The CEO of marketplace lender Funding Circle says the industry is going through a “golden age” despite troubles for platforms like Lending Club this year.
Funding Circle is the UK’s biggest marketplace lender, worth over $1 billion.
The company is a marketplace for small business loans, connecting businesses that want to borrow money with savers and institutions that want to lend money for rates of around 7%.
Funding Circle CEO Samir Desai told Business Insider: “It was certainly a tough first half of the year with various things going on with Lending Club, which caused investors to take another look, and then the stuff with Brexit. But actually, what I’ve always said is I think we’re in this golden age for our industry.”
Lending Club, the biggest marketplace lender in the US, was engulfed in a scandal earlier this year that forced out its CEO and founder after it was discovered that he was falsifying loan data to make them meet buyer criteria. That incident led many investors in the sector to reconsider their exposure.
In the UK, marketplace lenders have had a tough time too. Former top regulator Adair Turner said in February: “The losses which will emerge from peer-to-peer lending over the next five to 10 years will make the bankers look like lending geniuses.”
I think the future is much better than people actually imagine.
So why does Desai think we’re in a golden age? “If you look at the net returns that have been generated by marketplace lending platforms, they have been the highest of any asset class over the last 5 years with the lowest levels of volatility. If you look on the borrower side, borrowers flock in their droves to this kind of customer experience.
“There has been a lot of noise, but if you take a step back — you just have to look at the people joining the industry in terms of the calibre of individuals not just from the tech side but also from the finance side. I think the future is much better than people actually imagine.”
Funding Club made several senior hires from the traditional world of finance in the last year. Chief risk officer Jerome Le Luel joined from Barclays, former Nomura International and EMEA CEO Jeremy Bennett was hired as CFO, former ECB board member Jorg Asmussen joined the company’s board, and so did ex-Lloyds Bank CEO John Eric Daniels.
Desai jumped on the phone to talk to BI about the company’s 2015 accounts, which were filed this week with Companies House.
Here are the key numbers from 2015:
- Loan origination up 132% to £727 million;
- Revenue up 144% to £31.9 million;
- Loss up 114% to £36.9 million;
- Loss margin reduced from 132% to 116%.
Desai told BI: “We were pleased with the performance, it was in line with the targets we set at the beginning of the year. We were investing substantially in technology and new overseas businesses.”
Funding Circle acquired Zencap last year, a deal that took the peer-to-peer lending platform into Germany, Spain, and the Netherlands.
Desai says: “Despite the fact we invested a lot in the business we managed to grow revenues faster than net cash usage. We’re very focused on the long term. Our UK business we expect to be cashflow positive in Q4 of this year and also cover all sterling global costs, which is positive. But we still expect to invest heavily in our new markets, which we think presents an opportunity at least 8X as big as the UK.”
As a result, Funding Circle doesn’t expect to make a profit this year. As I pointed out recently, the UK’s two biggest marketplace lenders — Funding Circle and Zopa — have lost a combined £50 million over the last decade and Funding Circle has yet to make a profit.
But Desai says: “The way to really look at it is what is the overall trajectory of each market. We’re not particularly focused on it [profitability], we’ve raised a lot of capital, we’re much more focused on each market and making sure we’re making progress year-on-year.”
Funding Circle raised £97 million in April last year, taking its total funding to over £200 million.
The company is keen to enter new markets but Desai is tight-lipped lipped on which ones. “We’re still focused on expansion but I can’t say where,” he says. “We certainly have an ambition to keep expanding into new markets.”
Le Luel, Funding Circle’s chief risk officer, recently shared the fact that the company dialled back loan volumes in the US after loan performance went off track. Desai downplayed the significance of this, saying it demonstrates proactive action from Funding Circle rather than a problem with the model.
Desai says: “I wouldn’t call it a hiccup. These things are things that we would expect to happen in the early days of different markets.
“It’s very important for us as a business that does not hold inventory to make sure that our customers get a very good experience. That includes borrowers and investors. Investors need to know that if we spot signs of underperformance in a portfolio, we will take aggressive action to tighten. We will take the hit to our own profitability, our P&L, in terms of servicing and origination to ensure that investors are protected.
“We spotted some signs of underperformance of the Q1 2015 cohort in the US, which represented about 10% of loans, we tightened up origination until we understood what was going on. In the event, it was probably an overreaction. If you look at the overall portfolio for 2015, it’s delivering a net return of about 8% a year, which is actually higher than the UK. The UK is very stable, it has been at about 7% a year.
“There are periods where we will bring down origination if we’re not happy about things, that’s a key part of our business model.”
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