Sourcing opportunities: Interview with Sourced’s Derek Pratt
Industry veteran Derek Pratt gives his views on peer-to-peer lending and the role that Sourced Capital plays in the sector
Derek Pratt is one of the most experienced executives within the peer-to-peer lending sector, having moved from banking to help build Assetz Capital from scratch as regional relationship director back in 2015.
He joined P2P property lender Sourced Capital last year as commercial director, helping the brand become directly authorised.
Pratt explains to Marc Shoffman why P2P lending still excites him and what Sourced offers investors and borrowers.
Marc Shoffman (MS): What attracted you to P2P lending?
Derek Pratt (DP): I started my career in 1985, in banking. I worked in asset finance, commercial finance and business development. I was in a hybrid role between credit and relationship managers. There were very rigid polices and guidelines in regard to what an acceptable deal looks like and lots of worries about the cost of capital.
P2P didn’t have these sorts of issues. Assetz was fairly young, I was one of the first few people in a relationship role and joined at ground level. They wanted to press the button and grow, it was P2P done properly. It was transparent, trustworthy and honest with no-one wondering if there is a hidden agenda.
The whole alternative finance sector was growing at the time – it was a way of finding solutions for people. P2P done correctly is something that undoubtedly helps the borrowers and provides opportunities for investors, so everyone wins. Furthermore, there is none of the bureaucracy or protocol that you get with banking.
MS: Why did you join Sourced?
DP: Sourced is purely focused on property. The issues affecting small- and medium-sized housebuilders are well known. Sourced has a unique business model, the franchise is part of the wider Sourced Capital empire. We are only lending to people we know who are property professionals. I wanted to personally influence its growth story.
MS: What role does Sourced play in the P2P lending space?
DP: The only borrowers we lend to are Sourced franchisees so we know who our borrowers are. We won’t get into rate wars. All our loans go out on the same terms to borrowers and we offer flexibility around structure to help make the deal work.
Our size is a blessing. We are big enough to do deals but small enough to assess each on its merits.
The advantages for investors are that we only do secured property deals. Everything has maximum capital exposure of 70 per cent gross development value (GDV). Investors get a fully transparent platform with full reports and surveys and updates throughout the process.
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Our target interest rates are typically 10 to 12 per cent, based on how much the borrower pays. We operate it as pound in and pound out.
We make money out of fees. There is no benefit in doing sub-optimal deals for us. It is not about chasing the number of loans but the right quality.
The majority of our fees are paid on exit, so we are invested in developments being successful. The exit could be a sale of a unit or refinance and the term is typically 12 to 18 months.
MS: How has the loanbook performed this year?
DP: We became directly authorised in February this year. Since we launched, we have written £32.4m of loans and repaid £16.2m of capital. Interest is paid on exit and £2.8m has been paid so far.
MS: Are you worried about a property market downturn?
DP: Clearly, we are aware of that risk. A big part of what we do is linked to the GDV. We know the transaction inside out, we know who the borrower is and track the progress throughout. We don’t just release all funds at once and retain money related to development costs so we are always managing risks.
Our loan to GDV only goes up to 70 per cent, so we are not on high valuations, if there were crashes it has to be a significant correction before our capital is exposed. There is also an independent valuation at the outset and we have first charge security.
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We won’t say we are immune but protecting investors is a massive part of what we do.
The platform isn’t putting on land bridges that are speculative on planning permission, everything will have planning permission and intrinsic value. We don’t do much in the speculative world where there have been large losses
We can mitigate a lot of the risks of a downturn and have a 100 per cent repayment track record and no legacy problems.
MS: How do you think the cost-of-living crisis will impact the platform’s users?
DP: There is no doubt that costs are increasing. There is a huge amount of money out there from an investment point of view though.
As a business, we are looking to support those looking for investment and the inflationary pressures are significant and go hand in glove with some of the elements of the cost-of-living crisis.
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If that means people’s savings are being eroded then they will consider their options, that is why we have seen 100 per cent growth in investor numbers since February.
We are selective in terms of who our investors are. We don’t do restricted. We only deal with high-net-worth, sophisticated and corporate investors and we don’t go out there and say P2P is the answer for everyone.
MS: Are there plans for new products in the future?
DP: We are not moving away from what we do. It is sensible to be good at what you know and know what you are good at.
The platform will introduce an auto-invest product at some point, subject to the Financial Conduct Authority’s (FCA’s) view and investor demand.
MS: What are your views on current and future FCA regulations?
DP: The FCA’s position is difficult. It has to address that there have been high-profile failures in the sector.
Our opinion is aligned to the FCA’s objectives of having transparent and clear information and making sure investors are protected.
Where the FCA has a challenge is in doing that in a diverse sector. Using a one-size-fits-all approach to regulation for consumers isn’t possible. It needs to be regulated in a way that different platforms represent different risks.
I hope the FCA continues to engage with the sector and hopefully will be sensible in its future approach.
