A lack of transparency is one of the key obstacles for p2p and marketplace lending platforms experiencing considerable growth in scale, according to ThinCats’ John Mould (pictured), who believes there are several other hurdles the industry needs to overcome to fit into the mainstream investment universe.
So far 2016 has shaped up to be a year of continued but slowing growth for the major players in the p2p and marketplace lending space. Scandal and doom-mongering has also been a feature leaving many to claim the industry is in crisis mode.
In the UK, full authorisation by the Financial Conduct Authority appears some time off for platforms and Mould thinks this and a lack of transparency over a raft of other metrics is hindering both institutional investors as well as independent financial advisers from become interested.
He is CEO of both SME lending platform ThinCats as well as its largest shareholder ESF Capital.ESF acquired a 73.4 per cent equity stake in ThinCats in Decmber 2015 having been providing the platform with cash for a year or so before that. ThinCats has been around for about as long as fellow SME lender Funding Circle – just over five years. It has passed the £100m mark in terms of cumulative lending and has delivered a historic net return of around 9 per cent per annum to investors.
Mould believes that the industry’s broader strategy of targeting retail money should be evolved with a huge opening up to capital from the institutional and wealth advisory market for it to grow considerably.
“Most of the money in the system comes from asset managers, IFAs and wealth managers. So the big turn on is when on the retail side those people - the gatekeepers - and big institutional pension schemes put their money in. That hasn’t really happened yet.”
“It takes you years as a fund manager to get an institution to be happy to lend to you - at least a 3-4 year track record.”
Direct lending exposure has become increasingly popular with pension funds in recent years due to the lack of decent yields in the regular fixed income market and the ongoing requirement to find steady income pay-outs for annuities. Mould says this “constant annuity revenue” could eventually come from platforms such as ThinCats.
"I just call p2p lending, direct lending for all. There are thousands of SMEs out there that can provide 4-6 per cent yield every year but sourcing it is difficult for fund managers. We are an alternative direct lender, but we are smaller ticket and more of the index rather than stock pickers,” he said.
Mould says the firm is gunning for a period of strong growth over the medium term over which he eventually wants to compete for institutional money in the quantities of other more mainstream income-bearing assets such as private debt hedge funds and commercial property albeit with a different underlying asset.
However, for this to happen he believes the broader industry should deal with several issues centring on greater transparency in returns, what investors are exposed to and securitisation. He says that many platforms are really asset management firms in disguise and should therefore be regulated as such.
“The sector has to get through all of that before it is even anywhere near an IFA, or anyway near being regulated and ready for mass market.”
Provision funds, collective pools of cash liquidity that act as a type of insurance for investors, are another area where Mould says investors and borrowers need greater transparency.
“Provision funds - how does that treat customers fairly if one person gets their money back before another? How do they fit in? Some of the platforms also lend money to the SMEs and turn around and say who wants a bit of this? That is a securitisation, how does that fit in?"
“All platforms also have both retail and institutional investors and we are not quite sure how they are both treated fairly. At least we know in a fund that they all come at the same unit price. Who decides who takes which loans?”.
“If you're the regulator you're saying half of them look like fund managers, half of them look like banks but worse and half of them have these provision funds that we don't know how they work and half of them just seem to be securitising debt. How does that work?”.