Fintech startup Wellesley & Co lent £1.7 million to its aristocrat founder to invest in the business

Graham Wellesley

LONDON — The aristocrat founder of online property investment platform Wellesley & Co is selling a multimillion pound property as part of a deal to protect the platform's 14,000 investors from losses on loans.

Wellesley & Co last year lent £1.7 million to founder Graham Wellesley, the eighth Earl of Cowley and a relative of the Duke of Wellington, to fund the purchase of shares in the business. The loan is secured against the sale of a property the Earl owns. Wellesley has not disclosed what the property is.

The equity investment is helping the company he founded absorbed losses on peer-to-peer loans made over the platform. Wellesley & Co had no obligation to absorb the losses but cofounder Andrew Turnbull told Business Insider the board decided to in order to protect the company's reputation.

Turnbull said: "If you look at it slightly more holistically, what we're really saying is: 'Graham has put his personal guarantee on the line to make good the losses that were incurred.'"

'It's something that's well governed'

Graham Wellesley invested £2.4 million into Wellesley & Co last September as part of a £2.5 million cash injection from directors. The investment was partly funded by a £1.7 million loan to the Earl from one of Wellesley & Co's subsidiary companies.

It is unusual to see a company offering financial assistance to someone wanting to buy their shares — it was, in fact, illegal for a private company to do this until 2008.

Turnbull told BI: "The proposal was put to our group board. We then went out and got independent legal advice to some fairly decent London lawyers. BDO [Wellesley & Co's accountants] clearly were happy with it because it's been approved."

He added: "We've formed an oversight committee who meet with Graham quarterly to evaluate the process he's going through in selling his property. It's actively being marketed. It's something that's well governed."

Turnbull stressed that the loan was not funded using any peer-to-peer funds.

He said: "We have multiple forms of working capital within our business. We have all manners of retained earnings and cash. We have the cash from the original equity and subordinated loans that we've put into the business. Similarly, we have an unsecured mini-bond business. We have a number of forms of cash sitting in the business to the tune of maybe £60 million, £70 million. Cash was not the issue at all."

'Retain our high-quality brand'

The September fundraising was to "absorb impairment losses that would otherwise have been passed on to peer-to-peer investors," according to accounts filed with Companies House last month.

Wellesley & Co lends money to property developers across the UK, raising funds through "mini-bonds" and a peer-to-peer investment product that connect investors directly with developers.

Three peer-to-peer loans made over its platform in 2015 went bad, according to Turnbull, and the company decided to absorb the losses rather than pass them to investors in order to protect the company's brand. He said the loans were "outliers."

Graham Wellesley told Business Insider: "Where Wellesley hopes to set itself apart is to deliver what we promise, which over time should lower our cost of capital... The board took the discretionary decision to protect our investors and retain our high-quality brand."

It's Graham putting his personal guarantee and assets on the line to basically prop up the balance sheet — cofounder Andrew Turnbull

It is not unusual for peer-to-peer lenders to absorb some losses that would otherwise fall to investors. Many platforms use so-called provision funds to cover a certain percentage of initial loan losses.

Turnbull said: "What that did is gave us a hit to the balance sheet and we had to go and put more capital into the balance sheet to make sure that we remained positive. Certain members of the board and Graham put funds in.

"Graham, he's a fairly high net worth individual and we have his full personal guarantee over the repayment of the loan as well... It's Graham putting his personal guarantee and assets on the line to basically prop up the balance sheet."

The loan to Graham Wellesley came on top of his base salary of £342,000, which makes him the company's highest paid director. The loan has an interest rate of 10.48% and Wellesley was charged £42,000 interest up to December 2016. Wellesley paid back £43,000 up to that point, leaving £1.69 million owed.

Relaunching peer-to-peer product

Turnbull said that losses from the bad loans in 2015 would not have led to investors losing money, only lessened their interest payments.

Wellesley & Co has 14,000 retail investor customers who had put £206 million into the platform by the end of last year, accounts show.

While it is not unusual for peer-to-peer platforms to cover losses, the Financial Conduct Authority last year warned that provision funds raise issues around transparency in the industry.

FCA CEO Andrew Bailey told Business Insider last year that the funds could blur the lines between P2P and savings accounts, and cloud the true risks associated with the investment. RateSetter and Zopa, two of the UK's biggest P2P platforms, have since closed their provision funds.

Wellesley & Co advertises on its website that: "Investors have never lost funds to date." Accounts show the company has lost £4 million out of a total £416 million lent out since launch in 2014, but these losses have so far been absorbed by the business.

Wellesley & Co removed its peer-to-peer product about "five or six weeks ago," according to Graham Wellesley. The company is currently "rejigging it to adhere to all of the FCA's new principles," he said and will be relaunched soon.

Back in profit

The group lost £210,288 last year, down from a loss of £3.2 million in 2015. Income fell from £13.5 million to £11.7 million.

The Daily Mail reported in January that Wellesley was in a "perilous state" after accounts showed it was in need of a cash injection. The Financial Times also raised alarm bells.

Turnbull told Business Insider that Wellesley & Co is now profitable after a significant restructuring of the business. Marketing costs have been slashed as part of a drive to cut overheads and Wellesley & Co is now focusing on bigger property loans.

Turnbull pointed out that Wellesley & Co's auditors, BDO, removed a warning that the company would need to raise funds to stay afloat within a year in Wellesley & Co's latest set of annual accounts, filed last month.

"Getting an auditor to go back on something like that without raising more capital is actually quite hard," he said. "We've got the business to a point where it's actually performing quite well."

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