An Investor’s View: New Entrants Disrupting Uk Lending Market

There is a growing trend afoot to revolutionise banking and investing by using technology to simplify the links between those who want to lend money and those who need it.

Technology is disrupting this sector like it has done to so many others including advertising your home (Rightmove / Zoopla), calling a taxi (Uber) and selling your second hand items (ebay). Many of these new technological players have been well funded, extremely well marketed, are focused specifically on a niche subsector (making their brands synonymous with the very service they provide) and most important of all have no or very little friction from a user point of view – effectively making them easy to use. This is the view that many of the new entrants to the UK lending market are taking………whilst at the same time keeping one eye on compliance. Manchester based Zuto and Carfinance247 are great examples of this trend. Their approach is disrupting the UK car finance market by changing the point at which car finance is obtained. They believe that organising the funding prior to finding the vehicle ensures their customers are in the best position to obtain a great deal on their dream car.

Why are investors interested in this space?

The obvious answer would be that we are attracted by the high growth rates achieved by some of the companies in the sector. While true it is really much more than this, it is the underlying changing market dynamics across the sector and the ability of these disrupting business models, enabled by technology, to continue to win market share despite the return of the traditional credit supply.

This market has developed by the coming together of a number of critical global trends. Trends such as a lack of innovation from traditional lenders, underlying customer dissatisfaction and trust issues with the banks, the availability of secure/scalable technology and the low returns from interest rates that both individuals and institutions are achieving.

In addition to this there are a whole range of individual subsector trends that are fuelling the specific alternative finance categories, including changes to pensions around withdrawal and annuities, the changing habits of consumer purchases and the flexibility required by certain businesses around funding working capital.

What do we consider important when considering investments?

Security / Scalability – This is critical. Significant platform improvements, or rebuilds, are super expensive but not as expensive as creating user friction or losing customer data due to systems being compromised by hackers. According to IBM the average cost of a security breach per company across the globe has reached $3.8m – this has the potential to be much higher in the alternative finance market.

Brand versus the Commodity Business – As the market becomes more mature we enter into the commodity race / the race to the bottom. When assessing a business we need to understand how are businesses unique? What is the level of repeat business if any? How strong is the Brand? Does the business have standalone or alternative funding capacity? Are margins stable or increasing?

Credit risk – Does the business assess or even take credit risk? Risks around the balance sheet are critical when assessing alternative finance providers. Some providers use SPV structures which have no or little recourse to the business itself, many act as a marketplace / online broker by, to coin a phrase, clipping the ticket when matching the user and the lender on each transaction. The important point around assessing a broker is the extent to which they have the ability to assess and write the credit risk as well as their track record of ensuring defaults remain low.

Compliance – One area that we know is very much in focus for disruptive UK lending platform’s is compliance. Fines / liabilities are large for non-compliant platforms so we need to know we are covered when investing. Compliance complexity is only likely to increase now that consumer credit regulation lies under the FCA rather than the OFT.

Overall the UK lending sector has had and will continue to have a significant impact on the UK economy. In the UK we are in a very privileged position as we have one of the most sophisticated financial services markets in the world carrying with it market leading compliance techniques as well as huge funding pockets to tap. We should continue to grasp our leadership of this sector and build these unique global alternative finance platforms without selling out too early to large international players.

About Beech Tree Private Equity

Beech Tree Private Equity was formed with the vision to create a new type of investor. An investor to work in real partnership with management teams/ founders to create category leading businesses in fast-growth sectors. We want to work with like-minded driven management teams to grow their businesses, providing capital, expertise and connectivity to collectively create real value growth.

We will invest between £10m and £30m into UK headquartered businesses providing funding for Management Buy Outs, Secondary Capital (to provide partial cash out for founder shareholders) along with Primary Capital (to accelerate growth organically or through acquisition).

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