AltFinanceNews has been closely following the activities of Channel Island based investor GLI Finance carefully – this London stockmarket listed finance specialist is slowly but steadily transforming itself into a powerful SME specialist, snapping up big stakes in Platform Black and Funding Knight.
The July 15th announcement of a £1.5 million injection into the Southampton based P2P SME lender was the first big AltFinance investment by GLIF. What are GLIFs plans for the space moving forward and how will Funding Knight use its new pot full of money?
But first – why the investment in Funding Knight by GLIF and not another rival SME focused lender?
According to Geoff Miller of GLIF, “I believe that management is critically important and in Graeme Marshall FundingKnight has an exceptional CEO who has extensive experience building value within smaller financial companies. One thing I learnt through years of being a fund manager and analyst in the Specialty Finance sector is that management above all is key to success in financial businesses. He has been prepared to back his vision with a significant amount of his own capital”.
According to Graeme Marshall, “FundingKnight is essentially service-driven, seeking to establish a reputation for high quality, which will in turn justify higher fees from its community of lenders and borrowers than are charged by “volume players”.
Adds Miller – “Funding Knight is intending to become the safest platform to put your money. It operates as a traditional bank hiding behind a web platform. For borrowers, it has a bespoke approach to structuring loan maturities (in months) and repayment profile (allowing initial repayment holidays). Its engagement with their management allows it to place more reliance on current information than the competition does, enabling it to make loans to companies recovering from hard times, which other platforms (overly relying on historic information) might decline”.
But surely the scale of Funding Circle must eventually over-whelm its competitors?
Not so, according to Miller, as Funding Knight’s competitors will be “entirely dependent on quantitative analysis of data on SMEs, as that is simply competing with the banks in their own back yard. Crowd funding platforms that combine data with a thorough underwriting process that draws on years of experience of underwriting SME loans (in the way that the banks used to operate before becoming dependent on data-driven decisions) cannot be scaled as rapidly as other models but will create a solid, sustainable, profitable platform for investors, borrowers and for the business itself”.
But if Funding Circle doesn’t over-whelm its peers, isn’t their another even bigger risk which is that the big high street banks push aggressively back into the SME space, under cutting the P2P platforms? Marshall accepts that there is “a significant risk if you base lending decisions exclusively on a “computer says yes” type approach. Although this may be eminently more scaleable, it is just competing with the banks and they have deeper pockets, huge IT budgets and Government pressure to be more active in the SME space. However, what the banks will not do is return to the more labour-intensive business of underwriting loans to individual businesses through understanding the underlying business models and risks. This is where FundingKnight is positioned”.
Miller agrees – “Of course, those quant-driven P2P models may be scaled sufficiently that they are bought by the banks eventually, but it is in my view a much riskier model. GLIF is in the business of establishing, nurturing and building a series of businesses in areas that are complementary to the mainstream banking sector, not directly competing with it”.
The other big question for any P2P platform is what will happen if there’s a recession…. and defaults amongst SMEs suddenly increase?
How will outfits like Funding Knight cope?
Geoff Miller again – “the GLIF view is that many crowd funding platforms will struggle once a significant wave of defaults hits the economy, but we believe that a properly underwritten portfolio of SME loans should be capable of performing reasonably well through more challenging times. The main concern we have is that bad experiences elsewhere in the crowd funding space during an economic downturn may cause prospective lenders to think again in the short term, but if the FundingKnight record remains strong through a downturn, those lenders will return in time”.
Both Marshall and Miller – not unnaturally – seem fairly confident about the future but how will the money be spent at Funding Knight? “On developing market awareness of FundingKnight, developing its website and to funding the cost of scaling the business” reckons Marshall, which would suggest a big increase in spending on marketing for instance.
For the FundingKnight CEO the key is now to have the right staff with the right experience in 2014, especially as FCA regulation looms into view. “FundingKnight has assembled an experienced management team in its field of operations – lending, website, marketing and business development – of whom the majority have worked in regulated businesses, which is important in the context of the new regulatory regime being introduced next year”.
Background on Funding Knight:
FundingKnight was founded in 2011 by Graeme Marshall, an experienced entrepreneur, who has built and grown a number of (mainly financial service) companies over more than 30 years. He provided the initial equity for FundingKnight, as well as significant funding for the loan book.
According to Funding Knight Graeme “continues to participate in every loan offered by the platform and encourages other members of the management team to do the same”. FundingKnight spent 2012 building its website, launching a few pilot loans in the process. It became fully open to lenders and borrowers in early 2013.
Insurance AI & Analytics USA (June 27-28, Chicago) is the only forum bridging the gap between the analytical and data minds and the business transformation leaders. As carriers rush to meet customer demands and deliver continuous business growth without dramatically increasing costs, deploying innovative technologies such as AI, machine learning and advanced analytics can be the only way to remain competitive. But in order to deliver real value to the organization, these innovations must have a real application in the core business areas and directly improve operational efficiency and deliver a seamless customer experience