Most P2P lending is focused on Peer A lending to Peer B for a specific purpose. In traditional lending, lenders often sell debt to another party who then lays claim to the receivable per the contract between the parties. Bond Mason has set up a system similar to this traditional debt investment for the P2P marketplace.
Bond Mason sells to p2p high net worth clients bonds that previously were only available to be purchased by large institutions.
The Background and Philosophy of Bond Mason
Bond Mason were one of the first in the FCA’s Innovation Hub program. ( For our international readers: the FCA is the UK financial regulator.)
“You need to demonstrate that your business model is innovative,” said CEO Stephen Findlay. “That it will add value to the marketplace. Existing regulation doesn’t fit even though it’s clear your business is likely to be in that regulatory context in the future. For Bond Mason, regulation may not apply or would be difficult to navigate and understand, so we were accepted into the program in April 2015. This led to us launching to the retail audience on October 19, 2015.”
FCA provides observations, insight, and feedback on how a business is modeled. They are supportive with navigating various challenges but only offer suggestions.
“Our lawyer, Simon Dean Jones, was one of the founding members of the Zopa team and worked heavily on our regulatory structure,” Findlay said. “We launched a direct lending platform for exclusive investors that sources and filters the best lending opportunities from across the marketplace. That was our aim.”
Findlay’s key focus is on alignment. Does the platform understand investor needs, and are they aligned with those needs? What is the platform’s track record?
Findlay developed this philosophy from experience. In the early 2000s, he served as an accountant with Andersen in their structured finance consulting team. Then he moved into direct investing, private equity, and leveraged buyouts. Until 2007, he made private equity investments into small- and medium-sized businesses in the UK and Europe with a generalist fund.
“After that, I helped with the $500 million Fidelity tech buyout fund–half in London and half in Boston,” Findlay said. “I was there for threee years and spun out the European team. I ran the spun-out Fidelity tech buyout as a partner with a focus on tech investment.”
In 2012, his marriage provided a trigger to step out of private equity to learn code and to program. He recognized that FinTech was a great space to be in.
“I worked on stuff privately to build experience,” he said. “Toward the end of 2013, being active in P2P lending in a personal capacity, I realized there was a lack of navigation for better P2P platforms and loans. As they were very diversified, there were no tools.”
Bond Mason was birthed out of that need. Through 2014, with CTO James Russel, they built a tech, business, regulator, and legal structure. In April 2015, they executed a funding round to accelerate growth through launch.
Launching Bond Mason
At launch, a team consisted of two to five people. For the first client, there was an ability to deploy 1,000 GBP+ safely with the knowledge that the platform is on the investor’s side of the table, able to provide safe and risk-adjusted returns.
“We filter platforms and loans,” Findlay said. “Our clients are diversified with a minimum of 50 but typically 100+ positions.”
Today, Bond Mason have about 5m GBP in assets under administration (AUA). That equates to about 30%-50% per month over the last 12 months. Now, a team consists of five to 16 people and is split into three groups: A tech group that is platform-built in house and bespoke forms the first, an investment team (a FinTech business) forms the second, and the third is a sales, marketing, and client service.
Bond Mason’s investment team has distinctive experience. Each one has a reasonable 10-15 years or more in the investment industry. Along with Findlay himself, Graham Martin is chief investment officer. He started at HSBC, moved on to Blackstone, and finally moved to Aries. James Wallace, the investment SVP, trained at Andersen in the specialist finance group, moved to Babson (a large credit fund), served on the European Credit Committee 8-9 years and has had responsibility for a $1 billion credit portfolio. He has been semi-retired for two years and works with Bond Mason part-time.
Making Bond Mason a Custom Fit
Bond Mason is not a fund. They spent a lot of time to make the platform as flexible and accessible for as many investors as possible and now have just under 300 clients.
“What we are is a strong distribution and management tool for people who invest in an asset class,” Findlay said. “We wanted to include a fund manager and client for highlighting which funds are not appropriate. We spend custom regulatory structure that is not a fund. Every client has a level of visibility to each underlying loan in their investment portfolio. Each portfolio is unique to each client.”
There are two reasons for this structure. In the UK, if you create a structure where lots of people have a similar portfolio, it is regulated as a fund under CIS (Collective Investment Scheme). Bond Mason has been FCA approved since 2009 and could offer a fund, but that would limit who can access it and shut retail clients out.
“As a rule of thumb,” said Findlay, “if it isn’t listed as a fund, you have to restrict it to clients who can invest 250k GBP. Listed, you have greater flexibility. Listed structure creates a platform that not everybody wants to get into. Clients can do what they want on top of it. There is more flexibility if you can control at the loan level. If you restrict structure, there is a lot less you can do.”
When asked how they differ from Orchard and analytics tech sellers like PeerIQ, Monja, and DV01, Findlay said he likes Orchard.
“It is similar to what we do and what we will do for institutional clients. They are heavily geared towards being a tech platform first. For our institutional clients, our services will be similar to what Orchard does,” he said.
Findlay is proud of Bond Mason’s level of investment experience in the team. His goal is to create an investment bank for the direct investment industry in P2P. To that end, they offer advisory and insight, but their partners can execute trades and manage positions while reporting back.
“We reviewed over 80 platforms,” Findlay said. “We approved and invested through 20 of those. We sit at the more conservative end of the place, targeting 7% return for clients. Our fee is 1% per annum, so that’s 8% gross. Most are asset-backed or secured in some capacity. What we are looking for is a deep understanding of credit. Do they have the track record experience in that world?”
Bond Mason reviews the loans and so far has reviewed about 3,500 loans and invested in 1,100 with a gross return of 8.93% per annum and 7.93% net. For every three loans that go into default, they get full recovery on two and are anticipate full recovery on the third.
“This is a low volatility product. Over 400 are paid in full,” Findlay said. “We lock up period/loan maturity. The average across the entire set is less than 12 months. We want to make sure the client is not over-exposed to changes in interest rate and inflation.”
Bond Mason is headquartered in the UK and not set up to take on U.S. customers. Although, they can pre-register.
The Future of Bond Mason and Direct Lending
The objective for Bond Mason in the next year is to have 50-100m GBP in AUA and to have commerce investing across other currency on top of GBP (EUR and USD, likely). According to Findlay, they are looking to accelerate and enable clients to access loans outside of the P2P lending community. They are working with both private banks and specialist finance providers to access their lending opportunities.
“We are very proud to be doing that,” Findlay said. “And providing those institutions with other forms of finance capital. This is innovative on our part.”
In the next year, Bond Mason will launch a new product focused on wealth management. Family offices and institutional investors will be able to deploy capital easier across the direct lending landscape.
“This is a compelling new asset class,” Findlay said. “Direct lending has been around for a long time. What is new is the sub-5m GBP loan category and having investors access that directly. From the investor’s standpoint, it’s very attractive. It’s still in infancy with a low barrier of entry; there are still a wide range of operators with a wide mix and quality. It’s talked about in a homogeneous way, but the risks and return are vast–from 3% return against mortgage or for very subprime unsecured consumer debt at 60% return and everything in between.”
A wide range of investment opportunities means options for the investor and another source of capital. Competition is a good thing. Borrowers can access finance more readily and cheaply because of direct lending.
“It will work in harmony with the existing financial institutions and structure,” Findlay said. “It is not disruptive and will not replace banks and other institutions. Banks will start investing via lending platforms, and they will eventually work in harmony in a multi-faceted way.”
Findlay predicts some bumps in the road. He thinks some of the platforms will consolidate and some will exit voluntarily or because they got things wrong.
“It’s interesting looking at so many platforms,” he said. “We met with at least 60 platforms as part of the due diligence team to interview and meet credit officers. We are looking for conservative returns, so we are at the more conservative end. We want to see experienced credit people with a strong process. We want to see a differentiated source of origination and understand why the borrower chose that platform. We look at their track record and align the platform to the investor needs.”
Written with Nicki Jacoby.