David Prosser discusses peer to peer finance in the closed-ended sector.
An industry launched on the principle of “disintermediation” might not be an obvious place for intermediaries to go looking for investment opportunities. But the booming peer-to-peer finance sector, which aims to cut the banks out of the process through which either individuals or businesses raise debt or equity from investors, is increasingly moving on to the agendas of financial advisers.
For one thing, the sector’s growth is difficult to ignore. Research produced jointly by the innovation group Nesta and Cambridge University suggests the UK’s peer-to-peer sector had generated £1.74bn of funding by the end of 2014, 161 per cent up on the previous year. By the end of 2015, Nesta expects the figure to reach £4.4bn. Plus there’s an international dimension too – the US peer-to-peer sector, in particular, is growing even more rapidly.
For another, the sector offers some potentially valuable investments. Where individuals and companies are borrowing money, the allure for investors is a consistent (and often generous) income stream and default rates that, so far at least, have been low. The risk profile of those peer-to-peer platforms raising equity for businesses is far higher – but there are various tax incentives that may offer compensation, and some investors are actively seeking these highly speculative plays.
How, though, to secure exposure to a sector that is fragmented across a multitude of platforms, each of which offers large numbers of very small deals? A sector designed to appeal to the peers of those seeking funding – individual investors – does not at first sight seem geared up to deal with wholesale investors such as financial advisers.
Enter the investment company sector, where three new funds have launched over the past two years offering exposure to peer-to-peer finance via a collective structure. P2P Global Investments, Ranger Direct Lending and Victory Park Capital Speciality Lending each focus on a different area of peer-to-peer finance, but all offer a professionally managed and diversified exposure to this new asset class.
That appears to be proving popular. P2P Global Investments raised £200m on its IPO a year ago and a further £250m through a C share issue in January – now it is publishing a circular to give it the authority to issue new C shares. Altogether, the three investment companies have raised £785m of capital over the past 12 months.
It’s not difficult to see why these funds are able to pick up such large sums. While many individual investors have embraced the peer-to-peer sector, managing exposure to it is tricky for financial advisers and institutional investors. Outsourcing the management of that exposure to a collective fund able to do nothing but focus on the deals on offer makes sense; so does seeking access to a more diversified portfolio of assets via such a vehicle.
Closed-ended funds, moreover, are well-suited to a sector where liquidity could prove problematic, especially for large-scale investors. The problems posed by inflows and outflows of cash in an open-ended fund, by contrast, make it much harder for such vehicles to invest in this sector.
None of which is to say that peer-to-peer finance is the right investment for everyone. But this is a new asset class that will have substantial appeal to at least some financial advisers’ clients – in that context, these new investment companies give advisers a useful route into the sector.