It will come as no surprise to a lot of investors and people in the finance sector that on the 24th May 2019 the peer to peer lender known as “Lendy” went into administration. For all the negatives Lendy have left us with, they also have to be acknowledged for the successes they achieved, in particular being an innovator in a new sector and although the growth of its business was seen by many as its biggest success it was also seen as their undoing.
It is reported that Lendy currently have £160M on loan with an estimated £90M in arrears, I am sure you will agree this is an enormous default rate that is clearly not sustainable and led to the instruction of administrators.
Although this may have been the feather that broke the camel’s back, I have looked through the company’s history to see if there was any signs of the potential issues and what we have learned from the business model. I appreciate it is always easier to look back at a situation but this blog has not been written to do this, instead it has been written to learn from others and to be successful in the peer to peer sector that we all love and believe in, and to also protect our investors.
Rapid growth
I believe this is one of the first and more obvious places to start, the timeline provided by Lendy on their own website shows the intense growth they received from doing their first loan in 2013:
Year : Amount Lent
2013 £30,000
2015 £32M
2016 £100M
2017 £300M
By any businesses’ standards, this is incredible growth and all company owners will know that with growth comes infrastructure problems. Even simply recruiting and training staff, developing systems and workflows to maintain high standards becomes a huge strain, particularly when you are hitting growth at this level.
There are peer to peer providers that have done this differently including ourselves, Crowd Property and Assetz Capital who have all achieved fantastic growth but maintained standards.
At Sourced, we have capped our funding in 2019 to give us time to review, adapt and improve after each fund, this will create the foundation for growth whilst maintaining our high standards and delivering returns to our investors.
Borrowers
It became clear in 2018 that Lendy were in serious trouble when they called in the FCA to support them as a borrower threatened to pursue them for a £10M claim.
The lending market is a relatively small circle of serious lenders and professional people, it became a regular occurrence of disbelief when I have met others in the industry and discussed projects that they had declined to fund, as the borrower was inexperienced, yet Lendy had funded the project.
I have to say this is a difficult subject for all lenders not just peer to peer and I have often heard it being referred to as an art rather than a science.
This is one of our key advantages of any lender in that we don’t lend monies to anybody outside of the Sourced Network, there are two key reasons for this:
1- Our borrowers haven’t just simply completed an online form or created a CV. Sourced know them personally, we have a relationship with them and have provided support and training to help them, assisting them with securing and developing the project.
2- Having a relationship with our borrowers means we know what experience and level of project is achievable for them which reduces the risk to our investors’s monies.
If anyone in our network wanted to develop 50 apartments but hadn’t yet completed a simple refurbishment, we wouldn’t even review the application.
Knowing your borrowers is important but having a relationship with them is on a whole new level, it makes the transaction more transparent.
Transparency
I mentioned this in my earlier point about borrowers, a key element that wasn’t transparent with Lendy was the level of arrears. It was reported that when the FCA were called in to deal with the threatening borrowers, the FCA uncovered that Lendy were only recording loans as arrears until they were over 180 days. At the time, Lendy were posting a 12% level of arrears, the FCA found that 62% of Lendy’s loan book was in arrears by over one day.
This not only affects Lendy, but it clearly shines a bad light on the industry and had they been open and honest about this, perhaps before it got to this level they could have introduced better systems or controls, points I refer to earlier when dealing with growth.
As a result of this, similarly other peer to peer lenders, Sourced have live feeds for relevant statistics to help investors make informed decisions but also to help us as a business reflect on the performance of our loans.
Summary
We can learn a lot from Lendy and no doubt, as the sector develops systems will be improved and risk reduced. Unfortunately, there will be investors that will suffer following the appointment of administrators and this will probably lead them to withdraw from the peer to peer sector which is a huge shame.
Peer to peer lending was created to replace the banks, giving investors more control, better returns and more transparency and I believe this is happening. I know myself and my team strive to achieve this every day as do others that support, develop and love the sector.