ThinCats chief executive John Mould is determined to fill a gap in the small business finance market. He talks to Peer2Peer Finance News about the deserving underserved borrower, the role of institutional funding in P2P and his concerns about the Innovative Finance ISA
THINCATS chief executive John Mould is on a mission to help the UK’s struggling small businesses to grow. “I want to help British business, it’s important,” he states. “Every time I lend £1m to a business in, say, Manchester, they do some work, employ some people and they get ahead. I am really passionate about that.”
Of course he is hardly the only boss of a peer-to- peer lender to lay claim to that motivation. But what does set Mould apart is the way he is going about it. With just under £273m of loans to date, ThinCats is one of the larger P2P business lenders, but it’s a long way behind Funding Circle’s £3bn plus, not least because ThinCats’ model is a bit more involved.
Rather than growing a simple ‘lender meet borrower/borrower meet lender’ proposition as quickly as possible, ThinCats is in the process of constructing what Mould calls a ‘direct lending ecosystem’, to unite retail and institutional lenders with small- and medium-sized enterprise (SME) borrowers all over the country, using the existing network of regional brokers, advisers and accountants as intermediaries to help source and deliver a ready supply of good-quality loans.
“UK SMEs are very underserved for debt,” says Mould. “Funding Circle have a portion – loans up to about £200,000. But above that it’s bloody hard for them to borrow.”
Key to his ecosystem vision is signing up the army of local business advisers, brokers and accountants – whose clients are ThinCats’ target market – to act as intermediaries.
“There are loads of lawyers, accountants and brokers around the country who want to work with SMEs but have no loan product to sell,” he explains. “I have the product.”
Firms which are looking to borrow several million pounds also like to get advice from independent
intermediaries, he adds, but getting the advisers on board means having reliable funding sources. That in turn means institutional money.
“If I am talking to a broker in Newcastle and I say I can fund your loans with lots of retail investors, they say ‘No thanks’,” says Mould. “But if I say I can fund these loans largely with institutional money, and that retail might take some of it, that’s the difference. They say ‘Yes’.”
The regional aspect is another key to the identity of ThinCats, which was founded by three local entrepreneurs – including chairman Kevin Caley – in Ashby-de- la-Zouch in 2011. It is the hard-pressed mid-sized SME outside the prosperous South East that is its target borrower.
Lending to these firms is a job that urgently needs doing, he says. “If people think that the UK is doing well, that’s bollocks. GDP is growing at one per cent but if you take out London then it’s stagnant or going down.
The average company in Scotland or Manchester doesn’t have access to the funds to invest and it’s not growing.” Offering between £1m and £10m to firms who are looking to invest in growth but struggle to find a lender, ThinCats’ average loan size of just under £300,000 sets it apart from many other P2P lenders whose modus operandi is automating large numbers of smaller loans.
Consequently Mould sees his role less as competing with the likes of Funding Circle, and more as plugging the gap for mid-sized structured finance loans that banks can’t – or won’t – service themselves.
“We focus on what we call the deserving underserved companies,” he explains. “They tend to have rising sales and staff numbers but no assets, so banks won’t lend to them. I am not doing a single loan that the banks are doing. To quote one of my loan originators – who used to work for Santander – ‘I haven’t been able to lend any money for the last five years, finally I can sit here and actually start lending’.”
Persuading institutional investors like pension funds that there is more to life than stocks, shares and bonds is a slow process but will be well worth the effort, according to Mould. “This model works but you can’t do it on retail investors alone,” he says.
In October ThinCats scored a major victory, landing £200m of funding including £70m plus from US asset-backed securities outfit Waterfall Asset Management. No doubt it helps open doors that ThinCats’ owner, ESF, is itself majority owned by a British pension fund.
“[The big institutions] have been thinking about how to do this, but they haven’t had the tools,” he asserts. “I walk in and they say ‘Ah, that’s the tool’. My prediction is that eventually between 10 per cent and 50 per cent of all lending in the UK will be non-bank lending, just like it is in the US.”
So does that mean that ThinCats is not really a P2P lender? Its focus on institutional investors and use of intermediaries have prompted some to ask this question, but Mould says that both the platform which lies at the heart of the business, as well as its core of loyal ‘expert’ retail investors, are very much in the classic P2P mould.
“We’re just about the only one [of the big P2P players] left where you can still pick the individual loans you invest in,” he says, referring to the rapid spread of auto-select offerings across the sector.
All the same it’s telling that in the latest, recently-rebranded ThinCats brochure, nowhere is the business described as a P2P lender. Perhaps the term is a bit mom-and- pop for the big institutions they are now courting?
“The contract is between the lender and the borrower. I call it direct lending,” he says. “At the top of direct lending you have £100m deals for big infrastructure like Hinkley Point. At the bottom you’ve got the £5,000 consumer loans from Zopa, and then you have Funding Circle for SMEs. What’s missing is the £250,000 to £10m bracket for SMEs.”
But if filling that gap means going after institutional money, where does that leave the firm’s retail investors – who have an average of £70,000 each invested? Will they find themselves relegated to second fiddle?
Mould admits that for the immediate future at least retail will only provide a small proportion of ThinCats’ funding, but he is adamant that no-one gets any preferential treatment.
“Everyone signs the same loan documentation and we always say that loans are underwritten by an institution but that we keep a certain percentage for the crowd,” he affirms.
“We did a £6.7m loan in September [its largest ever, to Chelsea Yacht & Boat Company] – the crowd took £4.7m. Retail investors get access to institutional quality loans, to me that’s beautiful.”
He also admits to some concerns over the Innovative Finance ISA (IFISA). The tax-free wrapper has generated a lot of interest in the P2P sector but has also been accused of muddying the waters for retail investors more used to the cash ISA, which is backed by the Financial Services Compensation Scheme.
“To be honest I would never have made this asset class ISA-able yet,” he says. “This is not savings, it is investment. You’ve got your cash ISA and your equities ISA, why put a new one in the middle that noone understands?”
So perhaps it is no surprise that ThinCats’ own IFISA has been delayed and is yet to come to market, rescheduled to an unspecified date later this year. When it does launch, expect it have limited availability.
“If people are moving from the cash ISA to the IFISA, I don’t want them,” states Mould. “I want people moving from the equities ISA. I only want a client who is financially savvy; it will probably only be open to existing investors initially.”
Like the firm he runs, Mould himself is not the classic P2P entrepreneur, his years of experience and blue-chip financial services background making him more of a poacher-turned-gamekeeper. After heading to Europe in the early 90s to escape a recession-hit Britain that was, in his words, “a bit shit”, he worked for the finance department of the Council of Europe in Strasbourg before landing a job in Luxembourg “for a firm I had never even heard of at the time called Morgan Stanley”.
That took him to London, where after a few years as Morgan Stanley’s head of operational risk he deftly escaped investment banking before the crash. He headed to New Star Asset management and then to Hermes, the BT pension fund manager, as chief operating officer. In 2015, when ESF acquired a majority stake in ThinCats, he was appointed chief executive.
“The idea was that we’d buy some other P2P [platforms] and use them to create funds,” he reveals. “But my colleagues met 60 of them and our conclusions were that most would never stand the test of time.”
The problems, he says, included too much focus on tech, a lack of understanding of how to find borrowers – “saying you’ll use Google Ad Words, well it just doesn’t work that way” – and poor credit management. So what was to have been a series of acquisition sprints instead became more of a build-and-scale up marathon focussing on ThinCats.
It may have taken a while to perfect the model but Mould is not in a hurry to chase any audacious lending targets. Despite making a record £12m of loans in December he won’t be drawn on how far or how fast ThinCats may develop, only that he intends to build a long-term, sustainable business fit for whatever the future may throw at it.
“I don’t have any great ambition to be lending £25trn or whatever,” he affirms. “The ones who win will be the ones who keep their credit quality.
“So we will always grow slowly but surely and cautiously. I just want to keep supporting British business and provide a risk-adjusted return to investors that they can understand.”
This interview featured in the February issue of Peer2Peer Finance News, now available to read online.