Since the launch of the first P2P focused investment company in 2014 – P2P Global Investments – more launches of investment companies with a P2P focus have followed suit, trailblazing the P2P concept and also attracting the support of high profile fund managers, such as Neil Woodford, Woodford Investment Management and Mark Barnett, Invesco Perpetual.
Whilst investors can gain direct exposure to P2P through online lending platforms, an alternative option is to invest through a P2P investment company. Offering attractive yields for income seeking investors, it’s perhaps unsurprising that there was a strong initial demand for P2P focused investment companies. The last year has been a year of mixed fortunes, however, for the sector. P2P Global Investments was down 12% and is currently trading on a discount of -22% (at 31 January 2017), while Funding Circle SME Income Fund is up 12% and is currently on a premium of 5% (at 31 January 2017).
Today, at a media roundtable held by the Association of Investment Companies (AIC), Simon Champ, CEO of MW Eaglewood Europe, managers of P2P Global Investments and Sachin Patel, Chief Capital Officer of Funding Circle talked about their thoughts on the prospects for the sector and the benefits of investing in P2P using the investment company structure. Their comments, along with those of Cormac Leech, Principal at Victory Park Capital, managers of VPC Specialty Lending Investments and Bill Kassul, Principal in Ranger Alternative Management II, the General Partner for the Ranger Direct Lending Fund have been collated below.
Prospects for P2P – is it misunderstood?
Sachin Patel, Chief Capital Officer of Funding Circle said: “The Funding Circle SME Income Fund was designed for equity-income investors to gain exposure to the small business loan asset class. Banks have lent to SMEs for decades and the loans were held almost exclusively on their balance sheets. As banks have retrenched from this market, Funding Circle is filling the void by facilitating lending to these same SMEs. This is therefore a very traditional asset class that Funding Circle has made available to different types of investors, including the Funding Circle SME Income Fund, for the first time."
Cormac Leech, Principal at Victory Park Capital, managers of VPC Specialty Lending Investments (VSL) said: “As a nascent sector, online lending is just beginning to be understood by investors. It’s likely that many investors will be surprised at how resilient the sector is in a recessionary environment. In particular, VSL’s balance sheet lending approach with downside risk protection is expected to provide attractive returns even in recessionary environments.”
Benefits of investing in P2P using the investment company structure
Simon Champ, CEO of MW Eaglewood Europe, managers of P2P Global Investments (P2PGI) said: “P2PGI invests through a diverse network of low-cost alternative lending companies – lending platforms, balance sheet lenders and other originators. The investment trust structure brings liquidity to an otherwise illiquid asset class. By investing across multiple sectors P2PGI creates a diverse pool of loans with the aim of providing a steady stream of income, whilst protecting investors’ capital.”
Cormac Leech, Principal at Victory Park Capital, managers of VPC Specialty Lending Investments said: “Investing via an investment trust reduces risk via diversification and also because the fund is managed by an experienced team of investment professionals who complete due diligence and continuously monitor the lending platforms. It is much more challenging and expensive for an investor to perform this platform due diligence themselves. Investment trusts are also able to source match-funded leverage where appropriate, thereby boosting investor returns. Investment trusts offer daily liquidity since the fund is listed and trades daily.”
Bill Kassul, Principal in Ranger Alternative Management II, the General Partner for the Ranger Direct Lending Fund said: “In this yield-starved environment, investing in the direct lending space remains attractive because of its consistent returns, low volatility and correlation to other markets and historically higher yields than other fixed income vehicles.
“With traditional banks continuing to migrate away from certain lending categories such as small business lending, we continue to seek great investment opportunities, especially in lending arrangements that are secured by borrower assets and collateral.”
Cormac Leech, Principal at Victory Park Capital, managers of VPC Specialty Lending Investments said: “P2P is something of a misnomer. A better description is online or non-bank lending. A significant percentage of creditworthy SMEs and consumers in the US and UK are underserved by banks and do not have access to traditional credit. Online and other non-bank lenders using financial technology have identified ways to lend to these borrowers, offering convenience and attractive rates; and using proven underwriting techniques.
“Victory Park Specialty Lending (VSL) provides balance sheet loans to these online and non-bank lending platforms, secured by the loan book, with the platforms taking the first loss on any defaults by the end borrowers. This ensures alignment of interest and has generated attractive returns for VSL and other funds managed by Victory Park Capital over the past 7 years.”
Simon Champ, CEO of MW Eaglewood Europe, managers of P2P Global Investments (P2PGI) said: “In recent years a powerful disintermediation opportunity has emerged as banks have retreated from some areas of the lending market due to increasing regulatory requirements. Coupled with the availability of data and the technology to capture it, these trends have facilitated the entry of low-cost alternative lending companies – lending platforms, balance sheet lenders and other originators – who are challenging the provision of reasonably priced credit.”
Sachin Patel, Chief Capital Officer of Funding Circle said: “Since the UK voted to leave the European Union, the Funding Circle SME Income Fund's performance has been very positive. This strong showing mirrors the performance of Funding Circle’s UK business over the past six months. UK SMEs have shaken off the macroeconomic uncertainty immediately following the referendum and continued applying for finance to grow their businesses - more than £300 million was lent through the platform in Q4 2016."
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- Data is to 31 January 2017 based on the last official close price at the month end, on a % share price total return basis. No expenses taken into account. Source: AIC using Morningstar.
- The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed ended investment companies, incorporating investment trusts and other closed ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help Members add value for shareholders over the longer term. The AIC has 342 members and the industry has total assets of approximately £157 billion.
- Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.