Investor Evening - 17th September

I'd like FC tell us where the rate differentials for the three term bands comes from - do they have any actual data. And where is a 30 month loan going to be pitched, if there is such a thng.

And yeah, why do they think they should set the rate for my money lending.

Oh, and why are secured property loans paying more than unsecured Bs.

Good luck.

Agreed. A share of every partial loan would be transparent and would avoid charges of cherry picking. And will there be a separate property version?

Thanks for the feedback thus far, all.  My understanding is that they are restricting the main session to questions about the move to Fixed Rates, so anything about the Investment Trust will have to be held back for the post-session drinks, which I may unfortunately need to leave early.

On the subject of transparency, that's also my biggest worry.  Presently, some borrowers seem to realise that answering questions from concerned investors is likely to lead to their final rate being lower - assuming they give good answers, that is!  In the new model, there will be no such incentive.  It's likely that there will be such a volume of Autobid and ISA money that every loan will fill anyway, so borrowers will eventually not bother to answer at all.  And this may also lead to FC being (even) less forthcoming with information that enables us to do proper DD on the opportunities.  So, we'll either have to trust their rate bands, or no-bid a large number of opportunities.  Time spent on the platform will become even less efficient.

I also want to clarify my interpretation of the Autobid behaviour - if you opt in for a rate band you will bid on all loans in that rate band, regardless of loan duration.

You could tweak this to be... In the future, what ratio of institutional investor, active retail investor and autobid investor do yo expect in say 1 and 3 years? Covers two birds with one question and slightly harder to brush off.

They are not separate issues. Part of the reason for moving to fixed rates is to be able to give a forecast for the trust performance - how much of a factor? The same applies to whole loans.

FC's business is based on trust in their ability to assess risk - it is what they are offering of value in the whole loans, the investment trust and the for the consumer lender (Autobidder). They will adjust their criteria so that the predicted loss rates per band are met. Sorry but I think you will get no satisfaction on lender- borrower transparency, increasing mediation by FC is the direction of travel - but do have a go.

They had a webinar yesterday afternoon. They said the investor evening tonight would basically be a re-run of that presentation. So I can let you in on how they answered a few of the questions coming up here. I expect the answers they gave yesterday will be the same party line as you'll get tonight:

Investors having time to doing research - They said Autobid will fill 65% of a loan and the rest will be available for manual bidders. So they hoped that would give time for some questions and research by those who want to do that. (Hmm ... not so sure about that). They said that they'd noted that some borrowers were keener than others to engage in questions and that engaging in questions with investors didn't seem to make a difference one way or the other to the final rates achieved. They said that with their new model they wanted to leave open the ability for borrowers who want to engage with questions to do so, but not to force borrowers to do so if they just wanted to get a loan quickly and didn't want to have to answer lots of questions. My view is that in practice, the loans will fill quickly, questions and answers will become irrelevant and there may not even be time to ask them and do any DD.

Active investors - They acknowledged that the change to fixed rates will be bad for "a small minority of investors who are actively engaged with the platform and are achieving abnormally high returns". They wheeled out the graph about who's better or worse off here: www.fundingcircle.com/uk/fixedrate/. They pretty much discounted the 20% who are "only" 0-1% worse off saying they'd be "not that different". They then focused on the 9% that were 1% or more worse off saying these were the "small minority". They didn't have much to say to them other than "we have to work to what's best for the majority" and Samir commented something along the lines of "in my position I'd love to do something that works for everybody but that's not always possible and in this case there will be a small minority who are worse off. I know that people in that position have helped to build FC to what it is and I know that you've enjoyed the auction model. I don't know what to say to you guys other than I hope you stay with us and wait to see how things work under the new fixed rate set-up". They also mentioned that some of the tactics that active investors have been using such as buying on the primary and selling on the secondary market and targeting loans with cashback will still be available to them. (Of course neither of those are that attractive if you can't get good rates on the primary market in the first place!). Possibly the only ray of hope for people wanting higher rates was an indication that in time they are looking to find ways to allow UK investors to invest in the US. They said this "might not be in the same 'pick and choose' way as they do here but they're trying to work on some vehicle to allow UK investors to get exposure to their US loan book".

A couple of outstanding questions which I have are:

1) They spend a lot of time referring to their graph that shows 71% of investors would have achieved better rates over the last year if they'd been on the current fixed rates. This gives them the nice headline of "the vast majority of investors will be better off with fixed rates". The graph of who is better or worse off is presumably based on number of investors. What I'd like to know is how would this graph change if you considered investment level of each of these investors? I would bet that the investors achieving above average rates would over-represent when you consider the size of their investments and their account sizes. In other words, what would that graph look like if it was plotted for capital deployed rather than number of investors. I wouldn't be surprised if it gave a very different picture ... maybe even that the majority of investors/investment by capital deployed would have achieved a lower rate if fixed rates had been implemented a year ago ... the exact opposite of the headline they are currently giving.

2) Liquidity. In the webinar they addressed the concern from people who had previously bought parts at rates below the upcoming fixed rates by saying "we knew that liquidity would be an issue for those investors so that's why we're increasing the range of discounts that you can sell at to more than cover those people who bought at the lowest rates". It was carefully and tactically worded but in effect what they were saying is "It's fine, we're enabling you to sell at a (big) loss so that you can exit your investments". My question is about liquidity going forwards for people buying new loan parts at the fixed rates. Up to now, the ability to sell quickly on the SM was largely due to holding loan parts that were at higher rates than other people held. Once everyone holds loan parts at the same rates, why would new investors want to buy them from the SM rather than buy new loans? Sure, some people will want to diversify, but otherwise, the only way you can incentivise buyers for a quick sale is to sell at a loss. Doesn't this model massively decrease liquidity and/or mean that there's a higher cost to liquidity (people having to sell at a loss if they want to withdraw money quickly)?

""a small minority of investors who are actively engaged with the platform and are achieving abnormally high returns"

Annualised return (after fees and bad debts): 15.2% - I guess that makes me abnormal.