This week we spoke with the Head of Octopus Labs and one of the brains behind Octopus Choice, Richard Wazacz. Richard gave us an intimate insight into the new peer-to-peer lending platform which is turning heads in the peer-to-peer lending market and wider wealth management sector.
Octopus Choice is the trading name for Octopus Co-Lend Ltd and 100% owned by the Octopus group. Octopus Choice is the platform where the product is manufactured, through Octopus Investments is how it is distributed.
We speak with the person behind the platform to get an understanding of why the investment giant has expanded into this alternative sphere.
Octopus Investments History
The £6bn asset management firm, Octopus Investments Ltd, was founded in the year 2000 with the purpose of stimulating changes in financial services due to the founders’ innate belief that financial services were broken. The premise was to create products and services for clients (IFAs), which helped generate wealth for their client-base (investors).
“The manifestation is a business which makes the complicated simple, something which has been done predominantly through financial advisors.”
Furthermore, Octopus Investments is recognised as a specialist in tax-efficient products, namely:
- Inheritance tax solutions
(*statistics correct at time of publication 22/09/16)
Institutional funds: £1.2bn
No. investors: 50,000
Octopus & Dragonfly
The Octopus lending arm of the business was established in 2009. There are 23 specialists in the lending team currently. In 2013, the Octopus group acquired property lending specialist, Dragonfly Finance Ltd, thus expanding Octopus’ lending capabilities.
“We’ve lent over £2bn through our Dragonfly business, which is a 100% Octopus owned business, but it’s been funded by institutions and investors through our tax products.”
Octopus Choice will utilise the lending processes practiced by Octopus Investments – and Dragonfly post acquisition – so it will be a continuation of the already proven and successful lending model.
“We’re following the underwriting processing criteria that Dragonfly has been following for the past eight years. We won’t be changing that business model.”
Dragonfly Finance Ltd (owned by Octopus) performance over time can be viewed here.
Loans to-date: 3,500
Lent to-date: £2bn
Total losses*: 0.1%-
*Past performance is not a reliable indicator of future results.
Octopus Choice Product
Target rate*: 5% p.a
Security: 1st charge asset debenture + LTV 60% (avg) + 5% loss position from OC
Diversification: 40 borrowers (target)
Min. investment: £10
*The target rate is the blend of all loans that are currently open for investment and is calculated and updated regularly. Actual returns could be higher or lower.
The idea of Octopus Choice was conceived ‘a couple of years ago’, according to Wazacz, when it was clear that technological innovation in financial services was disrupting traditional methods. As a renowned asset manager, Octopus was determined to retain its cutting edge and decided to create products which were more mainstream and had more application to clients and advisors’ clients.
“We have distribution to quality advisors, we make the complex simple, and we have great proprietary deal flow, initially through our property lending business, Dragonfly. With P2P, we felt we could bring these attributes together and create a mass-market, appealing product which serves our customers.”
Who can invest?
Octopus Choice is solely for retail investors as it stands. Institutional money does come into commercial property through the Octopus group, but only this property class. Octopus has a very strict conflicts committee in place to prevent the influence of institutions.
“We do not take institutional money onto the Choice platform. We will never give institutions preference, or let them cherry pick, we will never let that happen. There is no unfair advantage given to any Octopus customer, we favour equality.”
Who can borrow?
Investments into Octopus Choice will be allocated to loans secured against residential property through its Dragonfly Property Finance business. Loans are typically made to property professionals; borrowers must not reside in the property. The contract is directly between investor and borrower.
Octopus Choice loan type
Supply and demand shouldn’t be a problem for an established asset manager like Octopus that has £6bn AuM. Octopus Choice is therefore well poised to follow on from Octopus Investments’ already proven systems and processes. Confidence in its ability to match investors and borrowers is allowing the peer-to-peer lending team to plan two to three years ahead, assuming their expected growth rate is realised.
“We are growing quite prolifically at the moment, so we’re already looking at what we can strategically accomplish in two or three years, such as looking at other asset classes, how to grow the property business itself and so on.”
Octopus Choice Security
Octopus Choice only lends to borrowers where realisable residential property can secure the loan and a reasonable loan-to-value (LTV) rate can be achieved. The peer-to-peer lending platform will also invest alongside investors in all loans made across the platform.
- 1st charge on residential property
- LTV of 70% or lower – avg of 60%
Skin in the game
Octopus Choice will take a 5% first loss position along with the investor in all loans made across the Octopus Choice platform.
“We will lose our 5% stake in a loan before the investor loses any of their capital, and we will not get our interest back on our investment until the peer gets all their interest first.”
As an established asset manager with £6bn under management, having grown over a 16 year’ period, the group is not short of confidence in its capabilities. An experienced credit team and robust underwriting processes allows Octopus Choice to evaluate and approve borrowers with efficiency:
“Due to our scale we can manage and plan for liquidity better than smaller platforms and we are prepared to use our balance sheet as well. As the industry grows, secondary markets will become more stable and more diverse, as confidence grows, so liquidity will get better.”
Advisers will be able to invest through the same Octopus Choice platform as consumers, on behalf of their client. Octopus Choice can facilitate client-advisor fee management, but the ownership of the Octopus Choice account is held with the consumer and decisions must be made by the consumer.
“We will facilitate fee management, but the instruction must come from the client and not the advisor.”
Before we concluded the interview, we asked one last question.
What sets Octopus Choice out against the rest?
“Two things. Firstly: Our track record, we have lent £2bn in the last eight years, having started in the last financial crisis. We have a track record of lending effectively, over a long period of time, with very low losses. Secondly: I believe we’re the only platform that risks its balance sheet.”
Octopus Choice is unlike any other peer-to-peer lending platform on the market just now. It is part of the established and successful asset management group, Octopus Investments. The lending arm of Octopus has lent over £2bn in eight years, with very small losses. The group’s latest innovation will enable retail investors to gain exposure to asset-backed property loans, achieving attractive risk-adjusted returns, uncorrelated to the stock market. Moreover, Octopus could be the bridge between financial advisers and the P2P market, given its reputation in servicing IFAs.