When Christian Faes, a former securitization lawyer, set up Montello Bridging Finance in 2008 with surveyor and property developer Ian Thomas, the two partners entered a short-term mortgage market that was “a pretty plain vanilla, offline and unexciting business, where we could grow only slowly because we lacked capital to lend against all the deal flow,” Faes recalls.
But the two men learned valuable lessons that led them in 2013 to spin out of that company LendInvest, now a leading marketplace lender that attracted a £22 million ($31 million) investment last year, one of the biggest ever in the UK fintech sector. In March it raised another £17 million in equity.
LendInvest has provided investors with £560 million of investments secured against property in its short life and attracted borrowers with a capability to arrange in a couple of weeks deals that can take the mainstream banks three months. Its founders now harbour big ambitions.
“In the next four to five years we want to become a mainstream mortgage lender,” says Faes. “Our main constraints will be getting cheap enough capital, but as businesses like ours gain traction, borrowers and investors will see how much better the experience can be than dealing with big banks that remain burdened with bad legacy loan books and legacy IT.”
Retail investors that provide much of the lending capacity for most peer-to-peer lenders account for only around 30% of the money LendInvest makes available to borrowers. It has bank funding lines channelled through special purpose vehicles and manages two institutional funds that invest in loans originated on the platform.
“We have large institutional mortgage lenders that lend through us,” Faes says, suggesting their expert due diligence validates LendInvest’s credit underwriting process. “The head of credit at one of the biggest investors told me recently that we do more checks on individual borrowers than they do. We haven’t created some fancy algorithm to do the credit underwriting for us. We may have automated parts of the data gathering and collation, but it still lands on the desk of a qualified underwriter. And not only are all loans secured, we also take a conservative approach. It’s short-term lending secured at 60% to 65% loan-to-value,” Faes says. “We developed our credit underwriting over many years as an offline lender before evolving into more of a fintech business.”
When LendInvest started in 2013, it maintained a minimum investment level of £50,000 so establishing a customer base that was either institutional or at least sophisticated retail coming through family offices. As it has grown confident in its own systems, that minimum has come right down to as little as £100. LendInvest has delivered average rolling 12-month returns of 7.27% to investors, while reminding them that their capital is at risk. Investors can set their own selection criteria to lend against and build diversified portfolios of exposure as new loans come up that meet these criteria.
“The future for platforms such as LendInvest and their real value lies in originating good-quality loans,” Faes says. “We have even seen interest from banks to lend through us, because while they may know the UK property market, setting up a specialist department in the smaller, short-term mortgage market is expensive infrastructure for them to build on their own. It’s also tough for them to build this kind of technology.”
He says: “Banks are coming to us and saying: ‘We are interested in this mix of assets to lend against, can you originate that for us?’ And we can tell them: ‘Well, this is what we have coming through our underwriting platform.’”
Faes hopes that LendInvest can continue to grow at 100% per annum for the next couple of years. There are challenges. “It is hard to hire good tech people in London, and attracting them requires, among other things, substantial investment in marketing and the brand. We also need more business development people, more underwriters.”
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For all that, even at this high-growth phase, the company is already modestly profitable. “It’s good for the fintech sector to have a few companies that actually make money,” Faes says. “It shows you can build sustainable businesses.”
In March, LendInvest announced the second equity investment into the company by an expert external investor. Atomico, a venture-capital firm founded by Niklas Zennström, the founder of Skype in 2006, invested £17 million. This comes only nine months after LendInvest raised £22 million in series-A funding. As part of the latest deal, Mattias Ljungman, Atomico partner, joins the board of LendInvest. Ljungman co-founded Atomico with Zennström and has worked with many leading global tech businesses, such as Klarna (payments) and Supercell (gaming).
Faes says: “We don’t want perpetually to be in fund-raising mode. It’s quite distracting and we will not be forced to shoot for headline growth by compromising standards. We will only originate good-quality loans, even if that means low growth.”
He reckons the company is only scratching the surface of the potential transformation in mortgage lending. “Increasingly, buy-to-let borrowers will operate through corporate vehicles, so raising the capital charges for banks to lend to them, which retail and institutional investors lending through our platform do not face.”
LendInvest generated revenue through an effective net interest margin between the 7% or so it returns to investors and that 10% to 12% rate it charges to borrowers on loans of six to 12 months.
Faes says: “There are maybe a couple of thousand big buy-to-let landlords, and we are in regular contact with many of these borrowers and have a growing servicing team. We launched development loans at the end of 2015 and intend to add more new products this year.We are also looking at the potential for international expansion. But the broad vision is to become more of a mainstream mortgage lender.”