Alison Harwood, head of Varengold’s London branch, tells Andrew Saunders what the German bank is doing for UK peer-to-peer lenders
UNLIKE MANY LARGER, better known rivals, Varengold has no UK branch network and doesn’t indulge in slick advertising, but despite this undeniably low-key approach the German bank has quietly been building a name for itself as the go-to funding partner for smaller peer-to-peer and marketplace platforms looking to expand their lending.
That’s due in no small part to the efforts of its London office head Alison Harwood and her team, behind deals such as the bank’s £45m investment in MarketInvoice in 2017 and an agreement with Assetz Capital announced in March this year.
Although Varengold is based in Hamburg and funded by German retail deposits, Harwood’s London office is a vital part of its strategic mission – to be an expert partner for marketplace lenders, providing not just money but advice and insight too. “London is a location with some very highly skilled people, the industry here is highly developed and the rest of Europe takes its cues from what the larger players have achieved in the UK,” says Harwood.
The idea is to team up with business lending platforms who have more good borrowers than they can service with retail P2P investments and provide them with a steady stream of funding – usually over three years – to write more loans more quickly. As Harwood explains, Varengold acts as a kind of junior institutional investor bridging the gap between venture capital (VC) funding and larger institutions.
“We’re a sort of hybrid providing the middle step between the VCs and the larger asset managers, pension funds and so on,” she comments. “Our core aim is to be a partner for fintechs and a partner for the marketplace lending industry. We don’t have any aspirations to become a direct lender ourselves – we don’t want to put ourselves in a position where we would be competing with our clients.”
So what about that latest Assetz deal? Why choose a partner that is regionally focused and not part of the London fintech scene? “We like the UK property market, it allows us to generate a good risk adjusted return and helps our goals of lending into the real economy,” says Harwood. “Assetz has a good track record, it’s profitable, they have some very experienced people – in their loan management team, their recoveries team – and the structure that underpins their decision making is also very good.”
But she also admits that a business providing bridging finance for small- and medium-sized enterprise housebuilders in the North West of England has a certain post-Brexit-vote appeal. “It offers geographical diversity,” she says. “We were very focussed on London and the South East, and since the Brexit vote we have been highly engaged with clients on their management of the risks, and on managing the portfolio away from prime central London.”
Although Varengold started out as an asset manager back in the 90s, it got its banking licence as recently as 2013, so it is unusual amongst banks in that it is around the same age as many of its clients. Youth has its advantages, says Harwood. “We’re not all middle-aged men in bowler hats, like the bankers in Mary Poppins. At Varengold we’re quite entrepreneurial as an organisation because we are young. That does align us more closely with our clients.”
But being entrepreneurial does not mean taking seat-of-the-pants decisions and simply hoping that they will come good, she adds. Investing in smaller fast-growing firms is an inherently risky business so both Harwood and Varengold believe in doing their homework.
“The due diligence we demand is a very thorough process,” Harwood states. “There’s a desktop review with full documentation across all the operating areas of the business, and then there’s a full-on site review including interviews with all senior management.”
Then it’s over to Varengold’s in-house PhD-level mathematician for a deep-dive into the validity of financial projections, and a stress-testing credit assessment. It’s a disciplined process of look-before-you-leap that can demand a fair amount of time and effort from clients but that pays dividends in the end. “When clients get funding from us as a first institutional investor, we really see some positive acceleration in the business,” Harwood reveals.
That discipline extends to the way deals are structured and managed too. “We always require first loss positions, because clients need to be aligned with us on the downside, not only on the upside,” says Harwood. “They need to stand by the quality of the loans they are originating.”
Its funds are deployed primarily for lending on partner platforms, but Varengold will take small equity stakes as well. “We often receive equity kickers as part of our funding package,” Harwood explains. “Minority stakes that we only ever hold passively, but it does incentivise us, where there is excess funding available, to deploy it where we are aligned on the equity side.”
Harwood trained as a lawyer and after stints at Linklaters as a tax associate and in structured finance at Barclays, joined Varengold in November 2015 as senior VP of the London office. Why leave a good job at a brand name investment bank to join a small German outfit that few outside its sector have heard of? “At Barclays I was exposed to some really interesting financial structuring and technical work. But in a large bank there is always a huge amount of bureaucracy, and getting things done takes a very long time. I wanted to be somewhere a bit more nimble, where I could apply those skills in a more entrepreneurial way.”
She also reckoned that her career would progress further and faster in a smaller outfit. “I felt I wanted to move a bit quicker, which I have,” she explains. “I’m now head of the London branch in just four years.”
Harwood is keen to do her bit to promote diversity in two sectors – banking and fintech – where women are still under-represented. “I feel privileged to be a woman in a senior position in the industry, and it’s something that Varengold has been very supportive of,” she comments. “In the majority of the meetings I have I will end up being the only woman in the room. But I prefer to look at that as an opportunity. The perspective that being a woman can bring to banking and finance has been well documented since the crash.”
With a revamped website and a new, more specific strategy of building long-term sustainable partnerships with clients, Harwood has big plans to keep Varengold growing. Key amongst them is the development of new products and services such as its latest fronting offer, intended to make access to new European markets more straightforward by allowing clients to piggyback on Varengold’s regulatory infrastructure. “Fronting is a new product line we have spent quite a lot of time developing, and we’re just about to go live with our first very large client,” she reveals. “It’s something that I’m very excited about and that I think will be important for the development of the business.”
By allowing clients to plug into the EU passporting rights that Varengold’s licence permits, the bank can act as a third party to ‘front’ operations in countries with differing regulatory regimes that clients would otherwise have to devote considerable time and effort to developing on their own. “As a bank with a full service licence that can be passported across Europe, to able to partner with clients so they can utilize that regulatory infrastructure is a powerful thing – especially when you can bolt it onto the funding side,” she says.
The advantages of fronting are not purely about overcoming regulatory hurdles. It’s part of a drive by Varengold to become an operational as well as an investment partner with its clients. “It’s not just the regulatory umbrella – we are a full service bank with front, middle and back offices that can be utilised by clients in a tailored manner to fit their needs,” she says.
For example, rather than building their own KYC or onboarding teams, customers can use Varengold’s resources and technology to do it for them. It’s an approach that she hopes will help the bank not only hang onto existing clients as their funding requirements grow beyond its ‘first institutional investor’ sweet spot, but also to attract larger clients. “We’ve had a few conversations with some of the more mature platforms, where maybe we aren’t quite the right fit for them anymore on the funding side,” she states. “But this is a way that we can help facilitate the next step for their business.”
Harwood is looking forward to the role she can play in moving the bank and its customers into those new markets and services. She will not only be delivering Varengold’s growth strategy but also providing the same kind of customer-centric approach to funding marketplace lenders, that those lenders already provide to their own customers.
“I have a really interesting role working with dynamic clients, growing a business I’m directly responsible for,” she comments. “You do feel at the cutting edge of financial innovation, in an industry that is having quite an impact on where we go as a society for our financial needs. We’re coming out of an age where banks were almost there to regulate their customers. Now it’s all about how we can serve our customers, not how they can serve us.”
This article featured in the August issue of Peer2Peer Finance News, now available to read online.