Investor Evening - 17th September

Perhaps all the independent troublemakers have mysteriously succumbed to toxic vol-au-vents.

Ok, I'll have a crack at this while I have some peace and quiet (EDIT: Started at 7am, peace and quiet ran out before I'd finished…).  I'll focus on the Fixed Rate change, which was the main subject anyway, and although I took potted notes on the company performance, this is all available on the website and/or in the company accounts.  I'll also add a disclaimer that there were some parts where people were answering my (many!) direct questions where taking notes was difficult, and I also had a couple of hours of free-form conversations after the main session, so feel free to ask questions in case it jogs my memory!

Fixed Rates - the rationale
At the heart of the rationale for fixed rates is the desire for more certainty, particularly for borrowers.  Many don't like the auction system, and it causes reasonably large numbers to pull out of the process, some even quite late in the day, and not always because they don't like the rate that resulted.
Many lenders also don't like the auction system, with a reasonable number of complaints that their bids keep getting rejected and it's hard to put their money to work.
Volatility of rates in the auction model is currently heavily influenced my liquidity - comparable borrower requests will get higher rates in August (when lender liquidity is low) and lower rates over Christmas (when the number of requests is lower).
As we've also heard before, the hope is that the overall process will be shorter (assuming loans actually fill) which will mean less idle time for funds.

Rate card
The rate card has been set based on a set of factors - it's fair to say we didn't get into a lot of detail on this, but they were: Forecast interest rate trends, expected losses and volatility of losses (hence why net rates are higher for riskier ratings - greater volatility; greater returns).
The comparative average rates used in the FAQs for Fixed Rates were based on the last 100 loans at the time, which covered the August period - a period where average rates are typically higher.  They showed a table of average rates over the past 12 months or so which had a much closer correlation between the new fixed rates and those averages.
The 6% rate for 6-12mo A+ loans has been set that low because it's a very competitive marketplace, and they simply wouldn't attract borrowers with a higher rate - so, effectively, it's a marketing-led rate, rather than entirely risk-led.  It's important that they have an offer that is attractive to that group of borrowers, though, so that they're seen to provide a full service. It was pointed out, though, that in the time that FC has been lending they have never had a single default of an A+ 6-12mo loan.
They "hope for stability, but under certain circumstances it's possible that rates will change quite frequently" - that's not quite a direct quote, but pretty close.

Active Investors
As expected, they did assure me that there is a place for active investors in the Funding Circle marketplace, and they want that to continue.
They confirmed that the 29% that are worse off following the change was indeed calculated as individual investors, rather than weighted by investment volume, however the weighted percentage was not as different as I expected.  Sadly, I didn't note down the figure that was provided and can't recall it.
We talked about the effect on liquidity if the "losers" stop investing and take their money elsewhere; they hope this doesn't happen, but don't see it routinely causing loans not to fill, especially given that the fixed rate system should attract new (less sophisticated?) lenders.
I asked about large loans, citing recent property examples, and they confirmed that they have a number of levers they can pull to help a loan fill, including cashback and on rare occasions using FC funds, but that they would not arbitrarily change interest rates to help loans fill.
I asked Samir to look forward 12-18 months and project what proportion of lending would be institutional, FC Investment Trust (which they can't talk about), auto bidders and active investors. Of course he couldn't say, but did say that he hopes that there would continue to be a significant minority of active investors on the platform and that they had no desire to make FC (even) less attractive for active investors.

Autobid
Autobidders cannot select based on loan term, so won't be able to "opt out" of the 6% A+ loans; in part this is to ensure they can more consistently and predictably match lenders to borrowers; if people opt out at a more granular level they could end up with parts of the market with unacceptably low liquidity.
Confirmed that the rate set will only apply to loans on the SM. Of course this does mean that a 60-month A+ loan part will still be snapped up at 6% by Autobid if people also want to be able to pick up the "safe" new 6% 6-12mo loans on the SM. If I were an autobidder I'd be setting my minimum to 8.1% for A+ and forgoing those.
Autobidders will be allowed to set their bid amount to 0.25% of total investment (min £20), which will be better for people with large total investments. If I ever wanted to start autobidding, I'd want to be able to set my bid in multiples of £20, to facilitate selling on the SM, but didn't discuss this with them at the time.
There is no plan for Autobid to buy parts on the SM at a premium; this is primarily due to the risk associated with early repayment, whereby a loan bought at a premium that then pays back the next day could result in the buyer making a loss. This is also the reason for the total cap of 3% on premiums.
There was also a question about making an API available for those who want more control; as we know this is something that was looked at before but they couldn't make it performant, not least due to the volume of bidding going on in an auction environment. This is something they may look again for fixed rates, but no promises on timescales.

Rating systems / team
They are increasingly comfortable with the risk associated with E loans so we should see more and more of those coming through
As noted at the last meeting, they also track what happens to companies that they reject.  They have seen the ratio of rejected/accepted companies that cease to trade rise over time, to 4:1 this year, from 3:1 last year, and 2:1 before - that is, they are getting better at identifying those that are likely to fail.  It was noted that the companies might not have failed if they'd been given a loan, but who can tell!
Continue to see closer and closer correlation between projected losses and actual losses, which implies better data and better interpretation of data.
They have a lot more data than they can share with investors, for data protection/confidentiality reasons, especially with respect to directors' guarantees, hence why some of the ratings decisions sometimes look questionable.
Also, it was suggested that the Delphi score, whilst a helpful data point, is actually an indicator of the credit risk of engaging with the company in a B2B scenario, which is somewhat different to their creditworthiness with respect to external funding; that is, it's trying to measure something slightly different. This one might bear more discussion.

Q&As / engagement with borrowers / due diligence
There were a number of concerns/questions about borrowers' incentive to engage with lenders. They said that there was actually no real evidence that lenders that chose not to answer Q&As ended up with a worse rate than those that did, even in the current model, therefore, they've not been able to use that as a reason to persuade borrowers to do so.
Some borrowers just like to engage; some don't. That will probably continue.
There has been evidence where poor engagement in property loans (no answers, or bad answers) have caused funding to dry up, and this may happen with some of the larger SME loans too (which may prompt cashback to be offered)
An interesting point was made that some companies, especially successful ones or those with particular USPs, will not want to share details of the purpose of their loan, or additional information about their business on an "open forum" like FC. Essentially, it's not that they don't want investors to know, but they don't want their competitors to know this information! Some very high quality borrowers have previously refused to borrow through FC due to the need to keep such information secure and the view that they couldn't do so (easily) in an auction model. I wonder (but didn't ask) whether we'll see a lot of anonymous requests for funding, probably all A+ and A rated, in future.
They considered a non-bidding period to enable active investors to do their due diligence before bidding opens, but have discounted it for now.
They were honest in saying they don't know exactly how things will pan out, and if loans are consistently filling too fast for people to consider the information provided they may review this position.

New geographies
They are in getting closer to being able to take their business model to other European countries; this is in part predicated upon the move to fixed rates, and also upon some fairly significant technology changes over the coming months that will enable them to re-use significant portions of the infrastructure.  However, they do not plan to have a single, global platform supporting all countries.
The US isn't a "new" geography, but there were some interesting points for me:
• The US has been fixed rate since Day 1
• They think c. 60% of retail investors use Autobid in the US, but didn't have exact figures available
• The equivalent A+ 6-12mo rate is 5.9%
• Thy have more whole loans in the US - 60/40 split
• They are only allowed to have "accredited investors", who have a certain level of income/assets - minimum $50,000 investment to loan through FC.

Partnerships
One of the benefits of Fixed Rates is that it makes it easier to work with introducers and other partners, due to the transparency of the cost of borrowing.
They are looking at a partnership with Sage that will allow businesses to see their current FC balance within their accounting systems.
Clearly, even in a fixed rate world, it the cost of borrowing will depend upon the full credit assessment process in order to arrive at a band, and therefore a rate.

Performance, plans and profitability
Briefly, they're now lending $100M per month globally. Their 10-year plan is to reach $100bn of lending per annum, which is still a small fraction of the SME lending volume.
If you strip away the investment in new technology and the stabilisation of their platform (which they admit has not scaled well) they're profitable already.
The US business should become profitable within months (not sure how many!).
They recognise that the post-crash economic conditions have given them a unique opportunity to grow their business (cf Zopa that hasn't grown nearly as quickly, despite starting 5 years earlier in 2005).
They need to get as big as possible as quickly as possible in order to be a major player when economic conditions are less positive. This will give them more data on more loans/businesses, which will result in more accurate ratings and better outcomes for lenders, refine the offer to borrowers, making them more attractive and driving more business; essentially a virtuous circle, based on better and better data.

Yes, thank you very much for taking the time to attend, and write that up .

Interesting stuff.  From their business POV this makes absolute sense.  I've always thought that being able to have good evidence to back up things like bad debt estimates is a strong point of competitive advantage.  It gives a lender a lot of confidence when they can see lots of historical data that shows they've done better than their estimates.  Particularly when compared to newer platforms where bad debt estimates are really just a wet finger in the wind. 

Thank you arbster for taking time out to write-up your summary of the investor evening - much appreciated!

I think they acknowledge that it's an "outlier" but the view was that it's a particularly competitive space in the market, and anything above 6% would not be attractive to the borrowers in question. And we all know that there a whole load of investors happy to bid 6% on ANY A+ loan, and the Fixed Rates will save them from themselves (as MBR did previously, when they went even lower).
Apologies if I wasn't clear. On the PM, if you turn on autobid for A+, you get all of them, including the 6% ones, but only the nice, "safe" short ones. If you set your limit to "8.0%" you won't also get the less "safe" 6% parts that someone bid for a 60mo A+ last week and wants to get rid of on the SM.