By Ryan Weeks on Wednesday 7 December 2016
Secured peer-to-peer lending platform Wellesley says late accounts will be filed “imminently”.
Wellesley Group Investors Limited, the operator of secured peer-to-peer lending platform Wellesley & Co., has received a First Gazette notice for compulsory strike-off from Companies House. The notice required the firm to either file its accounts with Companies House within two months of 6 December 2016, or be struck from the register and dissolved.
Wellesley has now resolved the situation, with Companies House stating the following: "Compulsory strike-off action has been discontinued. This document is being processed and will be available in 5 days."
It’s important to note that First Gazette notices are regularly issued and dealt with without the recipient ultimately being dissolved. But it’s also notable that Wellesley, a retail facing business which has hundreds of millions of pounds of retail capital under management, hasn’t filed accounts with Companies House since June 2014.
Wellesley says that the filing of its accounts has been delayed for three reasons. The first is to allow time for a new chief financial officer (Alasdair Lenman) to review processes and procedures and implement a transition to IFRS accounting standards. The second is to complete a fundraising round (which we’ll come back to). The third is to prepare an annual review for publication alongside the financial statements, which will provide “further transparency on Wellesley’s business model, market opportunity and strategy”.
Wellesley says that both the audited statements for the 18 month period to 31 December 2015 and annual review will be publicly available “imminently”.
Wellesley & Co. launched in late 2013, touting its “skin-in-the-game” model as unique within the peer-to-peer lending space. Most peer-to-peer lenders do not take balance sheet risk alongside their investors, but Wellesley occupies a first loss position in each and every loan that is listed on the platform.
But it’s difficult to discern the exact makeup of the money that acts as the first loss piece on new lending. And there continues to be little disclosure as to the financial health of the entity to which Wellesley’s mini-bond investors have unsecured exposure – although it is encouraging to learn that the accounts will soon be made available.
Wellesley Finance PLC – the originator of the loans that ultimately land on the Wellesley & Co. platform – raised £25m via a mini-bond listing that launched back in July 2014. The company then launched series 2 at the start of this year, with a maximum issue size of £50m. The proceeds of these bond issues go directly to Wellesley Finance Plc as working capital, and can explicitly be used as lending capital on the Wellesley & Co. platform.
As noted above, Wellesley Finance takes a first-loss position when it invests in loans alongside individual investors. The directors of the company put up £5m of their own capital for this purpose when the platform launched in 2013. But with a cumulative lending total that now exceeds £350m, the skin that Wellesley has in the game is now comprised of a mixture of shareholder equity and money from Wellesley Finance Plc’s mini-bond issues.
When asked to identify the source of the money that is being used to invest in a first loss position alongside individual investors, Wellesley & Co. confirmed: “The money used by Wellesley to provide skin in the game is made up from a mixture of Shareholder Equity and Mini-Bond funds.”
Mini-bond investors earn a small premium to the interest rates on offer via the peer-to-peer platform. But in reality they cannot currently perform extensive due diligence on Wellesley Finance Plc, the company they are lending to, because accounts have not been filed since the summer of 2014. The lack of disclosure from Wellesley Finance Plc was the cause of some consternation when the mini-bond issues were first launched.
In addition to taking “skin-in-the-game”, Wellesley also operates a provision fund. Of the £366m lent out by Wellesley to date, £141m is eligible for loan provisioning. The platform anticipates sustaining losses of £1.4m, and currently has a loan provisioning balance of £4.1m. That £4.1m is money that has been set aside by Wellesley Finance Plc.
According to Wellesley’s website: “Loan provisioning sets out the minimum level of funds that Wellesley Finance Plc has committed to allocate from its own funds for the protection of the Peer-to-Peer customer investments in the event of a default.”
Asked about the makeup of the provision fund, Wellesley said: “To date, losses from impaired loans have been absorbed entirely by shareholder capital.”
Wellesley has been flirting with the idea of a fundraise on equity crowdfunding site Seedrs for some time, and the campaign is now live. The firm is looking for a minimum raise of £1.5m, but with capacity to take on as much as £4m. It’s a convertible round, so the valuation of the firm is not clear at this stage.
We learn from the campaign page that Wellesley & Co.’s last fundraise came predominantly from founder and CEO Graham Wellesley (pictured above), who owns 48.66 per cent of the company. This £2.525m round was closed in September 2016. £2.350m of the total sum came from Graham Wellesley himself, “partly supported by a £1.7m loan from the company”. This loan was granted to Mr. Wellesley by the Wellesley & Co. platform at a rate of 10 per cent per annum, with a term of 12 months. Repayment will be made via the sale of a property which Mr. Wellesley owns.
Investors on the Wellesley & Co. platform do not hand-select the loans that they invest in. Instead they commit funds to the platform and their funds are then automatically spread across the entire loan book on a volume weighted basis, giving each lender a proportionate exposure to every loan.
Wellesley has now posted expected loss figures as a proportion of its total current loan facilities for four years running. These came in at 1 per cent in 2013, 1 per cent in 2014, 1 per cent in 2015 and 1 per cent in 2016. These projections are uncommonly metronomic in the context of the wider peer-to-peer lending sector.
In its first three full years, the platform significantly outperformed these projections, posting actual loan losses of 0.0 per cent, 0.0 per cent and 0.55 per cent respectively. But as the business has matured, those losses have increased, as one might expect them to. With a month remaining in 2016, Wellesley’s actual losses for the year have been 1.8 per cent (correct as at 30 September 2016). AltFi Data’s records indicate that Wellesley has lent £81m in 2016.
Wellesley’s typical loan length is between 6 and 12 months, with a maximum term of 18 months, but it’s nonetheless possible that the lower default rates of early years are in part a product of the “youth” the loanbook.
If actual defaults continue to rise, the Wellesley platform may come under significant strain. Its provision fund is unique among provision funds. Let’s return to the company’s statement, that “to date, losses from impaired loans have been absorbed entirely by shareholder capital”. Does this wording imply that the composition of the provision fund has now changed to incorporate at least some mini-bond money?
Wellesley & Co. originated £139.6m in 2014, and £141.9m the year after. The platform has originated around £81m in 2016 so far. A linear extrapolation gives the platform a total of £88.4m in origination for 2016, and a growth rate of -38 per cent for the year.
Loans do not typically default in the early stages of their duration, and thus portfolio-wide performance often takes some time to come to light. If a platform is constantly originating more and more loans, that platform’s portfolio-wide performance will be forever flattered by the “youth” of the loanbook. But if origination growth slows, performance becomes more dependent on the health of older vintages of loans.
With its unique peer-to-peer lending model, its mini-bonds, and its newly launched equity crowdfunding campaign, Wellesley & Co. has a lot of plates spinning. The next few months will be crucial as the platform seeks to offer greater transparency to its investors. The publication of the overdue accounts will be an important first step.