AN ECONOMIC downturn will create opportunities for peer-to-peer lending, according to Samir Desai CBE, the co-founder and chief executive of Funding Circle.
“In times of economic dislocation, that’s when these opportunities become even greater,” he told Peer-to-Peer Finance News. “Banks pull back from the market and there are a lot of good, small businesses that can’t access the loans that they need to expand.”
The boss of the P2P platform, which is the UK’s third-largest lender to small businesses, said that Funding Circle is an “unstoppable force” regardless of the economic climate.
“We very carefully monitor all the economic variables but we’re not concerned about it, as we think this business model works regardless of the economic cycle,” he said.
“If we went into a recession we think credit losses would increase, we’ve been very honest about that, but we actually think the relative returns, say to the stock market, that we’ll deliver through a recession, will be even better than in good times.”
There has been plenty of debate as to whether the UK’s nascent P2P industry will be able to survive a downturn in the credit cycle. Zopa was the only platform to have been around at the time of the Great Recession, but critics argue that its loan book was too small at the time to be a true indicator of the robustness of the sector.
“There’s an argument that banks react quite poorly when downturns come, as they overtighten and they restrict the flow of credit, so there’s every reason to believe we can carry on increasing market share regardless of the market,” said Desai.
“In a downturn you should expect loss rates to increase, but it’s important to remember there’s a lot of loss coverage on these loans so even if losses doubled, trebled, people should still be making positive returns,” he continued. “Then it’s really about the relative performance, because if you’re delivering five per cent a year during a downturn, it’s going to be a hell of a lot better than what the stock market’s doing, fixed income, high yield, all of those kinds of asset classes.”
Desai said that his initial conversations with the new Treasury under Chancellor Philip Hammond have been “very positive” and that the government “recognises the role that alternative finance is providing to get more money to small business borrowers, help create jobs and stimulate the economy.”
“Times like this, banks typically curtail lending so my expectation is that the government is going to be pretty supportive, but let’s see,” he added.
Funding Circle unveiled its full-year results in September, which showed that its losses had almost doubled to £36m over the year, after expanding into Europe and the US hammered the platform’s bottom line. But Desai is adamant that Funding Circle hasn’t bitten off more than it can chew.
“If you believe genuinely you can get to a level of scale where you’re originating $100bn (£81.3bn) a year, as we do, you should be investing a lot in the future – putting in place the controls, the infrastructure and the technology that will allow you to do that,” he said.
“When you enter new markets you have to be very prudent so it’s costly as you learn, but we expect our UK business to be profitable in the fourth quarter of this year and the overall group profitability will depend on how many markets we enter and the maturity of those.”
Speculation has been rife over when Funding Circle will announce the UK’s first ever P2P initial public offering. Desai said there were “no immediate plans” to float, but said it was “definitely” in the company’s future.
“We have a very ambitious plan in the long run to create a lot of jobs in the world and go into a lot of different countries, so that’s probably best done as a public company,” he said.
It’s more the external factors that would be affect it, like if there were another Brexit type event. “We’re just focused on building the business and when the time is right we’ll do it.”