Stuart Law, chief executive of Assetz Capital, tells Andrew Saunders how the UK’s fourth-largest P2P lender has managed to achieve both growth and profitability
WITH A 35-YEAR track record in property behind him, Stuart Law is not your typical peer-to-peer platform founder looking to shake up the competition with a whizzy website and a new app.
Instead, he is an experienced and straight-talking professional investor who started converting properties after university, moved into buy-to-let and purpose-built student accommodation and was drawn to the P2P model for his Assetz Capital business, not so much out of ideology but simply because it works.
In the aftermath of the financial crash, he explains, his existing property business had a supply of registered investors who wanted something that provided good returns but was less exposed to equity risk than the buy-to-let property deals they had been doing.
“We were looking for something property-backed and high interest, but not buy-to-let,” he says.
“Our investors were definitely of the mind that prices [at the time] were more likely to fall than rise.
“That led us to funding property development and also lending to businesses more generally who could offer us property security. We trialled it and there was a lot of demand.”
Thus in Spring 2013, Assetz as a P2P platform was born. Not only was it the first UK P2P lender to purely offer secured loans, its first deal was the country’s largest P2P transaction at the time.
“It was a £1.5m development loan funding a small purpose-built student accommodation block,” says Law. “It showed the appetite there was from investors.”
In its first year of business, Assetz lent £19m in total and that first deal set the tone for the firm’s ongoing approach to development funding – big enough to move the dial but also very carefully risk-managed.
“It was very safe – our money only started going out of the door as the bricks pretty much reached the top floor of the building,” Law explains.
“We haven’t really changed that policy – the developers’ money goes in first and our money second. We are not very keen on out-of-the-ground risk, because no matter how much due diligence you do, you just don’t always know what you will find underground.”
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In the five years since then, Assetz has accrued over 28,000 investors who have lent a total of over £500m through the platform. That makes it the fourth-largest P2P lender in the UK, albeit a fair distance behind the top trio of Funding Circle, Zopa and RateSetter – but the gap is closing, he says.
“We are currently about half the size of RateSetter. It won’t take much more for us to be two-thirds of their size and then maybe it will be the big four not the big three.”
His ambition for Assetz is to become a billion-pound-plus lender, a goal which he says is entirely within the platform’s grasp. But Law’s experience as an investor means that he is not only focussed on growth but also on that rather more neglected commodity, profitability. There is no shortage of fast-growing P2P platforms, he says, but not so many which turn a profit. Being both fast growing and profitable is the key to a sustainable business, according to Law.
“I have been in business since I was a teenager,” he states. “We could definitely take more funding in and grow faster, but at what cost? We’ve decided to balance – we require profit which to some degree constrains growth, but it makes you more stable and gives you a better shareholder return.”
P2P platforms which put growth before profit may be doing so because they genuinely need the cash to fund scale, he says. But profit-free growth can also suggest fundamental problems.
“The most common reason is that the model just doesn’t work,” he asserts. “Some businesses just can’t generate sustainable profits.”
To prove that its model really does work, Assetz made a profit of £1m last year and £2m this year. “It will double again next year,” says Law. “It’s a perfectly sensible path that shows we are a proper business – investors want to know that.”
Although P2P has been great news for the industry’s investors and borrowers, equity shareholders in the platforms themselves have often had to be a good deal more patient – the prospect of a potentially lucrative initial public offering or sale being their best hope of a decent return in many cases. Law tries instead to treat his customers and shareholders in a more even-handed manner.
“Our growth comes through our network of brokers – we look after them and they look after us,” he explains. “But we also have a policy that shareholders should be doing OK as well. We have paid around £46m in gross interest to our investors since we started, and our last company valuation was around £52m. So we now have a shareholder value that is approximately similar to what we have paid to investors in cash interest.”
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Not only is that approach fairer, he adds, but it also makes for a better balanced and more resilient business. “You can’t just focus on shareholders – we have seen where that leads,” comments Law. “But you can’t just focus on the customer either. People have tried that and they fail to make profits and become unstable. That’s not a good place to be.”
With its HQ just south of Manchester and relationship managers across the UK, Assetz is predominantly a regional lender, and its focus is on prosperous areas outside the capital.
“We’ve got people on the ground from north of Edinburgh all the way down to the South Coast,” Law says.
“We remain principally focussed on the regions, because where there’s muck there’s brass. There is plenty of money to be made there but less focus from London-based lenders.”
So where are the regional sweet spots for a property-backed lending business? The country divides into three areas, he says. Firstly London, with its dynamic economy which attracts huge global interest butcan be volatile.
“Central London has too many ups and downs and is too reliant on speculation rather than investment when it comes to property. We stay away from that.”
Secondly, the economic blackspots which it also avoids. “At the other end are the parts of the country with poor employment, poor infrastructure and poor pay. Income per head in these regions is not enough to sustain property prices.”
Thirdly, “there is everywhere else – all the other cities like Birmingham, Leeds, Liverpool, Manchester. They are evolving and those cities are becoming powerhouses,” he says.
It is in those growing second and third-tier cities that Assetz looks to do business, funding local housing developments and small businesses – provided they have property to offer as security.
Assetz used to undertake some debenture investing in green energy, but since the subsidies for wind and solar PV became much less generous, the deals dried up and it has pulled out of that market.
Law says it has been a sensible move. “It wasn’t big enough to focus on anymore, and it simplifies all our messaging,” he says. “There are no debentures and no loans against cash flow now. We are a purely property-backed lender.”
Although Law has been a property entrepreneur for nearly all his career, he studied electronic engineering at Sheffield University and started his own accounting software business while he was there. So is Assetz a fintech or a techfin?
“We were set up never to compromise the fin,” explains Law. “But we benefit dramatically from the tech – our retail-facing software is what brings the money in.
“A lot of fintechs – including some quite big names – are just using other people’s software. But the majority of our systems – our loan management and investment systems, CRM for the guys out in the field – are written in-house.
“Not many companies do that, but how can you be a fintech if you don’t do your own tech? I am chief executive but I can talk binary with a techie and know if what they are saying is correct or not.”
Assetz is also unusual in that it retains a manual pick option for those investors who still prefer to make their own choices. “We will be maintaining that for the foreseeable future for those that want it. We don’t see the need to alienate those people,” he says.
He is sceptical of the reasons given for the increasingly common autopick-only model used by many large platforms. “I think they are scared of the challenge presented by individual loans,” he comments. “The black box might be simpler but it also hides a multitude of evils.”
With all that exposure to the regional economy, has Law noticed much impact from Brexit? “It is affecting the London market to a degree, but in the regions the only thing I suspect is that businesses are being a little bit more careful, holding back a bit more cash,” he says. But as Law points out, Brexit hasn’t actually happened yet and the impact – good or bad – will only really start to be felt when it does. “When the laws start changing and we leave or we don’t leave, or whatever happens. If Brexit goes well there will be a substantial property boom and a significant boost to the economy.”
And if it doesn’t? “We don’t know how bad a bad Brexit could be. We do see some Armageddon analysis, but while that is possible you would have to think that we will try to avoid that.” Let’s hope that Stuart Law’s voice of experience is right on that, too.
This article featured in the August issue of Peer2Peer Finance News, now available to read online.