The rise of peer-to-peer

There’s a new kid on the UK peer-to-peer block, even if the name dates back a very long way.

Wellesley & Co, co-led by chairman and founder Graham Wellesley (a descendant of the Duke of Wellington, Arthur Wellesley), has already lent more than £22 million through 40 deals since its inception in November last year.

The Wellesley model is firmly based on small loans – in the region of £0.5 million to £10 million – to UK individuals and businesses, secured against real estate.

The firm claimed last month to have made the largest loan in the UK to date from a peer-to-peer platform when it issued a £8.3 million loan secured on 27 property assets situated in several south London boroughs and Essex.

Wellesley hopes the platform will appeal to retail as well as institutional investors, and in its infancy it has been largely the former who have committed capital – to date the platform has attracted more than 2,000
investors.

Andrew Turnbull, co-founder and director of Wellesley, told Private Debt Investor that recent successes in peer-to-peer lending were attributable to its ability to offer investors an “inflation-beating return,” unlike traditional banks at present.

“Many savers are turning to peer-to-peer lendng,” he said. The market, around since 2005 in the UK, was relatively quiet up until 2010 but has grown strongly since then, Turnbull observed.

The UK alternative financing sector – which includes peer-to-peer lending, crowdfunding and invoice lending – hit the £1 billion mark at year end 2013, according to research from investment bank Liberum AltFi Index. Albeit small compared to traditional lending, the industry grew on average around 6 to 8 percent in the last quarter of 2013.

One of the first entrants to the market in 2005 and the UK’s largest peer-to-peer lender, Zopa, has advanced £438 million since inception. It is growing at 3.3 percent while Ratesetter, which entered the market in 2011, has advanced £151 million and has a growth rate of 12.5 percent.

Relative newcomer Wellesley offers investors annual rates varying between 3.75 percent to 7.5 percent with no fees, depending on the length of the investment.

Wellesley’s successful start in the P2P industry lies, according to its founders, in securing its lending activity against highly liquid properties and the fact that the four senior team members have put their own
cash at risk.

“Every loan we make is backed by a tangible asset and at present we deal exclusively in property. All loans are secured so that we have a property that we can sell. We don’t lend unless the property can be taken to auction and sold in a relatively short space of time,” Turnbull says. The firm is exploring the possibility of expanding into other asset classes however.

In a ‘skin-in-the-game’ type arrangement, Wellesley’s partners have around £4 million exposure on its current loan book, Turnbull added. “It’s a floating number. It’s much like the way a bank keeps Tier 1 Capital,” he
explains.

The firm uses its own cash to make loans to borrowers before assigning the loans to lenders via the platform. As a result, the firm has the flexibility to compete with other lenders without prior approval needed via the
platform. “We want the highest quality loans. We want to compete on rates very aggressively,” Turnbull explains.

“In the event that a loan [was] to default and the security was insufficient to cover the loan, Wellesley would lose its investment first,”according to the firm’s literature. It has a provision fund designed to cover losses, with a coverage ratio of 1.2. There have to date been no defaults, but the firm has modelled a default rate of 2 percent.

On a traditional short-term bridging loan to buy another property, Wellesley can quote 0.65 percent per month plus a 2 percent average fee, equating to 10 to 12 percent per annum, Turnbull said.

Loans have a loan to value (LTV) of 50 to 60 percent and are short term in nature: the average term length is 11 months with a maximum limit of 18 months.

Around 50 percent of its lending sits within the M25. The remaining is allocated to big cities outside of London, like Manchester and Edinburgh. “The rest of the UK presents an attractive place to lend,” Turnbull said.

Wellesley revealed plans to scale the business via external investment, and has already fielded a number of calls from interested parties. At present it’s a small part of a nonetheless very dynamic and high-growth sector. And with institutional capital behind it, that growth could accelerate still further.