Know your assets: Interview with HNW Lending’s Ben Shaw
HNW Lending’s Ben Shaw talks to Marc Shoffman about the evolution of his asset-backed lending platform…
Former accountant and portfolio manager Ben Shaw founded peer-to-peer lender HNW Lending almost 10 years ago with the aim of helping the well-off access money quickly.
He initially aimed to focus on lending against assets such as classic cars and fine wine but due to his career experience has found the majority of the P2P lending platform’s business is bridging and property finance.
Shaw explains what the future holds for HNW Lending.
Marc Shoffman (MS): How did you get into P2P lending?
Ben Shaw (BS): I trained as a chartered accountant with one of the big five firms. I then went into banking for a short while before becoming an investment adviser for property firm Telereal Trillium.
I was helping with portfolio management, contract management, assessing new portfolios or property to buy and financing.
One of my jobs was helping run a £100m pension scheme and investing its money. Whilst I was doing that, I came across P2P lending and thought it was an interesting business.
MS: How has it evolved?
BS: I thought my niche would be the more exotic stuff – cars, planes and boats – but as I knew lots of people in property financing and bridging from my previous roles, the platform has actually mainly focused on that. When I sent out an email saying I was leaving my old role, people approached me with property loans and now 95 per cent of what we have done is property and only five per cent is the more unusual stuff.
HNW Lending has been running for about nine years. We have done something close to 500 loans, we have almost always earned interest and are rated highly by P2P research and ratings firm 4th Way.
I now put my money in as a first loss tranche on pretty much every loan, usually worth 10 per cent. What that means is if you have someone borrowing £100,000 and they only pay back £90,000, I lose £10,000 and lenders get capital back in full.
Because we have grown, we are able to do larger loans, our average loan size is now four times what it was and is around the £400,000 level. We are also quicker at doing stuff, so we can take a view on things where we weren’t able to in the beginning.
MS: Who are your typical borrowers?
BS: Our typical borrowers tend to be individuals who are moderately wealthy but not super wealthy, who need money quickly and are prepared to pay a bit over the odds.
It could be someone who needs to do a buy-to-let deal quickly, for example at auction, whereas it may take six months to get a mortgage.
I am often the one who completes the loan if we haven’t had enough signs ups, knowing full well that chances are high that in week or two there will be lenders who buy the remaining portions. If I am doing a loan, it is because I am comfortable the person will repay, I do the loan and hope lenders will come. They usually do.
MS: How do you check and choose your loans?
BS: We look at the asset, valuation and the borrower’s ability to repay. Also, we look at the exit strategy and do a background check on the borrower and any guarantors.
I have a guy who specialises in trawling the internet and other data sources to look for potential issues. There are also a bunch of checks the solicitor does.
MS: Has the pandemic and cost-of-living crisis changed the way you operate?
BS: Our attitude changed as a result of Financial Conduct Authority (FCA) rules in December 2019 and the Covid-19 pandemic. The two things kind of fell on top of each other.
The new FCA rules made us look at creditworthiness assessments of borrowers, while the impact of the pandemic on the courts has influenced what we can enforce. That means we are now trying to choose loans we don’t think will result in any enforcement action.
Read more: HNW Lending seeks better quality loans after second most profitable year
It is different to when we started. We thought if a property loan went into default we could quickly go through the court process to get the asset back and ensure people got their interest and capital repaid.
That philosophy doesn’t marry well with the FCA rules from December 2019 and doesn’t work when court delays can be very substantial and courts aren’t as lender friendly as they used to be.
It is better to choose loans that don’t default. In the past we may have run a loan book with a 30 per cent default rate, now it is running at five per cent. The returns are higher for lenders in the current environment and it means we are manging risk and reward better.
MS: Who is your typical investor?
BS: Our typical Innovative Finance ISA (IFISA) customer is probably investing most of their £20,000 allowance with us and spreading it over four loans or in our auto-invest product. Outside of this, users range from our £10,000 minimum to some with more than £1m invested.
Our auto-invest product pays six per cent returns but we are going to try to push that up now that interest rates are rising.
So far only one loan hasn’t paid its capital in full. Some loans are paying more which helps create a surplus and covers others when there may be issues.
MS: Have investor attitudes changed?
BS: Bigger lenders tend to diversify more than they used to. People are now expecting more than they were six months ago in terms of interest, which makes sense as interest rates have gone up.
We have been moving up our pay-outs to lenders, the market has moved up, we have to try to get that off borrowers which isn’t always so easy. Borrowers are beginning to see they can’t get the cheaper rates they were getting a year or six months ago.
People think interest rates are going to peak so it is not a bad time to put your money into P2P lending as the rates now are probably at the peak of the cycle. If you can lock in a two or three year-loan you are probably doing well.
There is still quite a difference between what we are offering compared with a bank savings account. You may get four per cent at a bank and we are around nine per cent. There is a big premium for going to a P2P lender.
MS: How has the regulatory environment changed?
BS: It has got more difficult as the risk warnings and the process you have to go through to onboard new investors are more onerous. That has made it more challenging to recruit new investors. It also doesn’t help that the regulator has lumped us in with cryptocurrency.
We have to make investors aware of the risks.
There are P2P lenders doing loans that arguably are far higher risk than others, but the FCA doesn’t differentiate.
MS: What do you think has driven some P2P lenders to leave the retail space?
BS: It costs more to deal with small individual retail investors than one or two big institutions. If you can get a funding line cheaply from an institutional investor, why would you worry about retail?
We think we have a good medium route with a minimum investment of £10,000 in each loan or £5,000 in the IFISA. Rather than hundreds of people in each loan, we get 10 to 20, that is not unmanageable. Having a lower minimum investment can create more of a headache. Our model allows us to give a personalised service, if the loan is in arrears, we try to answer queries the same day.
MS: What is your outlook for the sector?
BS: The sector will continue to grow. We offer good risk-adjusted returns, arguably as good if not better than equities and bonds, and far better than putting money into a bank.
More people are getting used to the sector and its track record. We have close to 500 loans and hardly any losses.