What is Loanbook Capital about?

LoanBook Capital is a Spanish peer-to-business (P2B) finance platform, providing an alternative to traditional savings and fixed income products to investors of all types via direct participation in loans, and other forms of credit finance, to mature, good quality Spanish SMEs.

LoanBook provides credit origination and management services to clients. These services are supported by an online platform, which gives investors access to credit opportunities through an auction marketplace, as well as a soon to be launched secondary market for trading loan participations.

What are the three main advantages for investors?

As with other P2B platforms, the main attractions for investors of this model are typically greater risk adjusted returns, control and transparency over investments and lower fees. LoanBook is no different in these characteristics: we provide access to an asset class that offers a return that exceeds that available from traditional fixed income investments with comparable characteristics (e.g. risk and liquidity), we allow investors to manage the risk and return profile of their portfolio online in a transparent way, and we do not charge fees to investors, other than for providing liquidity through our secondary market.

However, LoanBook has some unique features that other platforms do not. Firstly, we offer investors the opportunity to invest in both loans and invoice discounting (in the form of pagarés) through a single marketplace. This provides investors with the ability to better manage their risk by diversifying their portfolio in credits with a variety of risk, return and duration. Secondly, we put a great deal of emphasis on risk management; we have a team of credit risk professionals and have developed an in-house credit rating system that allows us to monitor and manage risk & recovery effectively, which ultimately leads to a better net return to the investors. Thirdly, our team is made up of professionals with institutional backgrounds in investment and credit management, which means that our approach to client service and reporting brings the best of institutional discipline and ‘alternative finance’ ease and transparency.

What are the three main advantages for borrowers?

As with advantages to investors, LoanBook offers the borrower the typical advantages that you would expect from a P2B platform; competitive and transparent cost of capital (interest rates & fees), access to an alternative channel of finance and a quick and easy application process.

Another key advantage for SMEs, over traditional banks, is that we do not ‘bundle’ our service with other products or services, such as insurance, deposit accounts or Director business. This enables SMEs to separate their working capital requirements from personal and ongoing operational financial needs. Furthermore, as is the case for investors, LoanBook has some unique advantages over its peers. Firstly, unlike other platforms that focus on a single form of finance, we are able to offer borrowers three types of finance in the form of loans, short-term revolving credit lines and finance via the discounting of ‘pagarés’. And secondly, we are not purely an online service; having a team of experienced credit professionals enables us to take a personal approach to managing relationships with SMEs.

How did you start Loanbook Capital? Is the company funded with venture capital?

LoanBook was started at the end of 2012 by two founding partners with their own capital and initiative. The company’s shareholder base has moved on somewhat since then, with each of the three-man management team, and a number of the employees, having an ownership stake in the company.

In September 2014 we raised an additional 690,000 Euro, and in doing so strengthened our Board of Directors with the addition of Antonio Viola Roca, a former MD at BBVA in Europe and Latin America, CEO at Altitude Investments and Deputy General Manager at MoraBanc.

There are also a number of external shareholders that bring unique experience and expertise, but there has been no venture capital involvement.

Is the technical platform self-developed?

Yes, the technology platform is designed and developed in house by a team with a track record of developing finance systems. We feel that this is the only way to be able to remain agile in adapting to the demands of our clients, whilst it also reflects that fact that LoanBook is about financial innovation, and that technology supports the financial product rather than defining it.

What was the greatest challenge so far in the course launching Loanbook Capital?

Our greatest challenge has been adapting an Anglo-Saxon Crowd-Lending model to the Spanish market.

We’ve found that investor attitudes are more conservative in Spain than in the UK, which has influenced the duration, risk and return profiles of the products that we offer to our clients. Spanish investors are more focussed on capital preservation than high yields. To accommodate this, our early lending activity has focussed on larger, good quality, established businesses with low probabilities of default. We’ve also introduced a ‘loss protection’ mechanism to one of our products, whereby LoanBook and its management assume the losses arising from the product strategy.

We’ve also had to adapt the channels by which we attract investors. We undertake a significant amount of offline activity, both directly ourselves and using our intermediary network, in order to attract high net worth and sophisticated investors. Over time we expect to attract more of our clients online, and expect them to become more familiar with our model and the ability to diversify risk through our marketplace.

What ROI can investors expect?

Since launch, investors have achieved an annualised net yield of 6.5%, on average. As I’ve mentioned, our investor audience is relatively conservative and has a healthy level of caution when it comes to this new, unfamiliar asset opportunity. We expect this to change as the sector matures, but for the time being we are targeting companies with low expected losses to provide more certainty to the investors in our products. Indeed we are yet to experience any defaults.

It is also important to mention that our credit products are short-term; we provide short-term working capital funding of 90 to 360 days. So levels of default are much more transparent in our platform, as our investors carry risk for shorter durations than many of our peers.

However, the Spanish market presents a huge opportunity for us to target yields well in excess of 6.5%. Indeed, we have started to introduce higher yield credit opportunities to our marketplace, and our expectation is for investors to be able to generate a stable net yield in excess of 7%.  Existing loans financed through our marketplace have gross annualised yields ranging from 6.4% to 8.6%.

Ultimately, our intention is to provide credit opportunities for investors of all types, so that they can decide on the return, along with the associated risk, that they are comfortable with. It is our job to make sure that we screen and rate the businesses that we place in our marketplace to ensure that losses are at the bottom end of the statistical range, and provide information transparency to our investors so that they can make an informed decision.

How is the Spanish market different form the UK p2p lending market? Are there advantages/disadvantages (e.g. in regulation, credit scoring, …). And how does the current economic situation in Spain impact p2p lending?

Aside from in the lowest SME risk quartile, where traditional banks remain very active, there is much less competition from alternative sources or finance than in the UK, particularly among smaller companies. That said, the credit market is comparatively mature and sophisticated, with high quality credit and risk information, which is generally readily available.

The Spanish P2P sector is still in its infancy, certainly compared to the maturing sector in the UK. LoanBook is currently the most developed specialist SME platform in Spain and, most significantly, is the only platform with a model that is not solely founded on retail clients. Many of the UK platforms are now taking the approach of combining sophisticated and institutional investors with their retail clients, which is a trend that we are also following.

Although activity in the sector in Spain is behind markets such as the UK, it has picked up in recent months as a result of draft “enabling” legislation announced by the Spanish government earlier in the year. The legislation, which is now being reviewed by parliament, is largely consistent with attitudes at EU level and supports the development of the alternative finance sector. Of particular importance is that investor restrictions will not apply to professional investors and those applicable to sophisticated investors are expected to be light. We expect regulation to bring much needed legitimacy to the sector and we are supporting the government in its development.

The current economic climate in Spain is ideal for businesses like ours. The opportunity to achieve significant growth in credit volumes in Spain is huge. The SME finance sector has traditionally been dominated by banks, with very few non-bank options.  However, banks in Spain have been particularly hard hit by the financial crisis and the recovery in lending volumes has been much slower than in the UK.  As such, credit supply to SMEs is restricted.

Demand from SMEs, on the other hand, is significant. Spain is a nation of SMEs, with in the region of 3.2 million small & medium sized businesses accounting for over 50% of GDP and employing around 60% of the workforce. Of these nearly 1/3 have solvency levels considered high or very high by Axesor (a Spanish credit rating agency), a position which will only improve as Spain’s economic recovery progresses.

Where do you see Loanbook Capital in 3 years? Is P2C Lending a threat to banks?

In 3 years I expect to see LoanBook as the largest P2B lender in Spain, catering for all profiles of investors; retail, high net worth, sophisticated and institutional. We will have an open-source marketplace for SME credit opportunities in which all investor types can participate, whether located in Spain or overseas, and I expect us to be a genuine and enduring alternative source of finance for Spanish businesses.

I expect to see consolidation in the sector, most likely geographically, and we will see it what manner that will impact us, but generally it can only be positive in ensuring that our industry is sustainable.

On the subject of banks, I think that P2B lending is a threat to some of the traditional activities of banks, however it does not need to be a threat to banking institutions themselves if they embrace it positively. We have already seen forward thinking banks collaborating with P2B platforms in the UK and I expect to see more of that in the future.

The P2B model has grown in a market segment that was not serviced, or serviced poorly, by banks. The reasons for this stem from macro-economic, regulatory and liquidity issues. What we are doing is filling that gap with a model that meets the needs of the customer, which in turn enables banks to focus on customers that better suit their own commercial model. It that regard I think the two models can be complementary.

P2P-Banking.com thanks James Buckland for the interview.