Industry Profile – Stuart Law
A major challenge for fintech startups is striking an appropriate balance between the ‘finance’ and the ‘technology’. It seems like a no-brainer, right? But there are plenty of examples of founders and executives with deep technology backgrounds and limited experience in financial services who underestimate the challenges they face; whether it’s misreading the competitive landscape (traditional financial services firms are rapidly getting themselves up to speed on the tech side of the equation), failing to understand how difficult it can be to navigate the regulatory environment of a given sector of the industry or region (traditional financial services firms have lots of practice), or simply not knowing how the software they are building is actually used (having never worked in financial services before). At the other end of the spectrum, you can find leadership with years of experience in financial services, but little understanding of how the latest technologies really work, how they may be successfully deployed, or how to communicate ideas to engineers or developers best. I suppose it might be a passable strategy for some industries, but the ol’ fake it ‘til you make it approach to tech innovation is unwise when it comes to financial services.
This month, we caught up with Stuart Law, CEO & co-founder of Assetz Capital, the second largest European / U.K. peer-to-peer business and property lender. With 30+ years as an entrepreneur (many of those focused on financial services and technology), Stuart is decidedly not faking it. A serial entrepreneur who established his first software business at 18, Law describes himself as “never having been a particularly fast coder,” but pointedly adds, “understanding how software works at a detailed level—I designed and spec’d financial systems for three decades—is invaluable.” We talked to Stuart about financial software development, Assetz’ approach to the borrower experience, and his thoughts on lending in a post-Brexit world.
“Some people say I talk binary [1’s and 0’s, i.e., machine code] with our IT team, and it’s probably not far from the truth. I find it very helpful to be able to understand software and IT at that level,” says Law.
Striking a Balance with Software at the Core
“General software development is where I started, back when computers were just reaching U.K. homes,” Law remarks, “but it quickly evolved into a focus on financial software.” He founded several businesses, including one that specialized in developing bespoke financial systems for SMEs. Eventually, he sold these businesses, but his knowledge and appreciation for both software and financial services remained, proving an excellent base for founding Assetz. “Some people say I talk binary [1’s and 0’s, i.e., machine code] with our IT team, and it’s probably not far from the truth. I find it very helpful to be able to understand software and IT at that level,” says Law.
He founded the Assetz group of companies in 1999—among the first fintech firms globally to harness technology to help individual investors access U.K.-based residential and student investment properties. Since then, Assetz Capital has taken a similar approach—marrying financial know-how with software development—and it remains one of the fastest-growing online lenders in the U.K. and Europe, a peer-to-peer platform (the majority of their loans are funded by individual investors) providing loans to SME businesses and property developers.
“Assetz Capital, in a sense, is a classic combination of Fin and Tech,” he states. “We’re not using technology to automate credit decisioning. We empower our deeply experienced business lending and credit team with great tech. The tech makes the loan processing really speedy and efficient, minimizing the time to lend down to the critical path and also keeps our operational costs down.” And the results speak for themselves. “I believe we’re the only scaled, consistently profitable peer-to-peer lender in Europe focused on the business sector.”
“If you’re lending in the amounts that we’re lending, you should never consider doing that without meeting the borrower face-to-face, seeing their business and checking it over.”
Relationship Lending in the Age of Fintech?
It may seem anachronistic, but, while automated credit underwriting and relying on alternative data sources to gain additional insight into borrower creditworthiness makes for good copy these days, for loans of a certain dollar amount, the more traditional methods of credit analysis and relationship lending are critical. “If you’re lending in the amounts that we’re lending, you should never consider doing that without meeting the borrower face-to-face, seeing their business and checking it over.”
Initially, Assetz Capital’s loans were relatively small—£100,000 or so—and most were secured by real estate. But the business rapidly grew and soon issued its first big development finance loan to an established small developer building student accommodations and multi-family housing. “We funded a £1.5 million loan, which was, at the time, three times the previous largest peer-to-peer loan that had been funded,” Law shares proudly. “It went very well, and we paid back the investors on time, and the project went very smoothly. It was a very sound investment, given it was only around 50 percent loan-to-value and in an area of development that we had expertise in.”
Today, Assetz Capital focuses on lending mainly in the £200,000 to £5 million range, and all their loans are now secured by real estate—a first for peer-to-peer lenders in the U.K. and in Europe. “It’s an entirely different type of borrower than a £20,000 unsecured small business loan,” Law relates. And this difference also extends to the transactions themselves. There is little in the way of standardization in transactions of this nature. Both parties benefit from a personal touch. Assetz Capital has hired highly experienced regional relationship directors all over the country, from the very North of the country in Scotland down to the South Coast. “To a borrower, we look like the long-lost bank branch manager they may have heard tales of or even possibly experienced if they are old enough. They can actually deal with a decision maker, in person.” Regional directors are typically ex-bankers with 20 or 30+ years of experience. “Someone that understands the region they operate in and all kinds of businesses, that can help them structure a loan in a way that is affordable for the borrower, and acceptable to us and our investors.”
Coming Full Circle
Some older folks may feel a slight twinge of nostalgia hearing about Assetz’ brick & mortar, high-touch approach to the borrower experience, but that’s where the similarities to traditional lenders end. For regional directors, the credit team, and the rest of the Assetz organization—as well as investors using the platform—it’s all about technology. “As you’d expect from my background, we put together a strong team to focus on the CRM and loan management software from the outset. Our co-founder and CTO Chris Mellish led the contracted team that designed the first version of the lending platform for Funding Circle.” It’s worth noting that, at the time, Mellish was one of only a few people globally with practical experience building out a peer-to-peer lending platform.
For the Assetz team that means everyone feels very connected to day-to-day operations. “Everything flows through our system, regional directors 200-300 miles away from our head office in Manchester are very much a part of the daily workflow and processes,” Laws states. “It was purpose-built. Our head office is centrally located in the U.K. Credit, loan administration, loan servicing and all of the other associated departments are there, providing support to the regional teams to the north and south. All connected via our system.”
A Different Approach to Real Estate Investing
“The investor network we’d built as Assetz Property, was looking for something a bit more than the usual approaches to real estate investing, like simply buying a house and renting it out,” Law says. Their platform allows individual investors to participate in large property-backed and development deals that historically were not accessible to them. And it’s been rather popular.
“When we launched version two of our platform a couple years ago things really took off,” Law says they’ve been growing at a rate of approximately 100 percent per annum. And, while retail investors have funded the vast majority of the £430 million worth of loan facilities that Assetz has issued—and remains their focus—they continue to see interest from institutional investors for the remaining loan flow.
Investors can choose to invest in individual hand-selected loans or invest automatically in a diverse range of secured business loans. Interest is usually paid at regular intervals, and the capital is repaid when a loan matures, usually between six months and five years.
What had looked like a catastrophe for the global economy became “the once in a lifetime opportunity that we’d been waiting for and gave the U.K. a chance to follow the U.S. and help move alternative finance to become the majority of SME funding in the market rather than the minority at present,” he explains.
Lending in a Post-Brexit World
The Great Recession proved to be the proverbial lemons-into-lemonade moment for Law and the Assetz team. “We had around 100,000 private investors looking for a sensible return on their money, but the banks were weak and dropping interest rates to historically low levels,” Law recalls. “Investors were crying out for yield and income. Other parts of my business could deliver that yield with simple real estate investments, but we saw the opportunity to satisfy investor demand and set up a secured lender that specialized in property-backed loans. … We made sure that from day one our team had deep skills in SME and development finance.” What had looked like a catastrophe for the global economy became “the once in a lifetime opportunity that we’d been waiting for and gave the U.K. a chance to follow the U.S. and help move alternative finance to become the majority of SME funding in the market rather than the minority at present,” he explains.
And now, substantially due to a lack of financing availability to small- to medium-size house builders, the U.K. is experiencing a severe housing crisis. After the 2008 crisis, “the banks just pulled the plug on house-building funding here in the U.K. for small builders,” explains Law, causing the number of SME developers to further contract. “We’re down from around 25,000 of those house builders a few decades ago to just 2,500 today.”
“The U.K. government is now getting obsessed with solving the housing crisis and is becoming incredibly supportive,” Law notes. Lawmakers “recognize that a handful of big house builders can’t solve the problem on their own.”
Getting to scale was a big moment for Assetz. Currently, the company is funding “hundreds and hundreds of new homes each year… Bear in mind: there’s only around 180,000 properties built in the U.K. every year,” Law continues, “Even funding a couple of thousand or so more, will move the needle. And this is very much just the beginning and strong but sustainable growth each year is our mantra.”
U.K. banks have been slow to finance SME and property businesses since the Great Recession. “The new net lending figures for 3Q17 showed that the U.K. banking system only put an extra £100 million pounds into the economy through business lending and to small- and medium-sized enterprises. That’s awfully low and shows that the banks have moved back to being just the foundation capital of the country, not its growth capital-that’s very much the preserve of alternative finance now,” says Law, noting that Assetz alone did 27 percent of that amount in new net lending during the same time period.
“I think Brexit will probably affect banks more than alternative lenders, as best as we can tell at the moment,” Law continues. “Frankly nobody knows for sure as frustratingly we still don’t have a definitive plan agreed.” But he believes “that’s the opportunity here in the U.K. for alternative finance … The unique situation we have in the U.K. is that we have massive government support for SMEs and housing, but a complete lack of funding supply from old-style banking, and that’s creating the huge opportunity for alternative funders. The majority of funding for SMEs is from alternative lending in the U.S. and we want to help that happen here in the U.K. with a particular focus on well-run growth companies who can help our GDP grow in turn.”
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