Funding Circle Review: Operator Health
In addition to our review of the Funding Circle loan book performance we have also conducted a review of Funding Circle’s operator health. From an investor’s perspective, it’s important to understand the stability, both financial and otherwise, of a particular peer-to-peer lending platform. We call this ‘Operator Health’.
Assessing Operator Health is important as it addresses a number of risks faced by investors. These include:
- Operator Insolvency
To operate under FCA permissions P2P platforms must have an effective failure plan established to ensure loan contracts are still serviced in the event of the platform going out of business. Ultimately, the loan contracts between lenders and borrowers still exist in the event of insolvency so, providing the P2P platform has an effective failure plan, investors should in theory receive capital and interest repayments.
To a certain extent this does protect investors from losing everything, however, if a platform was to become insolvent this would create significant turbulence for investors and it’s likely that losses would be incurred.
P2P thought leader and Principal at Victory Part Capital Advisors, Cormac Leech, told The Financial Times in July 2016:
Fraud risk is the biggest issue for the sector because you basically have to trust the management that they’re doing what they say they are
In the US market, Renaud Laplanche, the former CEO of Lending Club, stepped down in May 2016 after loans were sold which were of higher risk grades but packaged up with lower risk graded loans. Although no retail investors were affected by this misconduct, it demonstrates that the management teams of P2P platforms can have considerable amounts of control.
- Unethical business practices
With all investing it’s important to know who you are dealing with to ensure the operations and nature of business aligns with your own personal ethics.
Funding Circle Key Information
|Provider Name||Funding Circle|
|Company Name||Funding Circle Holding Limited (Group) Funding Circle UK Limited (UK)|
|Company Number||7123934 (Group) 6968588 (UK)|
|FCA Permission||Authorised and regulated by the FCA, under interim permissions. An application for full permission has been submitted.|
|Telephone||+44207 401 911|
|Staff||350+ (UK Business), 600 + (Global)|
|Address||71 Queen Victoria Street London EC4V 4AY|
Funding Circle Financial Health
The Funding Circle group is in a period of growth and investment. The company has raised equity investment totalling $414 million from venture capital investors including Baillie Gifford, Blackrock, Index Ventures and Accel Partners.
As stated in the company accounts, the key objective of the company is to grow lending and borrowing internationally, whilst delivering risk-adjusted returns to investors supported by a strong credit position. In pursuing this objective, the company has invested heavily in technology, staffing, marketing and international expansion. The company has proven it is capable of raising funds to support its growth and has a healthy £86 million cash position at the end of 31st of December 2015. Although the 2016 company accounts will not be available until October 2017, we do know that loan origination has increased from £531 million in 2015 to £823 million in 2016. This increase in loan volumes will correlate with an uplift in revenue.Although the group is not operating in profit, the company directors stated in their most recent filed accounts that they are satisfied that the company is performing in-line with targets. Revenue has grown significantly in the period ending December 2015 compared to the year previous.
The greatest risk to Funding Circle’s financial stability is its ambitions for growth and its need to spend to realise its ambitions. If the company spends aggressively in order to chase new markets, Funding Circle may become financially unstable, however, with such a large cash position and a track record of raising funds this is unlikely.
Funding Circle Failure Plan
Funding Circle has put in place arrangements to ensure investors continue to receive payments and any un-invested cash sitting in the client account, should Funding Circle become insolvent. In the event of insolvency, Funding Circle would transfer its loan servicing obligations to a third-party backup servicer, Link Financial Outsourcing Limited, with whom the P2P provider has entered into a back-up servicing arrangement. Cash within a Funding Circle account is held in a segregated client account and can be withdrawn at any point.
Link Financial Outsourcing Limited is authorised and regulated by the Financial Conduct Authority with permission to conduct consumer credit business under firm reference number 606817. Funding Circle reserves the right to use a back-up servicer prior to insolvency where such action is in the best interests of all of the investors.
Funding Circle Company Structure
The Funding Circle Group has operations across the UK, Spain, Germany, the Netherlands and the USA. Although operations exist globally, 74% of Funding Circle’s group (Funding Circle Holding Limited) revenue in the period ending the 31st December 2015 came from its UK business (Funding Circle UK limited). It’s important to note that UK investors are solely exposed to UK businesses when investing through the Funding Circle UK platform.
Investors may gain exposure to U.K, European and U.S markets through the Funding Circle SME Income Fund, a listed Investment Trust. For more information on the Funding Circle SME Income Fund, please visit: http://fcincomefund.com/.
Funding Circle Management Team
Funding Circle was founded by three friends, Samir Desai, James Meekings and Andrew Mullinger. They met at Oxford University and after a couple of years working in various City roles grouped to start Funding Circle.
The company is well supported by an experienced non-executive board comprised of venture capitalists, economists and ex-bankers.
|Samir Desai||Group CEO||Samir is CEO of Funding Circle and one of the company's founders. He is overall responsible for the company's day to day operation and strategic direction. Prior to founding Funding Circle, Samir, worked in as a private equity executive at Olivant and a management consultant at Boston Consulting Group. He graduated from Oxford University with a first in Economics and Management.|
|James Meekings||Managing Director of Funding Circle UK||James is an executive director of Funding Circle UK. He is a cofounder of funding circle and is the current Managing Director of Funding Circle UK.|
|Lucy Vernall||Secretary||Lucy is the General Counsel at Funding Circle. She is Funding Circle’s main lawyer and her responsibilities extend across all global markets which Funding Circle operate in. Prior to Funding Circle, Lucy was the General Counsel at Wonga.com and former managing partner at Kemp Little LLP, law practice. Lucy graduated with a BA Law degree from the University of Cambridge.|
|Jörg Asmussen John Eric Daniels Andrew Learoyd Henrik Neils||Non-Executive Directors||The Funding Circle non-executive board is comprised of high profile venture capitalists, economists and ex-bankers.|
Funding Circle is a well-funded business that is growing rapidly. Although the company is not operating in profit, its large cash balance at the end of the 2015 period, as well as growth in loan volumes in 2016, should comfort investors. After founding the business in 2010 the management team now contains experienced entrepreneurs who are supported by a qualified board. The company is currently in a phase of growth, and providing costs associated with their global expansion plans don’t spiral out of control, it’s unlikely that Funding Circle will become insolvent.