facility? No What is the minimum investment for ordinary investors? EUR 100,000 What is the maximum investment for ordinary investors? EUR 10,000,000 Can businesses lend money on your platform? Yes Do you offer cashback for ordinary investors? Yes Are your loans predominantly bullet or amortising? Bullet What are your fees for investors? None What are your fees for borrowers? 1.9-5.8% of face value When is interest paid? Monthly

APPENDIX 35

FOLK2FOLK Who do you mainly lend to? Businesses Domicile of platform? UK In what year did you start offering loans to investors i.e. formally open for business? 2013 Who is your national regulator? FCA Are you formally regulated by your local regulator? Yes Are your investments available in a tax wrapper structure? Yes For early exit, investors have to pay a listing fee of £250 and a success fee of Do you have a lock in structure which penalises early exit for investors? 0.5% (less the listing fee) of the value of the loan being sold Do you offer a contingency fund of some sort? Please specify. No Do you offer an auto invest facility? No What is the minimum investment for ordinary investors? £20,000 What is the maximum investment for ordinary investors? No max. Can businesses lend money on your platform? Yes Do you offer cashback for ordinary investors? No Are your loans predominantly bullet or amortising? Bullet What are your fees for investors? No fees 2% initial arrangement fee and 1.25% What are your fees for borrowers? or 1.5% annual arrangement fee depending on the loan When is interest paid? Monthly

FUNDING CIRCLE Who do you mainly lend to? Businesses Domicile of platform? UK In what year did you start offering loans to investors i.e. formally open for business? 2010 Who is your national regulator? FCA, SEC, Bafin and AFM Are you formally regulated by your local regulator? Yes Are your investments available in a tax wrapper structure? Yes Do you have a lock in structure which penalises early exit for investors? No Do you offer a contingency fund of some sort? Please specify. No Do you offer an auto invest facility? Yes What is the minimum investment for ordinary investors? £1,000 What is the maximum investment for ordinary investors? N/A Can businesses lend money on your platform? Yes Do you offer cashback for ordinary investors? No Are your loans predominantly bullet or amortising? Amortising What are your fees for investors? 1% What are your fees for borrowers? 0.9-6% When is interest paid? Monthly

APPENDIX 36

LANDBAY Who do you mainly lend to? Property investors (BTL Mortgages) Domicile of platform? UK In what year did you start offering loans to investors i.e. formally open for business? 2014 Who is your national regulator? FCA Are you formally regulated by your local regulator? Yes Are your investments available in a tax wrapper structure? IFISA Do you have a lock in structure which penalises early exit for investors? No Do you offer a contingency fund of some sort? Please specify. Yes we have a reserve fund Do you offer an auto invest facility? Yes What is the minimum investment for ordinary investors? £100 What is the maximum investment for ordinary investors? N/A Can businesses lend money on your platform? Yes Do you offer cashback for ordinary investors? No Are your loans predominantly bullet or amortising? Bullet What are your fees for investors? None What are your fees for borrowers? Product fee up front When is interest paid? Monthly

LENDIFY Who do you mainly lend to? Private borrowers Domicile of platform? Sweden In what year did you start offering loans to investors i.e. formally open for business? 2014 Who is your national regulator? FI Are you formally regulated by your local regulator? Yes Are your investments available in a tax wrapper structure? No Do you have a lock in structure which penalises early exit for investors? No Yes, a fund that securitises Do you offer a contingency fund of some sort? Please specify. amortisation monthly on our automatically investment accounts Do you offer an auto invest facility? Yes What is the minimum investment for ordinary investors? 1kr What is the maximum investment for ordinary investors? N/A Can businesses lend money on your platform? Yes Do you offer cashback for ordinary investors? No Are your loans predominantly bullet or amortising? Amortising Service fee, 4% annual average rate on What are your fees for investors? investments Admin fee (495 SEK), instant transfer fee What are your fees for borrowers? (199kr), paper invoice fee (49kr), direct debit (10kr), e-invoice on digital bank (0kr) When is interest paid? Monthly

APPENDIX 37

LENDINVEST Who do you mainly lend to? Property Domicile of platform? UK In what year did you start offering loans to investors i.e. formally open for business? 2008 Who is your national regulator? FCA Are you formally regulated by your local regulator? Yes Are your investments available in a tax wrapper structure? No Do you have a lock in structure which penalises early exit for investors? No Do you offer a contingency fund of some sort? Please specify. No Do you offer an auto invest facility? Yes What is the minimum investment for ordinary investors? £1,000 What is the maximum investment for ordinary investors? N/A Can businesses lend money on your platform? Yes Do you offer cashback for ordinary investors? No Are your loans predominantly bullet or amortising? Bullet What are your fees for investors? No fees What are your fees for borrowers? Varies depending on product When is interest paid? Monthly

MARKETINVOICE Who do you mainly lend to? SMEs Domicile of platform? UK In what year did you start offering loans to investors i.e. formally open for business? 2011 Who is your national regulator? FCA Are you formally regulated by your local regulator? No Are your investments available in a tax wrapper structure? No Do you have a lock in structure which penalises early exit for investors? No Do you offer a contingency fund of some sort? Please specify. No Do you offer an auto invest facility? Yes What is the minimum investment for ordinary investors? £50,00 What is the maximum investment for ordinary investors? N/A Can businesses lend money on your platform? Yes Do you offer cashback for ordinary investors? No Are your loans predominantly bullet or amortising? Amortising What are your fees for investors? 15-25% of interest accrued What are your fees for borrowers? Varies depending on the product When is interest paid? Maturity

APPENDIX 38

MINTOS Who do you mainly lend to? Variety Domicile of platform? Headquartered in Latvia In what year did you start offering loans to investors i.e. formally open for business? 2015 Who is your national regulator? FKTK (Latvia) Are you formally regulated by your local regulator? No Are your investments available in a tax wrapper structure? No Do you have a lock in structure which penalises early exit for investors? No Do you offer a contingency fund of some sort? Please specify. Buyback guarantee Do you offer an auto invest facility? Yes What is the minimum investment for ordinary investors? EUR 10 What is the maximum investment for ordinary investors? N/A Can businesses lend money on your platform? Yes Do you offer cashback for ordinary investors? Yes Are your loans predominantly bullet or amortising? Amortising What are your fees for investors? None What are your fees for borrowers? N/A Varies depending on loan type, country When is interest paid? and originator

OCTOBER Who do you mainly lend to? SMEs Domicile of platform? France In what year did you start offering loans to investors i.e. formally open for business? 2015 Who is your national regulator? ACPR Are you formally regulated by your local regulator? Yes Are your investments available in a tax wrapper structure? No Do you have a lock in structure which penalises early exit for investors? No early exit possible Do you offer a contingency fund of some sort? Please specify. No Do you offer an auto invest facility? No What is the minimum investment for ordinary investors? EUR 20 What is the maximum investment for ordinary investors? EUR 2000 Can businesses lend money on your platform? Yes Do you offer cashback for ordinary investors? No Are your loans predominantly bullet or amortising? Amortising What are your fees for investors? 0 What are your fees for borrowers? 3% When is interest paid? Monthly

APPENDIX 39

OCTOPUS CHOICE Who do you mainly lend to? Professional Landlords Domicile of platform? UK In what year did you start offering loans to investors i.e. formally open for business? 2016 Who is your national regulator? FCA Are you formally regulated by your local regulator? Yes Are your investments available in a tax wrapper structure? Yes Do you have a lock in structure which penalises early exit for investors? No No – we co-invest in every loan and take Do you offer a contingency fund of some sort? Please specify. first loss on capital and interest Do you offer an auto invest facility? Yes What is the minimum investment for ordinary investors? £10 What is the maximum investment for ordinary investors? N/A Can businesses lend money on your platform? Yes Do you offer cashback for ordinary investors? No Are your loans predominantly bullet or amortising? Bullet What are your fees for investors? None Arrangement fee 2%, admin fees, interest What are your fees for borrowers? rates 4.99-8.99% When is interest paid? Monthly

RATESETTER Who do you mainly lend to? Personal Loans Domicile of platform? UK In what year did you start offering loans to investors i.e. formally open for business? 2010 Who is your national regulator? FCA Are you formally regulated by your local regulator? Yes Are your investments available in a tax wrapper structure? Yes Early exit fees are 0-1.5% depending on Do you have a lock in structure which penalises early exit for investors? investment market Do you offer a contingency fund of some sort? Please specify. Yes – We pioneered the provision fund Do you offer an auto invest facility? Yes What is the minimum investment for ordinary investors? £10 What is the maximum investment for ordinary investors? N/A Can businesses lend money on your platform? Yes Do you offer cashback for ordinary investors? Yes Are your loans predominantly bullet or amortising? Amortising What are your fees for investors? None Risk-weighted payment into provision What are your fees for borrowers? fund. This and RateSetter’s fees are included in APR Monthly in general, or maturity for When is interest paid? 1 Year market

APPENDIX 40

TWINO Who do you mainly lend to? Consumers Domicile of platform? Latvia In what year did you start offering loans to investors i.e. formally open for business? 2015 Who is your national regulator? FKTK Are you formally regulated by your local regulator? No Are your investments available in a tax wrapper structure? No Do you have a lock in structure which penalises early exit for investors? No Do you offer a contingency fund of some sort? Please specify. No Do you offer an auto invest facility? Yes What is the minimum investment for ordinary investors? - What is the maximum investment for ordinary investors? - Can businesses lend money on your platform? Yes Do you offer cashback for ordinary investors? No Are your loans predominantly bullet or amortising? Bullet What are your fees for investors? None What are your fees for borrowers? Interest only When is interest paid? Monthly

WORKINVOICE Who do you mainly lend to? Businesses Domicile of platform? Italy In what year did you start offering loans to investors i.e. formally open for business? 2015 Who is your national regulator? Bank of Italy Are you formally regulated by your local regulator? No Are your investments available in a tax wrapper structure? No Do you have a lock in structure which penalises early exit for investors? No Do you offer a contingency fund of some sort? Please specify. No Do you offer an auto invest facility? No EUR 1,000,000. We operate with What is the minimum investment for ordinary investors? institutional investors. No Max, largest investor has What is the maximum investment for ordinary investors? EUR 15m portfolio Can businesses lend money on your platform? No Do you offer cashback for ordinary investors? No Are your loans predominantly bullet or amortising? Bullet What are your fees for investors? 20% of profit What are your fees for borrowers? Approx 50bps When is interest paid? Maturity

APPENDIX 41

YOUNITED CREDIT Who do you mainly lend to? - Domicile of platform? France In what year did you start offering loans to investors i.e. formally open for business? 2012 Who is your national regulator? ACPR Are you formally regulated by your local regulator? Yes Are your investments available in a tax wrapper structure? Yes Do you have a lock in structure which penalises early exit for investors? - Do you offer a contingency fund of some sort? Please specify. - Do you offer an auto invest facility? Yes What is the minimum investment for ordinary investors? EUR 1,000 What is the maximum investment for ordinary investors? EUR 100,000,000 Can businesses lend money on your platform? Yes Do you offer cashback for ordinary investors? No Are your loans predominantly bullet or amortising? Amortising What are your fees for investors? 0.3% per year What are your fees for borrowers? 3% of borrowed amount When is interest paid? Monthly

APPENDIX 42

ZOPA Who do you mainly lend to? Low-risk UK consumers Domicile of platform? UK In what year did you start offering loans to investors i.e. formally open for business? 2005 Who is your national regulator? FCA Are you formally regulated by your local regulator? Yes Are your investments available in a tax wrapper structure? Yes Investors can withdraw cash to holdings account with no charge. If investors want Do you have a lock in structure which penalises early exit for investors? to withdraw a lump-sum prior to end of the loan term, they can sell the loan to other investors with a 1% fee We are currently winding down our provision fund following successful campaign to Do you offer a contingency fund of some sort? Please specify. change the tax laws for consumers. We do have a contingency plan to protect our customers if zopa was to go out of business. Do you offer an auto invest facility? Yes What is the minimum investment for ordinary investors? £1,000 What is the maximum investment for ordinary investors? N/A Can businesses lend money on your platform? Yes Do you offer cashback for ordinary investors? No Are your loans predominantly bullet or amortising? Amortising No fees for investors lending with Zopa. But if investors want to withdraw a lump-sum What are your fees for investors? from the platform, we charge a 1% fee for matching the loans to other investors An origination fee for setting up the loan and a loan servicing fee to each loan contract which is deducted from each What are your fees for borrowers? borrower repayment before the principal and interest is passed on to investors. Both fees are included in the loan’s APR. When is interest paid? Monthly

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