After years of speculation, M&A activity in the peer-to-peer lending sector has failed to materialise. Peer2Peer Finance News finds out why it’s taking so long
Traditionally, as a new market matures it becomes ripe for mergers and acquisitions (M&A), but the expected deal bonanza in the peer-to-peer lending sector has been more of a fizzle. Will the M&A boom ever materialise in P2P?
The sector has become an increasingly attractive area for both retail and institutional investors, prompting much speculation about potential tie-ups.
Analysts have heaped praise on the innovative market and the way it uses technology to bypass and provide a credible alternative to banks.
That innovation has helped the sector build up a lot of clout. The main UK lenders in the Peer-to-Peer Finance Association have collectively lent out more than £8bn, with giants such as Zopa and Funding Circle on more than £3bn each.
Zopa has not gone down the M&A route yet but Funding Circle has expanded into Europe by purchasing platforms such as German lender Zencap.
RateSetter, which makes up the ‘big three’ with Zopa and Funding Circle, acquired GraduRates’ loan book in late 2014. Last summer, its widely-reported “interventions” led it to buy two of its former wholesale lending partners that had gone into financial difficulty and to acquire a stake in another. The latter, George Banco, has since been acquired by Non-Standard Finance.
A spokesperson said no more acquisitions were planned in the foreseeable future, and it seems other P2P platforms are following the same track.
Interest from the City has also been quiet, aside from ESF Capital taking a controlling stake in business lender ThinCats during 2015.
But can that really be the peak for P2P M&A? The trouble is there aren’t enough big players, as Jamie Cooke, chief executive of FSCom, which advises on fintech compliance, explains.
“Markets that thrive from M&A activity are characterised by significant numbers of companies that can scale through innovative technology,” Cooke says.
“These markets are sufficiently mature that such companies are widely attractive.
“This is single biggest factor for the lack of activity within the P2P sector to date, which has been dominated by a small number of larger companies. It is also notable that the P2P market, to date, has not been of a scale and maturity to attract those institutional banks for acquisitions.
“However, I do expect that trend to change in the short term because P2P lending and the market has proven to be a reliable form of alternative finance with a long-term sustainable market. With the addition of regulation this should prompt more interest from external institutions looking to acquire a presence in the P2P space.”
Jon Gill, partner at UK law firm TLT, agrees with Cooke’s viewpoint and suggests that the Innovative Finance ISA (IFISA) wrapper will help build an image of reliability.
“One would normally expect consolidation in a market as it matures, but we have not really seen this in P2P just yet,” he explains.
“The sector has been growing rapidly, enabling platforms to achieve scale through organic growth without needing to aggressively pursue M&A.
“It will only be when growth rates drop off slightly that true industry leaders and those who are not quite as strong will be clearly identified. The recent launch of the IFISA will also encourage platforms to hold on and see how this feeds into their revenues before either looking to make acquisitions or indeed the shareholders looking for an exit event.”
A big issue holding back M&A in the sector is the cost of due diligence on a transaction.
Jonathan Segal, head of fintech and alternative finance at law firm Fox Williams, says a typical transaction may cost £40,000 to £50,000 in legal fees and charges to accountants, brokers and advisers, so it has to be worth the effort.
“I did think there would be more M&A by now,” he comments. “Particularly when firms weren’t getting their permissions, I thought some loan books would be sold. That hasn’t happened clearly.
“It would be costly from a legal perspective to get involved if you are only talking about buying things for a few million pounds.”
The cost-benefit analysis was an issue that Theresa Burton, chief executive of renewables P2P platform Trillion Fund, has been through in recent years. The platform closed to new investors in 2015 and she has been running down the platform since then, while talking to investors about purchasing the underlying technology.
But that wasn’t always the plan. Back in 2015, she had considered selling the £3m loan book, but the cost of legal fees and due diligence made the deal commercially unattractive.
“Completing the deal can outweigh any return you get on annual fees,” she explains.
“When purchasing loan books you need to consider the liability and the data and credit record you are getting.
“You don’t get a lot of history or volume with early-stage loan books so it is harder to judge. That is why we decided to run off our loan book instead.”
Ultimately, there has to be enough data to check to make the deal worthwhile, Burton adds.
“For a City firm or another company to get in they will be looking at the pipeline, borrowers and origination. They will also be worried about their reputation and monetary risk.
“The size of the deal has to be big enough to cover the due diligence cost.”
Another major issue is regulation.
Since 2014, P2P firms require authorisation from the Financial Conduct Authority (FCA), meaning that anyone purchasing them also requires the relevant permissions.
“P2P platforms are now regulated by the FCA and so any material change in control of the business requires the FCA’s prior approval,” says TLT’s Gill.
“This can be quite an involved process and introduces a degree of uncertainty and delay to transactions. That said, it is a standard feature of M&A in the financial services sector.
“Provided that buyers approach this in a wellprepared and diligent manner, it should not be too problematic.”
Conversely, the industry’s higher compliance requirements of regulation could actually encourage M&A. Cooke argues that higher barriers to entry to the market mean that smaller players may struggle to compete and consolidation is likely to occur.
Meanwhile, Gill expects to see banks and other financial institutions start looking to acquire P2P platforms to augment their existing offerings.
“I believe we will see both big City firms buying into platforms and platforms buying other platforms, although I believe the more significant story will be banks and wealth managers taking an increasing role in the sector,” he adds.
However, Segal cautions that it may not be worthwhile for a bank to make a P2P acquisition as they make more money from the spread between interest paid on deposits and funds they lend out.
One new development that may help facilitate the M&A boom is the rumoured initial public offerings (IPOs) among the bigger players.
Zopa, Funding Circle and RateSetter are all believed to be considering public listings, which would give them a lot of cash to splash.
Zopa co-founder Giles Andrews has described a public listing as a “natural route” for the business, while there are unconfirmed rumours that Funding Circle is planning a float.
RateSetter has said it would like to float in the longer term.
Iain Niblock, chief executive of P2P analysis firm Orca Money, suggests a Funding Circle IPO in particular would boost the brand.
“A Funding Circle IPO would accelerate their global strategy,” he explains.
“If it made sense for them to acquire other global lenders to achieve their goals I think this is possible.”
Segal thinks that an IPO would put cash in the market that could be used by the P2P platforms to buy up loan books, but he warns that being listed will also bring new challenges.
“Most firms are regulated anyway so are used to scrutiny from the FCA, but once listed they will also have scrutiny from shareholders and the risk of hedge funds coming in,” he says.
Another requisite of a stock market flotation is increased transparency and disclosure of the firm’s finances.
“More transparency is good but the question is if a firm’s reputation gets marred in ways private companies won’t,” says Burton. “There are a lot of people who can negatively influence your reputation when you are listed such as short sellers.”
It appears that the P2P industry will need to wait a little longer – and grow a little larger – before it would be worth the due diligence to turn this sector of innovators into one of dealmakers.
This article first appeared in the March issue of Peer2Peer Finance News, which is now available to read online.