Relendex co-founder and chief executive Michael Lynn tells Andrew Saunders why his platform is ready for anything in 2020 and beyond…
The peer-to-peer lending sector was born out of the aftermath of one crisis – the financial crash of 2008 and the subsequent collapse of traditional bank lending – and now it faces another, in the form of the coronavirus pandemic and the ongoing global economic fallout that is accompanying it.
How the industry – often criticised for never having faced the downward part of a full business cycle – will cope with this new challenge is a question that will only be fully answered once the dust has settled on the outbreak.
But Michael Lynn (pictured), co-founder and chief executive of housing development loan platform Relendex, says that platforms like his which provide secured loans against tangible assets are best placed to weather trouble. In fact, the fundamental security of the housing sector was what prompted him (along with his partner Max Lehrain) to quit a successful career in traditional financial services to set up Relendex in the first place.
“My previous experience told me that as a sector and an asset class, this was the most secure. We consider ourselves to be much better protected than [unsecured] small- and medium-sized enterprise (SME) lending or personal loans,” Lynn says. As a chartered accountant who spent a chunk of his early career in audit before moving into commercial property, the carefully-spoken Lynn may not fit the stereotypical profile of the iconoclastic fintech entrepreneur.
But his measured approach to business runs right through Relendex’s model. The firm provides development finance typically of between £500,000 and £3m to established regional house-builders with a track record of success, largely at fairly modest loan-to-value (LTV) ratios and with very carefully chosen criteria in mind. “Liquidity is a big thing for us,” he explains.
“So we’re always looking at the statistics: how many days does it take to sell a house or flat in a particular area? What’s the year-on-year growth? And what’s the average price there? Because we don’t want to be too far away from the market norms, we don’t want to be judging an area on average prices of £300,000 if we are lending against a £1m house – that wouldn’t be representative.”
Although Relendex is a national lender, it is most active in fast growing cities such as Liverpool and Manchester and in the outer London commuter belt – Bedford, Luton, Berkhamsted, parts of Essex and Kent. “We’ve never been London-centric because we’ve always thought the market was frothy and too high,” Lynn says. “There’s quite a lot of foreign capital coming in and inflating the market, and the first capital to take flight when things go wrong is that international money.”
Liquidity is also important to Relendex’s retail investors, typically 50-somethings with accrued capital looking for decent risk-adjusted returns. Because although they are prepared to invest for the term of a loan, circumstances can change and they like to know they can exit a loan early if they need to. “Unforeseen expenditure can come up for all kinds of reasons,” he says, citing the example of one investor who needed to pay for his daughter’s wedding. “If you haven’t got the cash in your bank account, you can’t pay for whatever it is.”
The firm has an active secondary market where loan parts can be traded between existing investors. But it also helps the platform to provide diversity to new customers. As Lynn says: “If you are given a mandate to invest £1m, but you’ve only got two or three loans live on the platform, but you don’t want to be in only two or three loans, you want to be in 20 – that’s where the secondary market comes in.”
Relendex’s investors are split fairly evenly between retail, aggregators like fund and wealth managers and pure institutions. Lynn admits that raising retail money is expensive, especially for a platform like Relendex whose coffers are not filled with venture capital or IPO-derived riches to spend on marketing.
“It’s a real challenge,” Lynn says. “You can burn money on Google AdWords at an alarming rate, and your conversion will still be poor.”
He believes that this is a big part of the reason why platforms like ThinCats have recently decided to go down the institutional only route, but says that while Relendex may seek to increase the proportion of institutional investment over time, it will not be giving up on retail entirely. “I have been involved in investment banking and stock broking, and what they discovered is that you get market feel from your private clients – a sense of where the market is, what the supply and demand is and what rate will fly,” Lynn says.
“We get great feedback from our [retail investors] and that’s really important. It helps us improve our proposition all the time.” Since it first opened its doors in 2015, Relendex has lent more than £44m at an average LTV of 60.5 per cent with no crystallised losses and a blended return of 8.37 per cent. Not bad in an era of historically low interest rates, Lynn points out.
But to satisfy the varied risk appetites of its investors – and better meet the needs of borrowers – over the past 18 months or so it has started to offer both senior and junior debt tranches, a technique borrowed from Lynn’s corporate finance background.
“Certain kinds of investors really want to lend against a property secured at 50 per cent LTV for a coupon of say six per cent to 6.5 per cent,” Lynn explains. “But borrowers might want to borrow at 65 per cent or even 70 per cent LTV. So we will provide that as a junior piece – it’s still part of the first charge but it ranks behind the senior piece at up to 50 per cent LTV. The coupon on the junior piece is between 8.5 per cent and 10 per cent – it reflects a different risk and that attracts a different type of investor.”
When it comes to the impact of the recently-introduced restrictions limiting new investors to a maximum P2P stake of 10 per cent of their investable wealth, he is not too concerned that this will lead to lower investment coming into the platform.
“Rather the reverse in fact,” he says. “If people have been set some parameters they will probably lend up to that, whereas previously they perhaps didn’t know how much of their investable wealth they ought to be putting in.” He also believes that, with the exception of some obvious bad apples such as collapsed mini-bond provider London Capital & Finance, regulated and responsible alternative lending is increasingly proving its worth. “The responsible platforms are doing a good job and delivering good risk-adjusted returns, net of defaults,” adds Lynn.
Read more: IFISAs: Universal appeal
“There’s enough data now to show that to be the case.” Thanks to this growing track record – and the introduction of the Innovative Finance ISA (IFISA) – Lynn reckons that mainstream acceptance is coming, but it’s not quite there yet. “We are still not fully accepted into the fold of the investment community,” he muses.
“One the one hand, the government has allowed P2P IFISAs, but on the other they are still not fully acceptable in the pension space.” This is unfair on the platforms and also denies pension investors access to a valuable asset class, he adds. “With good security and portfolio diversity we should be on a par with stocks and shares,” says Lynn. “Let’s not forget that a stocks and shares ISA can plummet in value, as we have seen in the first months of this year. Whereas we believe that your IFISA, if you have some reasonable spread, will actually protect your capital. That’s the difference.”
It’s time to recognise that all P2P products are not the same, he says. His proposed solution is that P2P loan fractions should be recognised as standard tradable assets – at least when those loans are secured and result in the creation of a new asset that can be independently valued, such as a house. So unsecured personal loans to consumers or small businesses wouldn’t count, but Relendex’s loans to housebuilders would.
“We already satisfy the liquidity requirement, because we have a very active secondary market,” Lynn explains. “But a piece of paper is not a recognised security. We don’t enjoy that accreditation, and yet an institution that invests in commercial mortgages can securitise those loans. Where’s the difference between what they are doing and what we are doing?” It’s a battle that is not going to be won overnight, but it is close to Lynn’s heart – don’t be surprised to hear more from him on the subject in future. His other plans for the business?
Chasing big lending targets is off the menu, perhaps unsurprisingly after Relendex’s failure last year to hit its £50m goal due to “Brexit uncertainty”. Rather, the secret to success whatever the economic weather in 2020 is to focus on really getting the basics right, he says. “The underlying business is an old fashioned one that is all about hard underwriting,” says Lynn.
“I think it’s an ideal time for our sector and its ability to grow, providing that we stick to our knitting, do the hard work and don’t go out on a limb to chase growth for growth’s sake.” And the P2P model is an intrinsic part of that ethos. “You’ve got to keep it simple and you must never lose the direct link between an investor and a loan,” he says.
It’s an approach that should stand Lynn, Relendex – and its investors – in good stead over the uncertain months to come.