The next stage
Crowdstacker was one of the first platforms to launch an Innovative Finance ISA, but it is not resting on its laurels, as chief executive and co-founder Karteek Patel explains…
CROWDSTACKER may represent one of the smaller members of the Peer-to-Peer Finance Association (P2PFA), but what it lacks in size it certainly makes up for in ambition.
Chief executive and co-founder Karteek Patel has big plans for the rest of 2018, which involve the peer-to-peer business lending platform diversifying its model. The platform, which was one of the first to launch an Innovative Finance ISA (IFISA), is currently developing a cash ISA and plans to launch a stocks and shares ISA later down the line.
This will enable Crowdstacker’s customers to manage their traditional and alternative investments across the same platform. For example, they will be able to see the returns that are being generated by their IFISA, stocks and shares ISA and cash ISA in one place.
“Hopefully, it allows investors to better diversify their risk because they can visualise what their portfolio looks like and what they are earning across their portfolio,” he explains.
While Patel wasn’t able to divulge further details at this stage, he said the team hopes to launch the cash ISA over the next six months.
More than three years since launching the business, the entrepreneur says the plan to offer a cash ISA and stocks and shares ISA were always part of Crowdstacker’s “road map” – hence why the business already has regulatory permissions to launch both. Nevertheless, he says secured business lending will always remain at the core of the business.
“As liquidity grows, it [Crowdstacker] can become a place where you can manage more of your pot and cash,” Patel says. “You can flexibly change risk across your ISAs or different investments.
“Naturally, the goal is that liquidity in the alternative part of that portfolio increases, which allows us to target bigger businesses that are looking for larger sums of money.”
With one eye firmly focused on the future, Crowdstacker is currently in the process of raising money via crowdfunding platform Seedrs. It has a target of £800,000 and has so far raised £579,000. The plan is to develop technology to automate processes, increase headcount, and invest in the business in order to attract new investors and borrowers to the platform.
Up to launch, the company was funded by Patel and co-founder Mark Bristow. It then received £1.2m in funding via a combination of debt and equity from institutional investor Omni Partners.
“Historically as a business, we have probably taken the least amount of investment in the first three years of our existence compared to our competitors, but we are probably achieving on aggregate one of the best revenue figures,” Patel notes.
“We have done a great job in terms of laying core foundations and we have a great model, so we want to accelerate that process.”
In Crowdstacker’s last financial year it generated revenues of £1.3m, bringing total accumulated revenues up to £3m over the past three financial years. Patel adds that the business is currently breaking even.
Since launch in June 2015, Crowdstacker has raised £50.1m for UK medium-sized businesses via the platform and has repaid £13.4m in capital and interest. The platform does not charge fees to investors, who can invest from £500 upwards.
Patel notes that 70 per cent of inflows have come from IFISAs, which is an area where Crowdstacker has gained traction amongst investors. As one of the first platforms that was able to launch an IFISA product in May 2016, Crowdstacker gained a head-start on competitors who faced regulatory hold-ups.
Looking ahead, Patel expects the number of IFISAs to grow significantly, given that they currently account for such a low proportion of the total ISA market. In this environment, he thinks that different P2P business models will have the scope to flourish.
“There is enough room for all of us to carve out niches in what we do,” he says.
Crowdstacker’s niche lies in medium-sized UK businesses – and this was the opportunity that Patel and co-founder Bristow initially spotted when they set up the company in 2013.
“At the time, the likes of Funding Circle, RateSetter and Zopa were doing amazingly well servicing small- and medium-sized enterprises (SMEs) and personal lending,” he explains. “Where we saw a gap was medium-sized businesses that needed larger fund raises of up to £50m, which is the largest we have done.
“We saw that the standard approach taken by other platforms would not work for these businesses. As companies evolve through their lifetime, they get a bit more stable but also more complex. I think our due diligence process and structuring process accounts for that.”
Crowdstacker’s credit process involves an automated stage, which is used as a filtering mechanism. After this point, Patel says the rest of the process is bespoke and he likens it to the work that is carried out by corporate finance firms.
A by-product of the platform’s thorough due diligence process is to produce 20-to-30-page documents about each underlying company and loan. This provides investors with detailed information to base their investment decisions on.
Patel adds that the team is highly selective about the companies they lend money to, which means that Crowdstacker tends to feature less loans on its platform compared with competitors.
“Our model will always be quality over quantity,” the chief executive adds.
The platform currently offers investors access to 10 loans from a host of different businesses, with interest ranging from four per cent to 7.5 per cent per annum. Loan maturities also vary but do not typically exceed five years.
Today, the platform is seeing the highest demand so far in its history from businesses that are seeking funding for growth and development. While this should be viewed as a positive, Patel says Crowdstacker’s key objective is to maintain credit quality.
“For us, we are trying to focus on medium-sized businesses which are well through the start-up stage and have experienced management teams who have operated through cycles,” he affirms.
As the UK approaches the March 2019 deadline to leave the European Union, Patel has noticed that medium-sized businesses are re-evaluating their funding.
“In 2009, many banks pulled out rapidly in terms of lending to SMEs, which caused that market to really suffer,” he explains. “People who survived that period and have grown their businesses are looking at that and saying, ‘we don’t want to be in the same position, we want diverse funding lines and we don’t want to be reliant on one bank or partner’.”
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Rising interest rates represent another trend that has implications for businesses and the P2P industry. While savers are yet to see the benefits of the 0.25 per cent interest rate hike in August which brought the base rate up to 0.75 per cent, Patel believes the attractions of P2P platforms are unlikely to diminish in the future.
“Businesses are coming to the P2P or alternative finance space not only for the cost of finance, but also the ease of accessing finance, processing and dealing with alternative finance platforms,” he says. “That demand will remain.
“On the investor side, as spreads narrow [between government and corporate debt], it might be that some rates start to push up on the alternative finance side.”
In late July, the Financial Conduct Authority (FCA) put forward a number of proposals concerning the regulation of the growing P2P industry. Suggestions included only making P2P lending available to sophisticated investors or high-net-worth individuals who are fully aware of the risks, that investors should be limited to investing a maximum of 10 per cent of their net investible portfolio in P2P, and imposing marketing restrictions.
Patel welcomes any moves by the FCA to ensure regulation is kept up-to-date and relevant.
“Our focus, like our colleagues in the P2PFA, is to create an industry which makes investing easy to access and easy to use, for investors and borrowers alike,” he asserts. “A large part of this is about ensuring transparency, so that the basic ethos of P2P lending – to create a direct relationship between borrower and lender – can be preserved.”
In light of the proposals, Patel believes that Crowdstacker remains in a strong position, given that several of the items mentioned by the FCA (including an appropriateness test) are already part of the company’s existing processes.
Looking ahead, the entrepreneur expects to see tighter regulation, but hopes that the FCA can avoid adopting a “one-size fits all” approach.
“Our model is much simpler, so I’d hope that a certain amount of future-proofing has already happened,” Patel says. “For example, we are not making any lending decisions on behalf of investors and there is a direct connection between the lender and borrower. So in that sense we think there are less areas the FCA could target for our model.
“My other concern is the reputation of the industry. In the future, we might have a platform go under – and that is always a worry.”
Although the vast majority of platforms do a good job, he says a small minority could let the side down.
With the Seedrs crowdfunding campaign well under way, what is the future likely to hold for Crowdstacker?
“We want to accelerate the business,” Patel states. “We are doing around £20m per year in terms of investment and that is growing. We want to be doing £100m to £200m by 2021.
“This is an exciting moment for us as a business. We are raising funds and that is going well. The next stage of our growth will be more of the same, but also some different things coming through the pipeline.”
With its big growth ambitions and plans to expand across the ISA market, Crowdstacker may not remain one of the smaller P2PFA members for long.