Data
On a day that saw the AltFi Data team launch the UK industry’s first returns index – the LARI – transparency was inevitably a major talking point. The stipulations of the newly formed index dictate that all participants – currently Funding Circle, Zopa and RateSetter – must make their entire loan books available to download via the AltFi Data site. That’s a huge step forwards for the industry and one that, for me, helps to attach gravity to the peer-to-peer sector’s reputation for transparency.
Indeed, John Goodall’s keynote presentation later in the day touched on the idea that the industry’s reputation for transparency was, to some degree, unfounded. But that argument has the look of quickly becoming obsolete in the UK – as more and more platforms sign up to AltFi Data’s latest project.
And coming back to the project itself – what might the future hold for the LARI? Peter Renton of LendAcademy believes that the Index may well come to be viewed as the standard against which dedicated fund structures are measured.
Another key data angle was around the credit information that peer-to-peer lenders inevitably accrue over time. This data has a value of its own. But it’s not only the platforms’ capacity for accumulating unique data sets – the important point is that alternative funders are sufficiently unencumbered to leverage that data. As Giles Andrews pointed out in the Consumer Finance breakout session – the banks have an absolutely enormous wealth of data, but it is siloed away in some distant digital vault, and cannot be made use of in a timely manner.
Risk
Risk was on the menu throughout the day. Discussions centred around whether a surge in liquidity within the peer-to-peer space will have an adverse effect on the platform’s credit criteria. A particularly apt line of enquiry – given the heavy representation of institutional investors in the audience. Not to mention the ISA and SIPP providers that were also circling. The overriding sentiment was, as you might expect, that risk would continue to be priced sensibly – but I also get the distinct feeling (for some platforms more than others) that a move into funding riskier types of borrowers is inevitable. Indeed, I asked Giles at Zopa which was the greater danger – mispricing risk or simply the act of adopting a greater appetite for risk? His answer was that it is the act of moving into a riskier variety of lending that inevitably leads to mispricing – and hence you cannot separate one from the other.
Marketing popped up frequently in conversation. The primary area of concern was around clarity and the appropriate conveyance of risk. There were platforms on show that have recently engaged in mass advertising campaigns (RateSetter and Funding Circle) and their insights into this process were invaluable. The various sessions also touched upon the danger of terms like “savings” and “guarantee” – each of which has been the subject of some back-and-forth between platform and regulator in recent times.
Stuart Law from Assetz Capital offered an interesting take on risk appetite. He argues that ISA money, whenever it arrives, will not accept defaults. In his opinion, gearing returns internally depending in lender type is the only sensible approach. That means offering a risker, higher yielding and first-loss-taking slice of the loan book to alpha-seeking institutions – in order to offer an extra layer of protection to consumer money. The latter would participate in the same deals, but on different terms. Terms that would produce lower risk, and proportionately lower returns (Stuart referenced a 4% to 5% range).
And finally, there’s the role of technology in reducing customer risk. Edmund Truell of Tungsten described the immense amount of information that flows through the company’s e-invoicing network. Tungsten’s oversight of this burgeoning grid allows for intervention in the instance of human error. The example that Mr. Truell offered was a situation in which a Tungsten user had seemingly paid £15k for the purchase of a laptop. Quelle surprise, the supplier would have been only too happy to accept the overpayment – if not for Tungsten’s intervention.
Evolution
Possibly the most omnipresent of all topics under discussion was evolution. A broad topic, admittedly, but one that underpinned the vast majority of debate throughout the course of the conference.
I asked Simon Champ (P2P GI) about the role of closed ends funds going forward. For now, such vehicles bring much needed scale to an industry where the individual platforms are not large enough to house the kind of money that institutional investors want to put to work. But what happens when those individuals platforms scale to the point that the fund structure is no longer an essential provider of scale? In answer, Mr. Champ pointed to the range of competitive advantages that partner funds can offer to a platform – such as relevant expertise, advanced technology and a host of other resources. Geoff Miller of GLI Finance added that, in years to come, it will only be the funds capable of offering significant value-added that will endure as the strategic partners of choice.
I quizzed a gaggle of equity crowdfunders over whether or not their industry – which has been channeling funding into a growing number ofestablishedbusinesses – was slowly moving away from seed-stage funding. The answer was a fairly resounding no. Karen Kerrigan of Seedrs instead sees recent phenomena (funding listed companies and the co-hosting of IPOs) as a credit to the flexibility of the model. But to stage a broad departure from seed-stage funding would be to lose sight of the essence of the equity crowdfunding sector. Not to say, of course, that there aren’t some platforms (like SyndicateRoom and Venture Founders) that cater almost exclusively to more established fundraisers.
David Snitkof offered an interesting take on access-enabling APIs. Though traditionally viewed as an institutional investment tool, David sees substantial benefit in exploiting such an algorithm as a private investor. And he’s speaking from experience! The Orchard Co-Founder automatically invests in loans originated by a number of different US platforms via a pre-determined set of selection criteria.
Dominik Steinkuehler of Lendico stressed that he sees cross-border investment as essential to the global development of the marketplace lending industry. Lendico is one of the few platforms to facilitate such activity, having quickly moved to penetrate 6 different international markets – following a launch in late December 2013. Delve further into Mr. Steinkuehler’s thoughts on globalisation by revisiting his interview with AltFi.
The mixture of opinion on product diversification fascinated me. For some, particularly the Assetz Capital guys – who now offer a diverse range of debt instruments, it is an essential facet of customer retention. Borrowers are capable of servicing a range of requirements using one platform. That has the potential to form a powerful proposition. Investors are offered exposure to a number of asset classes, risk levels, terms and returns. Equally powerful. But for some, and count Iwoca's Christoph Rieche among these platforms, the specific opportunity that they are trying to address is more than large enough to hold their focus in the short term – and many of these platforms would feel nervous about branching out into product types without the relevant expertise.
What Assetz is trying to deliver is a form of one-stop-shop for borrowers, but I was curious to learn whether a third party aggregator – showcasing a range of SME funding options – might represent a better method of one-stop-shop delivery. Representatives of Alternative Business Funding, The Funding Centre and Funding Options were fervently nodding in the audience. The platforms themselves were more measured. It seems as though there’s room and appetite for both internal product diversification and aggregation. The word of the moment was “complimentary”.
And finally, an appropriately evolutionary note to end on: tax wrappers. Veterans Francis Moore (EPM) and Stephen Cave (Greyfriars) echoed what I’ve been hearing a lot recently – that the opportunity for marketplace lenders to provide income to pensioners considerably outweighs the P2P ISA opportunity. Both men spoke with tremendous excitement about the alignment of personal pensions wrappers and peer-to-peer investments – but admitted that a lot of work needs to be done in order to open the heavy eyelids of SIPP and SSAS managers to the opportunity.
An enormous thank you to everybody that spoke in, sat in, or stood in the breakout room at any point on Monday. Please feel free to follow up on any of the above topics by dropping me a line at ryan@altfi.com.
