Exclusive: ‘Sizing up the lendtech liquidity gap ‘ – Alison Harwood, Varengold in “The Fintech Magazine”
Alternative lenders could help get the global economy on track, but they can’t do it without adequate debt financing. Head of Varengold Bank’s London branch, Alison Harwood, says now is the time for institutional investors to back them
With the global economy in uncharted territory, the relative calm in the markets through July and August has been accompanied by a stronger sense that the world is sailing through the eye of an all-encompassing economic storm.
No wonder retail investors are flighty: all bets are off, with second-wave lockdowns threatening to stymie what was, in any case, a tentative recovery from March’s market decline.
In such a climate, maintaining liquidity is a challenge for any firm – but for lenders, who have thus far played a crucial role in keeping businesses afloat, investors’ reluctance to push funds into their coffers feels like a stop-block for economic recovery plans the world over.
The struggle to maintain working liquidity has been felt particularly by lendtech firms, many of which carried a troubled history with capital markets into the coronavirus crisis. UK-based peer-to-peer lender Funding Circle drew unfavourable headlines when its share price fell 80 per cent after going public in 2018. In the US, digital lenders OnDeck and LendingClub bore comparable declines, their values having tumbled more than 90 per cent from the IPOs (initial public offerings) they set in 2014.
It’s clear that the markets haven’t warmed to the lendtech proposition – but now, with millions of businesses across the world scrambling for emergency funding to take them to the year’s end, fintechs in the lending space are caught in a double bind: desperate to prove their worth, they’re struggling to find the financing to facilitate the speedy, digital-only loans that set them apart from traditional lenders.
With retail investors pulling back, it’s institutional investors that must step in to fill the lendtech debt financing gap. That’s according to Alison Harwood, head of Varengold Bank’s London Branch, and an expert in the funding of fintechs.
Varengold itself performed a strategic pivot into credit platform investing back in 2015, leading the firm to the most successful year in its history in 2019 – trebling its profits compared to the previous year and proving lendtech investment to be profitable as well as practical.
Harwood is unequivocal in her rallying cry to investors.
“This is not the time for institutional investors to shut up shop,” she says. “It is instead a time to leverage the strength of trusted partnerships and play our part in shaping the economic and societal legacy of COVID-19.
“Fintech lenders can and must be allowed to contribute to overcoming the ensuing global economic crisis. To do this, they need strong support – not only from governments and regulators but also from their investor partners.”
In the initial days after the World Health Organisation declared a pandemic, it appeared that governments were dragging their heels when it came to helping lendtech firms to distribute loans to shell-shocked businesses. Nick Ogden, executive chairman of the UK’s ClearBank and long-time fintech guru, spoke for the entire alternative lending space when he remarked that, since lockdown: “It’s been a collective effort from everybody in the industry, trying to shout to the politicians ‘hey! We can help, you know!’.”
In the UK, those calls haven’t fallen entirely on deaf ears. Starling, OakNorth and Funding Circle were all eventually accredited to offer loans under the Coronavirus Business Interruption Loan Scheme (CBILS) , with Funding Circle alone having reportedly pumped £9billion, through the programme to more than 80,000 UK businesses since lockdown.
“The British Business Bank has received a little flack for not getting fintechs onboarded quicker,” says Harwood. “But, relative to their counterparts across Europe, I think there is a decent representation of fintechs and alternative lenders that have been onboarded onto the CBILS and then the Bounce Back Loan Scheme (BBLS).”
Both schemes are backed by the government – but lendtech firms are nonetheless being asked to source financing for the loans themselves. As a result, UK neo lender Tide ran into issues in the first week of June, having only received BBLS accreditation from the British Business Bank in May. The firm’s CEO, Oliver Prill, was forced to write a letter to his 150,000 SME customers announcing Tide’s withdrawal from the BBLS scheme, citing liquidity issues.
“The conclusion we have reached is that we, and players like us, can only really serve BBLS customers if the funding is provided [by the government],” Prill told reporters, leaving confidence in lendtech firms more than a little strained. Nevertheless, Harwood’s emphasis remains firmly on institutional investors, which she believes can still ride over the hill to back the portfolios of lendtech firms across Europe.
“Fintechs need investors to give them the financing to roll out to their customers,” says Harwood. “And lendtech firms are unique because they not only need to be able to raise equity capital to support the growth of their businesses, but they also need to raise significant amounts of debt financing to grow portfolios. So, naturally, they have far higher capital-raising needs than most other fintech businesses. That causes challenges for them and that’s exactly where parties like Varengold come into play,” she adds.
Varengold supports promising digital lenders with that broader level of funding, but it also welcomes its fintech partners under the bank’s regulatory umbrella, and provides them with access to Varengold’s middle- and back-office services.
“We have a deep understanding of the industry: we know what’s out there already and what we do and don’t like,” Harwood says. “We always have a strong alignment with the partners we’re working with, so there will typically be a first loss piece in place from the originator that keeps them strongly aligned with us, ensuring that the defined credit quality we think we’re getting will be sustained throughout the life of the relationship.”
Most interestingly, Harwood draws attention to the difficulties lendtech firms encounter when they scale, revealing an underserved financing gap that Varengold is particularly interested in plugging. As she explains, the leap from angel investment to institutional investment, as digital lenders scale up, is a crucial moment in the lendtech lifecycle.
“Lending businesses need someone to step in and start to grow the portfolio with them to the point where they can reach the broader capital markets, and deeper pocketed institutional investors like pension funds, that typically won’t look at a transaction unless it’s a book of £100million to £200million,” Harwood explains.
“And there’s very little liquidity in that space – between £10million or £20million and £100million – so that’s where we see our role as being important for the industry, in helping those lending businesses at that early stage grow portfolios and really consolidate.”
By targeting this gap in financing, the Hamburg-based bank has thus far supported the likes of LendInvest, Assetz Capital, and MarketFinance – all innovative European lendtech startups bringing instant digital credit to the lending sector.
Meanwhile, in January, Varengold provided Berlin-based scaleup Grover with debt financing of €220million – one of Europe’s largest fintech financing deals this year. And in Germany, where Harwood notes the government has been slower to recognise the support lendtech firms can offer SMEs – the so-called ‘mittelstand’ of the German economy – Varengold has sprung into action, too.
Having received accreditation as a ‘hausbank’ from the state-owned KfW development bank in May, Varengold has been instrumental in getting lendtech companies involved in the KfW-Corona-Aid loan scheme.
“We’ve been very active in helping German fintech lenders to access that scheme, which can only be done with a partnership through a house bank,” Harwood explains. “We’re the first fintech-driving house bank to have been onboarded by the KfW, to make sure that the alternative lending ecosystem has not been left out of those programmes.”
All of this underscores the value Varengold sees in the lendtech ecosystem, which Harwood believes will be vital as states and sectors fight back against the economic downturn.
As in 2008, when traditional lenders reigned in their credit appetite, Harwood predicts that digital lenders could step up to pinpoint the needs of businesses across Europe, servicing them with the loans they need to survive the oncoming recession.
“I think lending is going to be back at the front and centre of the fintech ecosystem,” says Harwood. “Now is a great time for them to showcase what they can do.”