From disruptors to dealmakers
THE MOST significant M&A deals don’t always manage to grab the headlines. The business pages are packed with analyses of multi-billion dollar mergers or failed acquisitions, and the so-called 50 per cent failure rate is ominously cited any time there is a new deal on the horizon.
But look behind the headlines and there is another narrative emerging. A narrative where savvy, forward-thinking companies use mergers and acquisitions to grow and strengthen their business. And 12 years after Zopa burst onto the scene, the peer-to-peer lending sector is ready to enter the fray.
Bit by bit, M&A is starting to shape the future of P2P. But in keeping with the sector’s disruptive reputation, it is not exactly taking the usual route. For years now, there has been near-constant speculation that the P2P sector is on the verge of consolidation, and rumours have swirled about big bank buy-outs and potential mergers within the industry.
Last year, Jason Purcell, chief executive of First Capital investment bank, predicted that there would be a “flurry” of M&A activity over the next few years. “In the early days, the financial services industry ignored what was going on with technology, but now they’re looking at it with more interest,” he told Peer2Peer Finance News. “I absolutely expect to see more banks experiment with this space, either by building their own platforms, investing in platforms or lending through platforms.
“I think there will be more acquisitions over the next three or four years as the firms get bigger and the banks react and buy them.”
Yet there has been a noticeable absence of any large-scale deals thus far. “To date there’s been very little M&A activity in the P2P sector, but it’s difficult to say whether this is because it’s still too early in the marketplace, or because the right opportunities haven’t come up yet,” says Stuart Law, chief executive of Assetz Capital. “From the Assetz Capital perspective, we’re open to relevant M&A opportunities that will add value and offer new avenues for growth, however we have yet to come across any suitable opportunities.”
This view has been echoed across the alternative finance space, by fintech professionals who believe that an M&A boom is long overdue. And who can blame them. There has been a raft of reports suggesting that dealmakers are on the prowl.
Research from the law firm Simmons & Simmons found that three quarters of banks and asset managers worldwide are looking to boost their collaboration with fintech companies to become digitally competitive, and 31 per cent plan to buy a fintech company over the next 12 to 18 months.
Meanwhile, Deloitte has reported that global M&A activity in disruptive innovation sectors such as fintech soared to $291bn (£239bn) in 2016 – a four-fold increase over the previous four years. In the first five months of this year alone, advisory firm Livingstone has recorded 19 mergers and acquisitions across asset, property and personal finance, worth over £3bn in deal value.
However, none of these deals involved P2P platforms. The research suggests that the money – and the appetite – is there for M&A deals in alternative finance. So why haven’t there been more deals in the P2P sector?
It may be down to innovation. There are two ways to grow a business – ‘build’ or ‘buy’. To ‘build’ requires an abundance of innovation which allows companies to set themselves apart by offering something completely new to consumers. To grow by ‘buying’ simply requires a company to acquire the technology or knowledge that it needs by acquisition. The majority of companies will start out by building on an innovative foundation, before turning to M&A as a way to maintain growth after this initial innovation ceases to be unique. There is little doubt that P2P lending was hugely innovative when Zopa launched in 2005.
But since then, the sector has grown and diversified to an extraordinary rate. Over the past few years, we have seen the launch of the first property-backed platform, the first Sharia-compliant platform, and the first securitisation deals. There are now more than 100 platforms operating in the UK, and by the end of 2016, the Peer-to-Peer Finance Association was reporting that its (then eight) members alone had cumulatively lent more than £7bn.
Meanwhile, partnerships between banks and platforms have become more and more commonplace, and the arrival of the Innovative Finance ISA (IFISA) and the bank referral scheme have helped to move P2P closer to the mainstream. But a number of leading P2P professionals, including RateSetter chief executive Rhydian Lewis, have rejected the idea of bank-driven M&A. After all, if the future of P2P involves bank-driven acquisitions, there is a risk that just 12 years after its arrival, P2P could be absorbed into the very mainstream it set out to disrupt.
P2P M&A certainly seems to be on the radar of the platforms, but it is still unclear exactly how – and when – it will take shape. Assetz Capital’s Law says that he expects to start rolling out an M&A strategy as soon as the company hits £1bn in lending. Given that the platform passed the £300m milestone earlier this year, and has experienced strong exponential growth of over 200 per cent, this could be as early as 2019.
RateSetter is one of the only platforms to have already dipped its toe into the world of M&A. When it acquired GraduRates’ loan book in late 2014, it was a largely opportunistic bet. GraduRates was performing well, but it was offering a very niche product and the owners had decided to run down the platform’s operations responsibly ahead of Financial Conduct Authority regulation.
“We spoke to GraduRates and agreed to take on its customers, making sure that the platform’s borrowers and investors were kept fully aware of what was going on every step of the way and also making sure they remained in exactly the same position,” said Luke O’Mahoney, a spokesperson for RateSetter. “At the time, we noted that this was a sign of the P2P lending industry maturing, showing that it was possible for a platform to wind down in an orderly manner.
“Our acquisition of the loan book went smoothly, and these loans are continuing to be repaid on our platforms.”
More recently, RateSetter bought two of its former wholesale lending partners that had gone into financial difficulty and acquired a stake in another. The platform wound down that segment of its business last December, after the regulator expressed concerns about P2P firms lending to other lenders.
Last month, RateSetter told investors that it had also taken ownership of Adpod, a beleaguered advertising company that borrowed £12m from one of the former wholesale partners in 2015 and still owes £8.5m. RateSetter has said it will absorb any losses from its own coffers as opposed to using the provision fund. The company gave all of its investors the opportunity to sell out free of charge, due to these “interventions”.
“These three interventions all stem from RateSetter’s wholesale lending which we discontinued in December 2016 and we do not intend to intervene like this again,” said Peter Behrens, chief operating officer and co-founder at RateSetter.
RateSetter’s wholesale interventions seem unlikely to be indicative of a wider industry trend, so while these small deals are worth watching, the more important question is whether a big, game-changing M&A deal is just around the corner.
A number of smaller platforms have indicated to Peer2Peer Finance News that they would be open to offers from larger platforms or banks, but there does not seem to be any sense of urgency.
One investor recently expressed their interest to Peer2Peer Finance News in the possibility of acquiring a smaller platform with FCA authorisation in order to leapfrog the lengthy application process, but so far no deals of this type have been inked.
“I suspect the long wait for authorisations to come through has had an impact,” says one M&A-focused lawyer. “It may well be that potential investors have been wary of investing until it was clear that a target platform was going to receive its authorisation. I suspect most platforms are also likely to want to wait until any impact from being able to offer IFISAs has fed through into their revenues, and hence their valuation.”
If this is the case, it’s unlikely that we would see any headline-grabbing M&A activity until after the next tax year, when IFISA-ready platforms have built up a track record.
Until then, M&A simply offers another opportunity for P2P lenders to demonstrate their inimitable brand of innovation.