Daniel Kiernan, research director at Intelligent Partnership, considers whether the time is right for advisers to start using peer-to-peer lending as part of their investment proposition
Peer-to-peer (P2P) lending activity is on the rise, and the Government is exploring the possibility of including it in ISAs. In an environment of exceptionally low yields, has P2P lending become sufficiently mainstream for advisers to consider it as a suitable option for their clients?
- Yields on conventional assets are exceptionally low; in comparison, P2P lending offers a relatively high yield with very low volatility
- Unlike conventional banks, P2P lenders do not have to hold a specific amount of capital in reserve, and their costs are considerably lower
- P2P lenders offer a wide range of opportunities; however, there are questions over how the asset class will react when interest rates start to rise
Most of you will be aware of the rise of peer-to-peer (P2P) lending and will have seen the Government is currently consulting on including it within Isas. Perhaps some of you have even noted the size of the industry here in the UK – a cumulative total of £3.8bn has now been lent via P2P lenders, with £1.2bn of that lent in the first six months of this year alone. The big question is – is P2P lending now mainstream enough for advisers to consider for their clients?
The problem all investors face today is the low yields on conventional assets. The base rate is 0.5%, a 30-day notice saving account might pay just over 1% and a five-year savings bond will pay about 3%. The yield on a basket of income stocks might be around 4% today and, while this option also offers the prospect of a capital gain, it comes with the risk of more volatility.
So the appeal of P2P lending is a higher yield than is available elsewhere, for very low volatility. According to research we have carried out for our forthcoming Alternative Finance Report, we think a yield of 6% to 7% is achievable. And the Liberium AltFi Data Returns Index (LARI), which measures the returns available by lending to the big three lending platforms in the UK – Funding Circle, RateSetter and Zopa – currently quotes a yield of 5.15%.
How do the platforms do this? Well, unlike mainstream banks, P2P lenders do not have a regulatory obligation to hold lots of capital and they do not have the same expenses as banks, such as branch networks. This means they can squeeze margins at both ends – and both borrowers and lenders benefit.
Furthermore, the lending activity is varied – a wide range of opportunities do exist. The broad split is between lending to consumers or lending to businesses but, even beyond that distinction, the platforms have very different business models.
Some only offer unsecured lending; others take some form of security from borrowers – such as a first charge on property, luxury goods or business assets. Some platforms run provision funds that are used to make lenders whole again in the event of default; others use insurance. Some are generalists; others specialise in sectors such as property, biotech or student finance. This is not a homogenous asset class.
Other signs of growing maturity include regulation – the industry has been regulated by the FCA since April 2014 – Sipp and (imminent) Isa acceptance and the deployment of more than £200m by the UK government (via the British Business Bank) and the influx of institutional investment into the sector.
So why hesitate? Well, P2P lending is still very young and the industry has not proven itself through the whole business cycle – although Zopa, the longest-standing platform, did live through the 2008 financial crisis. It is not certain how the asset class will fare when interest rates rise, liquidity is likely to evaporate in a crisis – at the moment it depends upon a flow of new investors – and there are concerns that, as the platforms race to grab market share, the quality of the borrowers could be compromised.
It is possible to mitigate these issues by diversifying across a number of platforms (and of course diversifying at the individual loan level), diversifying across both business and consumer lending and only making short-term loans to guard against the risk of interest rate rises. This is nit as much work as it sounds – most platforms have ‘autobid’ functions that allow you to set your investment criteria and then they take care of the rest.
Of course, all of that is still going to be tricky for an adviser to implement and be properly remunerated for. However, many of the platforms have built adviser portals to help you run your clients’ lending portfolios, so they are clearly anticipating that some advisers will become involved.
Is there an easier route? Well, a small number of funds focused on this sector have launched over the last 12 months or so. Take a look at GLI Finance, Victory Park Capital, the Ranger Direct Lending Fund and P2P Global Investments. These are investment trusts that are already ISA accepted and will run a diversified P2P lending portfolio that aims to provide investors with the sorts of yields mentioned above.
Intelligent Partnership has since 2008 provided education and information on alternative investments to a community of more than 3,000 financial advisers and investment professionals. As the UK’s only CPD-accredited provider in this space, the firm provide advisers with access to a range of events, training programmes, research papers, reports and portfolio analysis tools. It has created an educational environment not only to raise awareness of the industry but also to highlight best and poor practice, positive and negative trends and key market developments – all of which helps promote greater transparency and professionalism in the sector. Find out more about the firm here
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