I was in London this week to attend and speak at the AltFi Europe Summit 2015. Over 300 people descended on a conference center in central London called The Brewery (yes, they used to brew beer there) for a day of networking and education.
Like last year, David Stephenson, the executive director of AltFi, was our MC for the day and he kicked off the conference with a video featuring interviews with several industry leaders who shared their thoughts on where the industry is going. Then we got straight into the panels and keynotes. Below are some of the highlights of the day.
The Execution Phase – I really liked this comment from George King of the Infrastructure Group who said in the first panel of the day that we are moving from the phase of excitement to the phase of execution. Only those companies that can move between those two phases are going to succeed.
Culture – Rhydian Lewis, the CEO of Ratesetter, emphasized that as the industry develops business culture is going to become critically important. So much so, in his eyes anyway, that he believes it is the only truly sustainable competitive advantage.
Risk Concerns – Giles Andrews, the CEO of Zopa, said on a panel that he is very concerned with the approach to credit risk as a whole in the industry. He thinks some platforms will be tempted to move down the credit curve and with that will come not just increased risk but an increased likelihood that this risk will be mispriced.
ISAs Will Change the Industry – With the UK government set to decide whether to add a third ISA just for this industry many people foresee a huge influx of investment. Managing these large inflows will be a challenge with Rhydian Lewis predicting that rates will inevitably come down.
Cyber Security – Mark James of PwC gave a generally upbeat presentation on the future of the industry but he also warned of potential problems. With all of the news of website hacking and stolen credit cards recently he is worried about a similar threat happening in P2P lending. These platforms are built on trust and a major cyber security attack could be very damaging.
Introducing the LARI – AltFi Data released a new index at the conference: the Liberum AltFi Returns Index (LARI). This index tracks overall investor returns in the sector with data coming from the big three platforms right now: Funding Circle, Ratesetter and Zopa. To get this done all three platforms had to share their complete loan book with AltFi data. The returns have fluctuated primarily between 4.5% and 6% for investors overall. It will be interesting to see if the LARI gets much traction but regardless, I think it is another positive step for the industry.
The Move to Marketplace Lending – David Snitkof, a co-founder at Orchard, said that more traditional direct lenders are moving away from the balance sheet model to the marketplace model. It provides a diversification of capital sources and allows for a more diverse product mix with different investors having different risk appetites.
Inflows Will Not Last Forever – Geoff Miller, the CEO of GLI Finance, made the point that no asset class in history has ever had net inflows last forever. He thinks few CEOs are considering this possibility. He also said that in his due diligence on the platforms he has seen some shockingly naïve CEOs out there with loan pricing that is “remarkable”. Once interest rates rise Miller sees a more competitive environment with undifferentiated platforms, what he calls “banks lite” fading away.
Testing the Stress Test – My favorite presentation of the day was by Gareth Rumsey, the Research Director at Experian. He analyzed the recent Funding Circle (UK) stress test that said loan defaults would rise 1.55 times during the next recession. I have to admit when I saw the results of this stress test I was a little skeptical that those numbers would hold true. Rumsey took us through a detailed analysis of actual UK business insolvency rates from 1965 to 2014. What he found is that insolvency rates in recessions typically peak at around 1.5 times the average so he believes the Funding Circle stress test was done well and even slightly overstates the likely increase in defaults in the next recession.
There were plenty of other interesting presentations including one by 83 year old Lord Young, who is a special advisor to the Prime Minister on entrepreneurship. In an uplifting speech he relayed many lessons he has learned in an entrepreneurial career spanning more than 50 years. He also shared that in a few months he is going back to the private sector and is looking forward to starting his next business.
I enjoyed my day at the AltFi Europe Summit. It struck me that, much more so than in the US, the UK industry is going through rapid changes right now. The government there is so much more proactive and supportive than the US government – our government does virtually nothing to help this industry. While we are picking up speed in both countries the way this is happening is very different.