The Orca research team recently completed analysis on ArchOver’s historic loan book, and, also, created a comprehensive ‘ArchOver Investment Report’ (download PDF) to use for due diligence. This article is a highly-condensed version of the report. The full report can be accessed by clicking the button below and signing up to Orca if you don’t already have an account. If you do, simply log in as you have full access.
ArchOver is a peer-to-peer lending (P2P) platform that connects UK businesses requiring finance with investors seeking exposure to secured, fixed interest loans. Launched in 2014, ArchOver offers two investment models called ‘Secured and Insured’ and ‘Secured and Assigned’. Secured & Insured loans comprise 85% of the ArchOver loan book. Investors can expect returns raging 6.5% – 9% per annum (p.a), however rates depend on the individual loan selected. Investors are required to manually select the businesses they wish to invest in, making commitments (ArchOver refers to this as ‘pledges’) on individual loans with a minimum investment of £1,000. They are responsible for their own diversification, as there is no auto-bid function where ArchOver spreads an investor’s capital across the loan book.
Access our detailed report by signing up and navigating to ArchOver on the ‘Dashboard’. Download the PDF for free!
NB: If you’ve already got an Orca account, simply log in and navigate to ArchOver. You have full access.
ArchOver Investment Model: Secured & Insured
For investors investing in Secured & Insured loans they have their capital secured against the business and additionally the Accounts Receivable (AR), where the named ARs are insured, usually by ArchOver’s insurance partner, Coface. A typical AR makeup would comprise of trade debtors (where work has been completed and invoiced out) plus possible retentions, unbilled completed works and Work in Progress (WIP). ArchOver looks for ARs that have low churn and a good history of clients successfully settling invoices within terms.
Here is an infographic representation of the Secured & Insured investment model.
ArchOver Secured & Insured Model (Infographic). Source: Orca
When a borrower is approved onto the platform as a Secured & Insured loan, they confirm that insurance cover will be taken over their Accounts Receivable (AR). Insurance covers invoices for late payments, unsettled payments, and customer insolvency. It does not cover ARs that fall out-with the specified insurance policy, as determined on each loan.
Insurance is taken over:
- Invoices raised
- Unbilled work yet to be invoiced
Insurance covers ARs for:
- Late payment
- Unsettled payments
- Insolvency of the customer
Insurance disputes could arise if:
- There’s a dispute of service delivered
- The borrower fails to inform the insurer regarding a default in a timely manner
As an example, if the borrower normally gets paid on 60 days by their client, and after 180 days they still have not been paid and it’s unlikely they will ever get paid, the insurer is unlikely to compensate as the borrower has failed to let the insurer know of the payment issue within a reasonable time period. This is not a significant concern as historically whole of turnover insurer non-pay-out rates are low, in the single digit percentages. Pay-out claims tend to be 95%+ successful. This, however, shows that diversification across a range of borrowers on the ArchOver platform is important, despite the presence of insurance.
ArchOver Investment Model: Secured & Assigned
For investors investing in Secured & Assigned loans, their capital is secured against the business and additionally the future contracted revenue of the business, with ArchOver taking assignment of the contracts. Future contracted revenue means fairly stable revenue, such as monthly fees for software paid to established players. It does not mean any additional services, such as IT support.
ArchOver Loan Book
ArchOver has facilitated in excess of £44 million worth of loans cumulatively over time, and £19.61 million in 2017 so far (to 3rd Oct) – this is more than double the total lending for 2015, which was £8.69 million. The platform’s lending total grew 70% between 2016 and end 2017, and while this rate of growth is not looking likely for 2017/2018, lending is increasing and the platform has a rich pipeline of high value loans on offer for investors.
ArchOver Total Amount Lent Annually. Source: Orca
Weighted Borrower Rates
As can be seen below, the average weighted borrower rate has increased from 5.99% to 7.58% in three years. It has become more economical for ArchOver to target higher value, higher rate loans enabling the platform to continue the detailed credit analysis they conduct on borrowers.
ArchOver Weighted Borrower Rates. Source: Orca
Loan Book Breakdown
ArchOver’s Secured & Insured model is the platform’s flagship model, with 85% of loans being attributed to this model. ArchOver intends to continue maintaining this breakdown, but will increase the value of its Secured & Assigned loans, particularly in the immediate future, due to a healthy pipeline of higher value loans existing.
ArchOver Loan Book Breakdown. Source: Orca
ArchOver borrowers must:
- Be a UK limited liability partership or limited company
- Have a UK bank or building society account
The companies are typically seeking debt-finance for working capital or to replace invoice financing, factoring or bank overdrafts. Borrowers can advertise loans from £250,000 with no maximum. Loan terms average 18 months for 2017, and range from 3 to 36 months. Businesses can borrow through ArchOver multiple times.
Secured & Insured borrowers
For Secured & Insured loans, the businesses must be at least two years old, supplying goods and/or services with a proven business model.
Secured & Assigned borrowers
For Secured & Assigned loans, the businesses must be established and profitable with loyal clients and a low churn or high replacement record.
ArchOver’s Credit Team performs detailed credit analysis on each loan before approving and listing on the platform. ArchOver Loan Managers monitor the business and its assets throughout the loan on a month by month basis, enabling them to give advance warning if a default or change to repayment should be expected.
ArchOver Review: Company Ownership
ArchOver is part of the Hampden Group (Hampden), and 91% owned by Hampden Holdings Ltd, which is the ultimate parent company. Hampden is a leading provider of specialist business support services to the insurance and financial services markets, with 30 years’ experience and £2 billion of insurance assets under management. Despite ArchOver operating at a loss for 2016, Hampden has provided sufficient capital to meet the day to day operations and regulatory requirements of the platform for the foreseeable future. Hampden has also invested £10,751,000 across the platform to-date, with £3,896,000 currently invested, as one of the platform’s institutional investors.
ArchOver Review: Key Considerations
Zero Default Policy
ArchOver operates a zero-default policy and therefore does not estimate future default rates. Historically, the platform does not have any data to base future defaults on, however many major P2P platforms do model future defaults and bad debt rates which can provide comfort for investors in the eventuality of a default.
Investors are required to manually select the loans they wish to fund. There are only ever a few borrowers listed on ArchOver at a given time, so diversification can be hard to achieve. Borrowers are permitted to refinance their current borrowing with a new loan as well, which gives the illusion that there are two loans to two different borrowers, but this is not the case. The investor’s exposure is to the single borrower, albeit different loans.
There is no secondary market on ArchOver enabling investors to sell out or buy loans. Investors should therefore be prepared to commit for the duration of the loan term.
If there’s a dispute by the borrower’s customer for services delivered or if the borrower fails to inform the insurer regarding a default in a timely manner a dispute over insurance payout could occur. ArchOver’s strict monitoring process ensures they are kept abreast of any potential customer defaults. Also, ArchOver aligns its Secured & Insured lending with markets which are performing well and are highly insurable.
ArchOver Review Conclusion
ArchOver is a peer-to-peer lending platform that has taken elements of traditional underwriting and innovative investing to provide an offering which can provide attractive returns for investors, with multiple levels of security. The platform has positioned security at the forefront of its investment models, offering loans which are protected by two-tiers of security and, arguably, a third level of security, in the form of the strict monitoring the Loan Managers practice on a monthly basis. ArchOver has a stellar performance to-date, strong backing, and what appears to be highly secure offerings. There are some clear considerations for investors, however, which should be accounted for when performing due diligence.