At Orca we like to keep you, our users, informed with the latest news in the market. We also like to give you a deeper insight into a peer-to-peer lending platform’s inner workings. What better way to get under the hood of these platforms than with an interview. Here’s an interview we recently conducted with Crowdstacker’s CEO, Karteek Patel.
Crowdstacker is a manual selection, business lender, where loans are secured on assets and returns are up to 7% per annum.
Crowdstacker was founded in 2015 by Karteek Patel and Mark Bristow having sold their fixed-income trading operation in the City. Along with Julian Turnbull (co-founder), their combined skill-sets lent themselves to creating a manual loan selection, asset-backed SME lender, namely Crowdstacker.
“The range of expertise between us includes fund management, corporate law and investment product development and so we decided to get together and do something that brought those skill-sets together.”
It was the founders’ ambitions to provide a range of investment products, which were of good quality and tailored for everyday people, so the complexities and often inaccessibility of investments, reserved for an elite group, were removed.
“Our ambition has always been to provide high caliber investments to everyday people and engage them transparently providing opportunities that have been through a good vetting process. We provide people with the benefits and the risks, and products that are structured more akin to traditional finance but with the accessibility of crowdfunding.”
On the topic of the name, and the interesting term representing the borrowers on Crowdstacker – their “stack” – Karteek delved into the symbolic value of the name and also who it is investors lend to across the Crowdstacker platform.
“Our stack is not something you’d expect out of an investment platform, but our name symbolises our goal, and our goal is to search through the crowd, to filter, to scrutinise and present a curated stack of investments. We try and cut out some of the work (for investors) by presenting them with a filtered selection, where we present the benefits and importantly the risks.”
Crowdstacker facilitates loans to SME business borrowers in the U.K, typically looking to raise £500k – £1million+ for expansion and operational purposes. The businesses must be established, with demonstrable accounts, experienced management and securable assets providing underwriting of the loan. This has resulted in only a few opportunities being included in the platform’s “stack”, aiming to ensure only the best businesses are presented to investors.
“We’re looking at companies that can provide decent returns, run by good management teams and are established. To-date, we’ve looked at many businesses, but only a few have cleared the hurdle rate. Our pipeline is growing as is the overall quality of the applicants, however.”
*Find out about Crowdstacker’s latest investment opportunity here: ‘BurningNight Ltd Loan’
Lent to-date: £10m+
Historic default since June 2015: 0%
Expected default (2016): 0%
If these default statistics were presented by a large, mainstream platform with thousands of borrowers, like a Zopa, they would look very impressive. They are, however, fairly representative of a tailored, manual loan selection platform that only accepts a few loan opportunities onto the platform. The curation of well-vetted loans onto the Crowdstacker platform is critical to the platform’s success.
“I think it’s important to talk about our model, because despite these being the type of stats provided by our competitors, I don’t believe they’re relevant to all peer-to-peer (P2P) models. For us, we believe we’re truer to the definition of “peer-to-peer” in that we directly connect businesses and investors together, so maybe more like a Hargreaves Lansdown type of platform. We think these stats are more relevant to platforms running an investment strategy underneath, like a RateSetter.”
Default Risk & Security
Q: What if a borrower does default, and a significant proportion of the loan book needs recovered?
“Firstly, we keep our entry bar really high. Historically we have probably seen many companies for every one company we accept onto the stack.
We do have procedures in place in the event of a default;
1: All loans to-date have been secured and we don’t expect to change that in the future and move into unsecured lending.
2: We act as a Security Trustee and have the authority to take action and instruct a collection agency or receiver depending on the company.
3: We value transparency and so we monitor companies closely and inform lenders periodically on performance.
By offering more transparency on the businesses we think it may potentially be better for someone to diversify, because if they have high exposure to property one of the loans may not suit them, so in theory if an investor selects the right loan for their portfolio then their portfolio is likely to be better diversified.”
Karteek continues to elaborate on some of the risks investors face and how Crowdstacker embraces being upfront about the risks and the unsuitability of this type of investment to some investors.
“I think what we do better than anybody else out there. We are very upfront about the risks, to the point where it’s in people’s faces. But actually, customers like that. We’ve even turned away people based on the questions they ask us and the things they’re saying which suggest they’re not aware of the risks.”
With peer-to-peer lending there is no guarantee the funds will be raised for the borrower:
Q: Has Crowdstacker faced any objections from borrowers seeking to quickly raise money?
“To be honest, those sorts of businesses disappear at our pre-screening. For example, if they’re (the borrower) looking to develop a property they either need the cash or don’t need the cash, so our model isn’t suitable for them, because there is no definite.
The Crowdstacker model suits an established business looking to diversify its funding sources. Also, I think most borrowers are fed up of Banks in general and so it hasn’t been difficult (getting co-operative borrowers), what has been difficult has been finding the right ones. It takes a lot of time. This is due to the more traditional due diligence processes we use and the documentation we produce and structuring of the loans, really. Our model works on quality whereas some mainstream platforms might work on scale.”
On the Crowdstacker website, investors will see that the loans presented have a minimum target raise, which must be reached.
Q: What happens if the business borrowing doesn’t meet its funding target?
“The rationale behind that (min. target raise) is that the amount needs to be reached so it doesn’t affect the security package. If we don’t reach the minimum we return the funds to investors. But generally most of our companies are looking for investment over the longer term, as part of a funding strategy. Some companies just do monthly tranches with the goal of reaching their target. So the minimum is the key target we need to reach in the first closing and beyond that we can increase that amount monthly if necessary so they can meet their ultimate target. These companies are happy to raise as an ongoing process.”
Crowdstacker & Financial Advice Market
A manual loan selection platform like Crowdstacker affords finance professionals, like IFAs, the capability of selecting highly vetted loans to include in a client’s multi-asset portfolio, perhaps.
Q: Is Crowdstacker receiving much attention from the IFA arena and is it a potential avenue?
“We are actually. We’re talking to a number of IFA firms, but I think right now they’re a bit hesitant to enter this space. I think it’s a question of educating them and overcoming the challenge of being associated with the stereotypical view of “peer-to-peer”, which is mostly represented by big mainstream platforms like Funding Circle, Zopa and RateSetter. This is a challenge we’re faced with, but I think the education process will just take a bit of time and we should definitely see better traction in time.”
At this point in the interview we introduced the concept of our upcoming Orca Platform which will allow IFAs to access a whole-market, independent view of the UK P2P market, giving them the tools and capability to adequately recommend P2P products to their client-base. Karteek had this to say of our proposition:
“I think that’s a really good idea. It’s important to give IFAs a solution which allows them to benchmark products against one another, this is why we think Crowdstacker would work well as the model is more digestible for an IFA just now.”
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Crowdstacker Innovative Finance ISA
One of few platforms in the UK capable of offering the Innovative Finance ISA (IF ISA), Crowdstacker succeeded in receiving permissions before almost all P2P platforms in the market. This means investors can invest in loans via the Crowdstacker IF ISA and gain tax-efficiency on interest earned.
Q: How did Crowdstacker beat everyone to market with the IFISA?
“To be honest, we didn’t start on an interim (FCA interim permissions) basis, we applied for direct authorisation from the start. There were pros and cons: during the process we couldn’t trade and we had to build all the technology and have all processes in place, so it was hard, but ultimately we feel it has paid dividends.”
Q: How popular has the IF ISA been with customers?
“Almost 50% of the funds lent have come from ISAs and this continues to grow. Obviously this has had a big influence (on investors), but also the types of businesses and amount of information we offer, potentially is more suitable for someone looking (to invest) through their ISA.
We feel our IF ISA is more like a Stocks & Shares ISA in the respect that you can pick and choose what (investments) you want in there.”
Despite being a reasonably new entrant onto the UK peer-to-peer lending market, Crowdstacker has done well to position itself amongst major P2P platforms who have loan books approaching £1billion (Zopa, RateSetter and Funding Circle primarily). Being able to offer the Innovative Finance ISA may provide retail investors seeking attractive, risk-adjusted returns with the added incentive required to get them investing.
Please note that forecasts are not a reliable indicator of future results. Please note that the extent and value of any tax advantage or benefits will vary according to the individual’s circumstances. Your capital is at risk if you lend to businesses