David Prosser takes a closer look at what is attracting investors to crowdfunding.
The crowdfunding phenomenon continues to gather pace, with the peer-to-peer loans sector setting the lead. From April, peer-to-peer loans made through platforms such as Zopa, Funding Circle and Ratesetter will be eligible investments for individual savings accounts (ISAs), while 2015 has already seen these platforms raise more money than ever before.
However, for investors and advisers tempted by the returns on offer from this type of crowdfunding – and particularly the attractive yields available – question marks remain. Above all, this is an industry that has yet to be tested during a period of economic downturn; will default rates, which have been remarkably low so far, begin to creep up as the cycle turns.
The obvious way to mitigate such risks is through diversification – investors with portfolios of peer-to-peer loans will be less exposed to individual defaults. And the good news is that the investment company sector offers an increasingly broad range of options for obtaining diversified exposure to peer-to-peer loans through a managed fund.
The latest addition to these options comes from the crowdfunding sector itself. Funding Circle, now the UK’s biggest platform in terms of funds advanced, has launched its own investment company, raising £150m for a vehicle that began trading on the London Stock Exchange at the beginning of December. The fund is targeting a yield of 7 per cent.
Investing in this way has a number of advantages. In addition to diversification, investors benefit from professional asset allocation; plus shares in Funding Circle’s vehicle are already eligible holdings for Isas, as well as for self-invested personal pensions (Sipps). Another benefit is that trading the shares is straightforward for investors who want to move in and out of exposure to crowdfunding – by contrast, the secondary markets available on the platforms themselves are not always so liquid.
Funding Circle may be the first crowdfunding platform to launch its own investment company, but there are a number of other closed-ended funds that already offer exposure to peer-to-peer – indeed, this corner of the investment company sector has been a particularly successful fund raiser over the past 18 months or so.
Other options in this space include P2P Global Investments, VPC Speciality Lending Investments, GLI Alternative Finance and Ranger Direct Lending, which all sit in the broader debt sector of the Association of Investment Companies’ classifications.
In fact, the closed-ended structure is particularly well-suited to this asset class, given investors’ concerns about liquidity and the relative freedom that investment companies have to manage the flow of income to investors.
For this reason, advisers can expect to see further launches and fundraising in this area. For example, Funding Circle’s new fund offers exposure to peer-to-peer lending in a number of international markets, reflecting the increasingly global nature of this phenomenon. While the UK is currently a leader in peer-to-peer, other funds will follow that international lead as overseas markets continue to grow.
There is nothing to stop people investing direct, of course, and crowdfunding platforms will continue to rely on individual investors to fund lending. But for those who prefer a more structured and managed approach, these investment companies provide an interesting opportunity.