One of the main recent criticisms of market place lending as a business model has been the absence of what’s called skin in the game i.e. as intermediaries the lending platforms are not putting their own capital at risk unlike more traditional balance sheet lenders such as banks. Two UK based invoice funding platforms – Platform Black and Investly – have now decided to confront this criticism head on by deploying their own capital alongside investor’s cash. This move in effect puts the platform’s capital at risk in the event of a default by a lender.
Platform Black (PB) announced this week that they’ll underwrite the first 10% of every auction on the platform, thus taking the first 10% of any capital loss suffered by an investor. The change in structure was implemented on June 1st. The platform quotes an example where a client defaults with a capital exposure of £500k, which forces PB to fund £50k to the investors’ capital loss on a % investment per investor. Platform Black concedes that this shift in strategy won’t entirely eliminate default risk but it argues that the investor can at least take some comfort that Platform Black will be considered in its approach to due diligence.
In addition to this big change of strategy, the business has also announced that it will contribute a 1% financial interest in every single invoice auctioned on the platform. According to Caroline Langron, MD of Platform Black, the decision to put its own capital at risk is simple common sense: “I stand by my belief that if I wouldn’t put my own money into an auction, then I wouldn’t expect an investor to do so either, so from 1 July we will be the first to invest in every auction”.
Crucially Platform Black’s move is in effect a concession that the there is some potential for risk from platforms behaving purely as agents – and not risking their balance sheet. According to Langron: “it is apparent that most marketplace lenders are intermediaries, not principles and therefore do not retain any credit risk. We feel there comes a time when we as an industry need to man up and put some skin in the game! As all good credit teams do, we treat all trades as if they were our own money”.
The announcement from Platform Black was echoed by news from one of its competitors Investly. The smaller platform has always had its employees and shareholders participate in auctions with their personal funds alongside outside investors but from now on the platform itself will be making bids on invoice auctions using the company’s own cash. According to Investly:“Our bids will be made with the username Investly so that they are visible and recognizable to all investors. Our bids will range from 5-33% of the invoice funding target.”
Investly emphasises that it will not be prefunding invoices. It says that it “will be making bids alongside investors. To ensure a good return for investors, we will not be adjusting our rate downwards if the auction rate falls.”
The Investly and Platform Black moves could be read as a sign of confidence in their credit risk models – the former platform argues that the move reflects “the trust of our team and shareholders in our credit model”.
Over at Platform Black, similar confidence is on display. It’s announced that after a run of bad debt sin previous years, over the last 15 months Platform Black has only suffered one bad debt of £65k in January 2015 against a turnover of £44 million.
These numbers will come as excellent news for the business’s ultimate owners, GLI Finance. The London listed SME lending specialist recently announced that it would be increasing its stake in the invoice funder via an issue of £5 million of preference shares to Platform Black. GLIF has long put its own money to work on the Platform Black market place but the extra additional capital from the pref shares has undoubtedly helped boost Platform Black’s firepower.
The $64 million question of course is whether this strategic move by PB and Investly is the start of a much bigger trend – will the big four marketplace lenders now be pushed into putting their own capital at risk? Does this mean that every alternative finance platform will end up moving away from marketplace lending and adopt the balance sheet lending approach?