Raising growth funding
Peer-to-peer lending platforms are entering a growth phase, and there is no shortage of equity funding available. Michael Lloyd reports…
Peer-to-peer lending platforms survived the pandemic, but the global shutdown forced some of them to put their expansion plans on ice. Now, many platforms are embarking on equity fundraising to fund a growth spurt post-Covid.
Platforms typically raise funds for key hires, global expansion, compliance, developing new products and building new technology, and will use a variety of channels to access external capital.
These include angel investors, equity crowdfunding platforms, funding rounds attracting institutional backers, and venture capital funding, to name a few.
Many P2P firms have raised money on equity crowdfunding platforms Seedrs and Crowdcube over the past few years and several cite them as their most common method for fundraising.
Most recently, Assetz Capital, CrowdProperty, Loanpad, Income and EstateGuru have used Seedrs, while Plend and JustUs have raised funds on Crowdcube.
Industry stakeholders have heralded the track record and strong investor appetite for P2P fundraisings on the two platforms.
But equity crowdfunding platforms face competition from institutional investors, who are increasingly turning their attention to fintechs and P2P platforms.
Augmentum Fintech has consistently backed P2P pioneer Zopa, which left the sector earlier this year to focus on its digital bank, and will continue to invest in fintechs and P2P platforms.
The fintech-focused venture capital firm took part in a £20m funding round for Zopa led by Silverstripe in March 2021, and in October it partook in a £220m round led by SoftBank.
Ellen Logan, an investor at Augmentum Fintech, says the firm looks for differentiated technology capabilities, ambitious, execution-oriented teams, large market opportunities and attractive unit economics which can support strong and sustainable growth.
She says the venture capital investor sees opportunities within both consumer and property lending and continues to invest in fintechs, including P2P platforms.
“Our view as Augmentum is that the digitisation of the financial services sector represents a huge opportunity, one that remains nascent despite the rapid growth of the fintech sector and record levels of fintech funding seen in 2021,” Logan says.
“As a specialist fintech fund, Augmentum will continue to invest in the sector, within which lending – under a variety of different models including P2P – represents a key vertical.
“Key attractions of the lending space exist in its scale, the ability of technology to improve our understanding and management of risk, and in the potential for business model innovation to broaden the reach of credit to underserved groups.”
Alison Harwood, vice-head of marketplace banking and head of London branch at Varengold Bank, says that the bank has some equity interests in P2P platforms, as well as offering funding lines.
The German bank has been an avid backer of P2P and alternative lending platforms, including Assetz Capital, EstateGuru, MarketFinance and LendInvest.
Harwood says the bank is now focussing on equity investments in existing clients only through participating in venture capital-led rounds.
When investing in a new business, Varengold embarks on intensive due diligence, involving a combination of desktop review across the organisation, infrastructure, risk, underwriting, legal, compliance and sustainability, combined with management interviews.
But as investments are only being made to existing clients, the bank has no fixed criteria because these firms have already passed this due diligence.
“Investing in fintechs which are already clients of ours gives us a close existing knowledge of their business before taking an equity investment position,” she says.
“It also allows us to strengthen close existing relationships and deepen the partnership approach we have to working with our clients.”
In February 2022, Peer2Peer Finance News revealed that Germany-based asset manager NordIX AG is actively seeking to make investments in at least 20 UK and European platforms over the next two years.
The new allocations will be made via the NordIX European Consumer Credit Fund, with a minimum commitment of €5m (£4.19m) per platform.
This all coincides with the trend of rising fintech investment. According to Innovate Finance data, the UK saw a record year in annual fintech investment in 2021, exceeding $11.6bn (£9.68bn), representing a huge 217 per cent rise from 2020.
Some new P2P platforms are looking to tap into this.
Craig Smith, co-founder and chief executive of new family and friends lending platform JustLend, has recently raised £175,000. He said that £25,000 of this came from winning an award and the other £150,000 came from angel investors who “really believed” in their concept.
The platform, which allows borrowers to create their own loan campaigns to raise funds and send these to up to 10 friends and family members, is currently in beta mode and working on launching formally later this year.
Smith says that the platform is already in discussions about its next funding round in which it hopes to raise around £1m and has started conversations with a number of venture capital firms and angels.
“Enthusiasm for the JustLend business is pleasingly high,” he says.
Rob Pasco, co-founder and chief executive of P2P consumer lending platform Plend, which recently received final approval from the Financial Conduct Authority before launching, says initially he raised equity from family and friends and has spoken to lots of different investors.
“There’s a mix of different options, from venture capital to family offices, high-net-worths, friends and family and institutional financing,” he says.
Bruce Davis, managing director of Abundance, says that for the past 10 years, his platform has relied upon a mix of angel investors and regulated crowdfunding offers to raise finance for the platform’s growth.
“We wanted investors who are aligned as much with our mission as our financial goals and those investors have proven very effective supporters of both those objectives,” he says.
P2P platforms are ultimately attracting investment for growth, and there is a wealth of funds available looking for a good home.
Last month, Shojin Property Partners closed a £3m funding round and aims to raise another £2m to fund its global expansion plans.
The P2P property lending platform said that as it ramps up its global expansion plans, the funding will be used to grow its operations with new hires in deal origination, technology, marketing and risk management.
As well as private investment, some platforms are benefitting from public equity funding.
Several P2P platforms, including Assetz Capital, JustUs and Crowd2Fund, took part in the government’s future fund, which effectively means that the government is an equity investor in these platforms.
The scheme offered convertible loans ranging from £125,000 to £5m from the government, subject to at least equal match funding from private investors. The fund was open to innovative, high-growth businesses that needed support during the pandemic, so P2P platforms were a natural fit.
JustUs raised £1.3m under the scheme in March last year and after an orderly debt-to-equity conversion agreement, the British Business Bank became a minority shareholder in the platform on 20 December, in a transaction which valued it at £50m.
Despite ongoing investments into the sector, attracting funds can still prove challenging.
P2P platform bosses describe how difficult raising equity can be and say in general they have a mix of investors approaching them and going out to pitch.
“We have had people come to us but it’s much more common that you go and pitch to people,” says Filip Karadaghi, co-founder of LandlordInvest.
“There are many ways to raise equity financing and most platforms will try different avenues to raise funds. There’s nothing set in stone. There are various approaches and challenges to maximise the chances of success.”
Davis says that from his experience of raising equity, it requires plenty of work to build your own contact list and generate media stories to attract investors.
“There are a lot of companies competing for attention, so you need to find your USP which makes your offer stand out on whichever platform you choose to do the raise,” he says.
Davis goes on to say that as platforms mature it can become easier to attract equity funding.
“Overall, there is strong interest in platforms within the sector which have a clear USP or market niche,” he says.
“As platforms scale then it will open up new sources of funding, such as institutions – whether that makes it easier to access capital remains to be seen.”
Simple Crowdfunding’s managing director Atuksha Poonwassie agrees and says if a platform is more established, they have been through a number of regulatory changes and understand how the industry works.
“I think it has become easier anyway because this marketplace is more widely understood and known than say three years ago,” she adds. “That always helps.”
External investment is an arguably essential component for platforms looking to scale and there is plenty of private capital available.
It is just a matter of knowing how to pitch and where to look, but now may be the perfect time for platforms to equity fundraise to finance their post-pandemic growth.