David Prosser looks at investors’ growing interest in the peer-to-peer sector.
The UK’s peer-to-peer lending sector continues to go from strength to strength, with what was until recently an alternative asset class now attracting interest from the mainstream. Hargreaves Lansdown, for example, confirmed that it is now looking at offering a peer-to-peer service from next year.
For investors, the attractions are significant. Peer-to-peer lending platforms such as Zopa, Ratesetter and Funding Circle offer much more attractive yields than cash deposited in the bank – chiefly because they enable investors to lend more or less directly to borrowers, rather than through a high street lender who takes a cut.
Nevertheless, peer-to-peer lending has its downsides. It’s not especially convenient – different platforms lend to different types of borrower, so investors may need to use different providers in order to build a diversified portfolio; even on a single platform it can be fiddly to build and maintain such a portfolio. Also, the risk profile of this sector has yet to be tested in more challenging market conditions for loans – default rates are currently very low, but there’s no guarantee they will stay that way.
Against that backdrop, you can see why many advisers and investors might feel more comfortable with a professionally managed exposure to the peer-to-peer sector. Enter the investment company industry, where the closed-end structure of funds is a good fit given the potential illiquidity of these assets.
In fact, there are now four investment companies offering exposure to the peer-to-peer sector, with total assets in excess of £1.3bn – pretty sizeable given that none of them are much more than a year old.
One of those funds, VPC Speciality Lending (VSL), is now looking to raise new money from investors. The fund launched six months ago, raising £200m from investors, and announced last week that it is hoping to secure another £200m with a C share issue that is due to close on 29 September.
The fund-raising underlines the extent to which peer-to-peer lending is generating excitement. VSL works with 16 platforms and said in March that it would invest the money raised within six months of its launch. In fact, the money was almost entirely allocated by July, with the demand from platforms for funding for their growing number of borrowers continuing to exceed supply. Hence the fund’s desire to raise more money.
There is every reason to expect the peer-to-peer lending sector to continue to grow quickly. In particular, it benefits from political support, with the Treasury doing everything in its power to support an industry that provides increasing competition to the mainstream banks. The latest policy initiative will see the introduction of Innovative Finance Isas next April – this will enable investors to hold peer-to-peer loans inside an individual savings account, and should provide further impetus for the sector.
The risks for investors in these funds are twofold: rising defaults on the platforms themselves would hit returns; so too would setbacks to the managers’ strategies, since all of them employ techniques such as leverage in order to provide potentially enhanced returns.
Nevertheless, it’s encouraging to see investment company managers offer an alternative option for investors and advisers interested in this asset class. And demand so far appears to be strong.