The UK Bond Network, a peer-to-peer bond and loan platform, held its second auction last month. Investors quickly moved in to finance a £1 million loan package to the LSE-listed company that was seeking finance, illustrating that appetite exists for this type of small-cap financing.
The company in question, which has a market cap of about £100 million (€122 million; $167 million) but whose name was not released, secured the required funding in five days after the loan launched. This was well ahead of its 14 day deadline, suggesting a strong vote of confidence in the initiative.
26 investors participated in the auction with commitments ranging from £5,000 to £100,000. A second offering by the same company, again targeting £1 million, was set to place on the platform the following week.
The UKBN allows companies, whether quoted or unquoted, to raise financing either through loans or bonds. The platform offers them the chance to market the bespoke instrument to investors ranging from high net worth individuals to institutional investors.
It aims to bridge the gap between smaller alternative finance providers – private debt funds, essentially – and the retail bond market, “[which is] generally not viable for companies seeking less than £20 million,” according to the UKBN. “Investors can access secured investments, with security typically being valued at more than the debt itself, for terms of one to three years,” the group added. Banks typically service the market below the £500,000 threshold at which the UKBN operates.
The UKBN is the brainchild of Chris Maule, its chief executive. He registered the company in late 2012 and spent last year securing regulatory approvals and building a pipeline of potential issuers.
Maule believes he has come up with a unique solution to address a funding gap of around £1 billion that he believes exists in the UK market in that size bracket. “I am not aware of anyone operating in the way that we do, particularly when considering the structure and size of financing we offer. We see ourselves as complementing, rather than competing with, the banks and other lenders.”
Typically, a listed company seeking to raise capital of between £500,000 and £4 million (the range targeted by the UKBN) would look to do so via a new issue of equity.
“But from what we’ve seen in recent years, particularly for some small-caps, there is now less appetite from investors, meaning lower valuations and more dilution, which therefore makes it a less attractive option to the companies seeking finance,” Maule explains.
For unquoted companies, there are options, but they are insufficient to address the appetite that he believes exists. “There is now an increased number of alternative finance providers, some of which [are] very successful, particularly within crowdfunding and peer-to-peer lending, yet there still appears to be a gap in the market that we are focusing on.”
Maule and his team have been working closely with external legal advisors, accountancy firms and IFAs who provide the platform with referrals. “We believe it is important to make the time to meet all our borrowers face to face, giving both sides the opportunity to present and understand each other’s business in better detail,” Maule says. He highlights how the group has a range of different funding structures for borrowers to choose from.
Maule underlines how essential it is that all of the bonds or loans offered via the platform are secured. “Some of our bond offerings have the option of an additional return built in, which would be correlated to how the business performs. This can be used to lower the initial cost to the borrower, yet allow the lenders to benefit in the event of good performance,” he says.
It’s an interesting initiative, and potentially represents a source of competition to private debt funds seeking to provide smaller loans direct to corporates. The proof of course will be in the number of deals the platform brings to market, and Maule for one is positive. “I am encouraged by the number of potential deals we have in our pipeline, along with a large number of recent enquiries. Part of the rationale behind the UKBN was the demand from existing business borrowers, and investors too – this is a demand driven offer,” he tells Private Debt Investor.