ESF Capital acquired a 73.4% equity stake in secured business lending platform ThinCats in early December last year. Since then, we’ve been left to wonder as to what a retooled, more institutionally geared version of the ThinCats platform might end up looking like. We need wonder no more. ESF Capital CEO John Mould – who also assumed the role of CEO at ThinCats at the time of the takeover – speaks to AltFi about the fresh shape and direction of the platform.
First, a bit of background. ESO Capital – a mothership of sorts to ESF – had been supplying lending capital to the ThinCats platform for a number of months prior to the acquisition. In February 2015 the company committed to deploying between £20m and £50m through the platform. The long-term plan had always been to acquire a controlling stake in the company. Though that box has now been ticked, John tells me that ThinCats Co-Founders Kevin Caley and Peter Brown remain shareholders, and are an important part of the company culture.
“Why ThinCats?” Was the first question I leveled at the ESF boss. Prior to ESF’s involvement, the ThinCats platform had been around for about as long as fellow SME lender Funding Circle (5 years), had breached the £100m mark in cumulative lending and had delivered a historic net return of around 9% per annum to investors. This had been achieved in spite of limited external investment. ThinCats had raised a grand total of £200k in equity money at that time – a pittance in relation to the sums secured by its P2P rivals. Funding Circle, for example, has raised $273m to date. ESF saw ThinCats in early 2015 as the most promising “amateur” platform in the market – and as a highly attractive acquisition target. To quote John:
“As the largest lender in the secured SME space, ThinCats was leading the charge in a really interesting direction. Despite this scale ThinCats had retained the true P2P essence that so many other platforms had lost, allowing investors to pick their own loans. It stood out as a great business despite historically little investment, and one that would quickly benefit from the significant investment that ESF could make that would, in return, grow the business and help both lenders and borrowers.”
In November 2014, ThinCats signed a deal with White Label Crowdfunding – sister company to rebuildingsociety – in order to revamp the platform’s technology infrastructure. The arrival of ESF appears to have curtailed this arrangement, which seemed to be dragging on anyway. John tells me that ESF’s focus is now on the sharpening of ThinCats’ existing technology base, rather than on the licensing of external technology. The ESF team is working alongside the original architect of the ThinCats platform in order to refine various aspects of the site, and will ultimately acquire the rights to the systems. John’s approach has been to tidy up the tech in “sprints” – starting with the back-end. The first item on the agenda was to extract the entirety of ThinCats’ transactional data from the machine and to verify the accuracy of that information. The numbers were found to be accurate to within a few pence – an encouraging testament to the efficacy of the platform’s accounting systems.
In terms of the mechanics of the platform itself, much will remain unchanged. The sponsor network – which is ThinCats’ sole source of deal flow – will remain intact. Every loan that is listed on the platform has been (and will continue to be) vetted and vouched for by an accredited sponsor.
The self-selection model, whereby investors choose which loans to participate in, is also staying. John sees this as “pure” peer-to-peer – a model that the likes of Zopa and RateSetter have branched away from in recent years. The crowd decides whether to invest on a case-by-case basis. The minimum investment amount of £1,000 will continue to be enforced. John sees the typical ThinCats investor as financially savvy and relatively wealthy. We also spoke about the platform being home to a large number of P2P “enthusiasts”. Unsurprising, really, given that autonomy is being slowly stripped away from investors on rival peer-to-peer lending sites.
There will of course be tweaks to the ThinCats model. A portion of the platform’s loan book will soon be siphoned off into a new type of investor account. This account will be comprised of a diversified mix of loans, covering a range of geographies, and secured against an array of assets – not just property. The soon-to-launch account will offer ThinCats’ investors an alternative mode of accessing the platform, and passive exposure to the loan book. John feels that the product will play an important role in capturing pension money, which he believes to be something of a “final destination” for the P2P asset class. On the evolution of the investor mix in P2P, John offered the following thoughts:
“2016 is the year the P2P asset class comes of age. Whether you’re a retail investor or an institution, you will probably have it in your investment portfolio by the end of the year. The ISA will drive this on the retail side, while institutions are now awake to the joint benefit of helping business around the country, while sourcing good quality loans.”
Broadly speaking, John identified three key sources of peer-to-peer lending investment: individual, institution and platform. These platforms – by which we refer to the likes of Hargreaves Lansdown and Tilney Bestinvest – promise to be crucial to the growth of the industry. The weight of IFA requests that will fall upon them following the advent of the Innovative Finance ISA (April 6th) will be impossible to ignore. John sees the vast majority of IFISA money flowing into P2P primarily via the various investment supermarkets. But the peer-to-peer platforms need to continue to press them and to educate them.
“Retail investors like being able to access all their assets in one place, moving easily between equities, cash and P2P investments. Platforms such as Hargreaves Lansdown and Bestinvest are the only places they can do this effectively, so will be in many ways the linchpin when the IFISA launches this year.”
There is, however, a caveat to John’s enthusiasm about these platforms. Hargreaves may well have an important role to play, but quite what that role will be is slightly muddied by its own peer-to-peer lending operation, which is still under construction.
The aggregator space is also of interest to John, but he sees the operators as fairly underdeveloped at present. We’d agree. For the aggregator model to work effectively in peer-to-peer lending, the credit processes of the many peer-to-peer solutions will have to be brought more closely into line with one another, such that risk assessment and pricing were made consistent across the board.
Branching away from ThinCats,ESF Capital defines itself as “an institutional P2P accelerator business providing strategic and operating resource, together with investment and lending capital”. In simple terms, as John put it, the company can offer peer-to-peer lending platforms equity investment, debt capital and technical expertise. That mix has, somewhat unsurprisingly, led to a great many reverse enquiries. Since the announcement of the ThinCats deal, ESF has been inundated with peer-to-peer platforms wanting to connect. Were they to acquire another platform in the UK, John tells me that it would have to be complimentary to ThinCats, rather than competitive. The European opportunity is also coming into focus, and ESF has already come close to finalising a deal on the continent. In fact, the company’s interests extend beyond Europe. ThinCats launched an Australian business in late 2014. John tells me that ESF has decided to increase its stake in ThinCats Australia.
Finally, then, what of the year to come? Many industry observers have pinned 2016 as the year that consolidation will take hold in peer-to-peer lending. ESF helped to kick off the consolidation process by acquiring a controlling stake in ThinCats.Funding Circle arguably began that process through the acquisition of Rocket Internet baby Zencap in October last year. But on the idea of 2016 being “the year of consolidation”, John is unconvinced:
“There won’t be any consolidation in 2016. Platforms will either grow up or die. The ones that can’t get past the regulatory hurdles or manage origination in a sustainable way will simply not survive.”
