Nicola Horlick’s Brave New World
No-one can dispute that Nicola Horlick knows a thing or two about money, so it’s rather fitting that the peer-to-peer lending venture she founded in 2013 is called Money&Co.
The seasoned fund manager’s envy-inducing CV includes becoming the youngest ever director of merchant bank SG Warburg aged just 28, turning around the assets of Morgan Grenfell in the early 1990s and founding several investment businesses, all of which has resulted in her becoming a household name.
A large photo introducing her as “the new face of crowdfunding” on Money&Co’s website makes it clear that she is not afraid to use her media pulling-power to drive the growth of the business. And why not? This is a sector that undeniably has some way to go in gaining the attention and trust of investors.
“Undoubtedly, what happened in the US with the market overheating and the Lending Club scandal has made it a bit difficult to get both lenders and investors for these platforms,” she tells Peer-to-Peer Finance News.
“It’s harder to get equity investment into the platforms and it’s made it harder to get people to lend. This is wrong in my view, because this is an investable asset class. It’s going to make it a longer, slower build for these platforms than people may have thought in the middle of 2014 when everyone was getting very excited and overheated.”
Money&Co focuses on lending money to small businesses, with a significant proportion of its borrowers coming from the manufacturing sector. The Mayfair-based firm now has 11 full-time employees and two part-time staff, but it has only lent out £8m since its inception three years ago. With an average loan size of £350,000 – far larger than the typical loans given out by the ‘big eight’ platforms – this is not a huge number of deals. But Horlick is adamant that it’s quality, not quantity, which makes a good loan portfolio.
“You’ve got to be really careful, because if you flood the market with money, you’re going to end up getting a lot of bad debts,” she says.
“We’re not trying to build a massive loan book; we’re trying to build a smaller loan book – where we keep our fees and don’t hand them over to somebody else in order to get the business – and where we are confident we’re not going to lose our investors’ money. We’ve done it in a more considered way than many others and personally I think that’s the right way.”
She emphasises that this is particularly important if the economic cycle turns – a real possibility in a post-Brexit world.
“We’ve actually been in a benign economic environment until now,” she says. “It still seems to be reasonably benign, but should the GDP start to contract for a couple of quarters, you’d soon see problems arising in a loan book that is focused on small- and medium- sized companies in the UK. So we’ve taken a pretty cautious approach.”
Horlick is not the only high-profile figure to be worried about bad debt in the sector. Lord Turner and the Financial Conduct Authority (FCA)’s Andrew Bailey have raised dramatic concerns this year about the risks in P2P, but “they’re completely wrong”, says Horlick, who argues that the industry fills a need in the market by providing specialist financing that the banks do not offer.
“We focus on transaction based loans,” she explains. “So if a company is buying another company, or if there’s a management buyout, it can be very difficult to borrow the money from a bank in order to make that deal work. We are fast becoming the first port of call for people doing those smaller deals and I think there was a real gap in the market.”
Like the rest of the industry, Horlick expects the main focus for the business going forward to be the Innovative Finance ISA (IFISA) – the tax-free wrapper which is set to open up P2P to a wider range of retail investors.
However, the FCA’s approval process has been notoriously slow. Neither Money& Co nor any of the eight Peer-to-Peer Finance Association (P2PFA) members who dominate the market have yet received permission to offer the product.
“I got really cross as we’re a fund manager as well, so we already have approval from HMRC to be an ISA manager,” she says. “But then the FCA suddenly decided that you wouldn’t be able to manage these portfolios even if you already had ISA approval until you had your FCA approval to originate the loans in the first place.
“The Treasury wanted to push it ahead really fast and then the FCA got involved and it all slowed down, so it was a bit annoying,” she continues. “But you know, we are talking about selling things to members of the public so it’s got to be properly regulated and properly thought through.”
Horlick says it is “very unlikely” that they will be able to offer the new ISA before January, but predicts “huge growth in funds under management” when they do.
“The thing about ISAs is that they’ve got much wider appeal,” she says. “You don’t necessarily need to understand the ins and outs of the auctions and the due diligence process. We can promote a much simpler message if someone is buying the ISA, as they’re in effect buying into us managing the money for them and that’s where being a fund manager as well as an originator of loans comes into play and makes a huge difference.”
She is keen to equate Money&Co with her previous career experience. “In effect I see this as being very much like an asset management business,” she says. “Yes, we’re originating loans, but you’ve got a team of people over there originating loans and you’ve got a team of people over here who are used to raising money in the retail markets and managing fund management portfolios. Marrying the two can create a really interesting business.”
It has been argued that the IFISA is riskier than a stocks and shares ISA as you could completely lose your capital if the loan defaults, rather than investing a stock that will go up and down. Horlick bristles at the notion.
“I’ve been investing in the stock market for 33 years professionally. I think it’s far more risky to invest in the stock market than it is to lend to good quality companies,” she asserts. “If you’re an equity investor, whether it’s a listed company or a private company, you are the last person to get paid if something goes wrong.
“So this is vastly safer than investing in equities. It’s not safer than investing in government gilts and it’s not safer than leaving your money in the bank, as the bank is too big to fail and the government will bail it out.”
Horlick is as bullish on the sector and on the company’s growth as you would expect. She shrugs off the idea that the likes of Goldman Sachs and Hargreaves Lansdown launching their own P2P platforms will provide tough competition.
“We’re doing something completely different,” she affirms. “There isn’t really anybody doing what we’re doing.
“That’s not to say there won’t be other people trying to copy us as we go forward, but what I’m trying to create is a very niche business.”
…P2P in the UK versus the US
“The US market is 90 to 95 per cent institutional money, whereas in the UK it’s more like 26 per cent so it’s a wholly different market. That reflects the fact it hasn’t taken off quite to the same extent that it has done in the US. We haven’t had the big IPO yet of Funding Circle. And the question is when will we get that big IPO? I think they’re finding it a bit tougher. Their growth figures have slowed in terms of the numbers they’re originating.”
“Inevitably, large businesses will delay investment into the UK. So this will have an impact on smaller businesses and if they are suffering in some way that’s going to impact on us, as they’re more likely to have bad debts.
“Theresa May says Brexit means Brexit, but what does Brexit mean? She hasn’t actually explained. This is the biggest thing this country has had to face since the Second World War and I worry about how whether people fully understand the implications.”
“The area of regulation where I think things could change is in terms of selling whole loans to institutional investors. There are some institutions who are building APIs – an electronic way of looking into the loan book of the originator to cherry pick loans before they ever get to the platform. It’s not forbidden at this moment and the FCA hasn’t said anything about it, but I don’t think that’s treating all customers fairly because you’re not giving the customer – the guy on the platform – the opportunity to see that loan because it’s been plucked out.”