Future of P2P investment. Is diversification the real answer?

mikb

Lukelo said:

mikb said:

Lukelo said:

... some of my friends told me about P2P investment.

Wait until your friends get round to tipping you off about Bitcoin! Then you'll be all set!

Haha, I think I missed this train already  

A lot has changed since P2P started -- returns have fallen, risks have increased (or at the very least, been made more visible), platforms that introduced Safeguard/Provision funds either withdrew them entirely, or suddenly started getting people warmed up to the idea that it was a discretionary payment, and may not pay out some, or all, of any losses, and the clear relationship between lenders and borrowers has been muddied by all sorts of "black-box" simplifications.

Thank you for your feedback! Can I ask if you tried to invest in P2P loans?

Tried? No -- I *did* invest! Yes, it was a big leap of faith.


Started: Zopa (2010) and Funding Circle (2010) (from when FC were still in their first 100 loans phase), Ratesetter (2011 in 3/5 Year markets), and Assetz Capital (2013).


Currently: Zopa: All out and closed. Funding Circle: Out as of Sep 2017 (The true death of Funding Circle) but still waiting for the bad debt/defaults to shake out -- a slow process. Ratesetter: Stopped lending as of Sep 2019 (5 year rates not high enough IMO) but was happy to keep re-lending, but with dubious Provision fund figures and their CoVid response that changed, now capital is half-out, rest to follow soon. Assetz Capital: No longer actively lending, in wind-down, so pulling repayments/interest, but a good chunk trapped in their queue/pool/whatever it is today for the rest.


So I've seen all the twists and turns of the above 4 companies first hand.


There was a time when due-diligence led to loans being turned down, or given "barge-pole" status. FC especially threw the due-diligence and credit ratings out of the window, because they needed to grow the size of the business (they couldn't grow much of a profit after all) so that they could float the business in an IPO and make a fortune from the sudden increase in "value". In a way, this was successful (for certain people who cashed out and ran on the original flotation euphoria), but ask a Funding Circle shareholder today what they think now, and they will probably spit on you.

Aceace

Lukelo said:

Aceace said:

Unfortunately,  P2P has been tainted by some very bad, and in some cases fraudulent, platforms. Understandably, well intentioned victims of those platforms are very vocal in discouraging others from getting similarly burnt. It's important to take these views into consideration as a warning as to what can go wrong. To compound this the FCA have shown themselves to be rather inept in their regulation and their protection of investors, so best not to rely on them.

Hello Aceace, 

Thank you very much for this detailed information. 

Maybe you can name those platforms that you have used or are using right now? Thanks!

Hi again Lukelo,

Here's a link to the P2PIF where I recently responded to a similar question https://p2pindependentforum.com/post/398359/thread (I hope the link works and is within the forum rules, I haven't tried one from this forum before). 

I'm happy to discuss my views on any of them on either open forum or via PM. My concern on doing so here is that any discussion might get overwhelmed by those that are totally against all P2P investments. As I've said before, it's important to take their views into account as they will likely have been formed from genuinely bad experiences, but to write a whole, growing, investment sector off is IMO not justified. Each investment needs to be considered on its own merits. 

Here's some details on my latest P2P investment.  It's an example of one that I consider to be a perfectly sensible investment as part of a well diversified P2P portfolio. It's on the ABLrate platform, loan number 1000147, a property development of 3 houses: 

• There is no development risk as all 3 houses are complete and on the market (so effectively a bridging loan that's priced as a development loan).
• 13% pa interest that is earned from day 1 (via a system they call Instant Returns), so no cash drag.
• Interest is paid for a minimum of 6 months even if the properties sell sooner. 
• An LTV of 69% (so the property values need to fall by 31% before lenders' capital is at risk), admittedly it's on a second charge basis. (There are also other elements to a rather complex security suite. Best see the proposal for details).
• The ABLrate platform is currently profitable, and has proved itself to be very tenacious in chasing defaults IMO. 
• The borrower has several other loans on the platform and has maintained their scheduled payments throughout the Covid19 crisis.
• Other loans to the same borrower have traded above par on the ABLrate SM.
• IFISA eligible.

None of the above makes this a sure thing. There is always risk when you step outside of NS&I and FSCS protection, but it sits very comfortably in my portfolio. 

bigadaj

Aceace in relation to the loan you've quoted you seem to be glossing over the fact that thee is no first charge security, second charge and debentures. The borrowing company has a number of loans on ablrate with property development schemes and has serviced the debt without any hiccups to date but the risk is higher than you imply in my opinion, not being a first the charge then the ltv quoted is a little meaningless. I have put a few quid into that loan and am surprised it hasn't filled more quickly, further discussion on p2pif.
Ablrate is the only platform I'm currently active on and don't foresee that changing. I never saw the point in zopa/ ratesetter etc as the returns were too low for the risk though took advantage of a couple of incentives over the year. Lendy/ ss was a slow car crash and i managed to get out with about 12% returns before the platform crashed, had a small amount in collateral which is stuck and will be a capial loss unless fca failures are compensated, running out some defaults on moneything with a current return of around 8%, reducing as interest accrues but most loans defaulted so any returns will be a bonus.

Aceace

bigadaj said:

Aceace in relation to the loan you've quoted you seem to be glossing over the fact that thee is no first charge security, second charge and debentures. The borrowing company has a number of loans on ablrate with property development schemes and has serviced the debt without any hiccups to date but the risk is higher than you imply in my opinion, not being a first the charge then the ltv quoted is a little meaningless. I have put a few quid into that loan and am surprised it hasn't filled more quickly, further discussion on p2pif.
Ablrate is the only platform I'm currently active on and don't foresee that changing. I never saw the point in zopa/ ratesetter etc as the returns were too low for the risk though took advantage of a couple of incentives over the year. Lendy/ ss was a slow car crash and i managed to get out with about 12% returns before the platform crashed, had a small amount in collateral which is stuck and will be a capial loss unless fca failures are compensated, running out some defaults on moneything with a current return of around 8%, reducing as interest accrues but most loans defaulted so any returns will be a bonus.

Hi bigadaj,

Thanks for sharing your experience. I tried Zopa, FC and Ratesetter out and came to a similar conclusion to you, that the returns weren't worth the risk. I still have small amounts stuck in all 3, but I've received nearly all of my original capital back already. I also have a very small amount of test capital stuck in Lendy and agree with your sentiment there. Fortunately,  I never tried Collateral. 

I'm sorry you feel that I glossed over the fact that the ABLrate loan is a second charge.  I did mention it. You really can't expect first charges at 13%. I can't agree the the LTV is irrelevant.  The 69% quoted is the value for the ABLrate lenders' second charge security. Perhaps you have misunderstood the position. I'm not sure of the legalities of quoting the values from the borrowing proposal, and i don't have time to investigate right now,  so I'll illustrates my point with a fictitious example:

If a first charge holder lends £450k on a property valued at £1m, and the second charge holder lends £240k, then the second charge holder's LTV is 69% ((450k + 240k) / 1m = 0.69), which is a very meaningful figure. I.e. the total lent is 69% of the value of the security. Sorry if I'm teaching granny too stuck eggs. 

Best regards

masonic

I'm sorry you feel that I glossed over the fact that the ABLrate loan is a second charge.  I did mention it. You really can't expect first charges at 13%. I can't agree the the LTV is irrelevant.

Well you can expect first charges at 13% on the Ablrate platform. I hold one such loan, and it appears there is at least one other currently available on the secondary market, albeit at a very small premium. Perhaps it is reasonable to manage expectations about new business written since the collapse in interest rates, but on the other hand there is an element of supply vs demand and there isn't much money sloshing around P2P platforms at the present time. Selectivity is key.

I do share bigadaj's misgivings about 2nd charges, they are not quite the red flag to me that development finance (proper) raises. The main concern would be that valuation reports are prepared, usually with only cursory information, based on the open market value of a property at that time, perhaps with a restricted marketing period value. The more realistic valuation would be in a fire sale scenario, with receivers'/administrators' fees to come off before any distribution is made. The actual recovery could be quite a lot lower than OMV - 50% or lower is not out of the question, at which point the 2nd charge investor in your example has sustained a 100% loss. I've been very grateful to 2nd charge holders in the past where a corresponding first charge has been offered alongside or in advance of a 2nd charge loan. But some valuations are more resilient to circumstances than others.

It is very clear, though, that investing at 13% (which means the borrower will be paying even higher rates of interest) involves some substantial risk of some form.

Aceace

masonic said:

I'm sorry you feel that I glossed over the fact that the ABLrate loan is a second charge.  I did mention it. You really can't expect first charges at 13%. I can't agree the the LTV is irrelevant.

Well you can expect first charges at 13% on the Ablrate platform. I hold one such loan, and it appears there is at least one other currently available on the secondary market, albeit at a very small premium. Perhaps it is reasonable to manage expectations about new business written since the collapse in interest rates, but on the other hand there is an element of supply vs demand and there isn't much money sloshing around P2P platforms at the present time. Selectivity is key.

I do share bigadaj's misgivings about 2nd charges, they are not quite the red flag to me that development finance (proper) raises. The main concern would be that valuation reports are prepared, usually with only cursory information, based on the open market value of a property at that time, perhaps with a restricted marketing period value. The more realistic valuation would be in a fire sale scenario, with receivers'/administrators' fees to come off before any distribution is made. The actual recovery could be quite a lot lower than OMV - 50% or lower is not out of the question, at which point the 2nd charge investor in your example has sustained a 100% loss. I've been very grateful to 2nd charge holders in the past where a corresponding first charge has been offered alongside or in advance of a 2nd charge loan. But some valuations are more resilient to circumstances than others.

It is very clear, though, that investing at 13% (which means the borrower will be paying even higher rates of interest) involves some substantial risk of some form.

All very fair points. I too share your general concerns over second charges, but didn't agree that the LTV was irrelevant. Together with the additional security suite, the borrowers record, the completeness of the development and the rate offered, I'm more than happy to hold this in my portfolio. 

bigadaj

If you think any quoted ltv on a p2p property loan is reliable then you aren't being sufficiently cynical in my opinion. If you look at defaults on most platforms, where a property has to be sold admittedly at short notice, the realised value can be a fraction of the quoted value, 50% is often quite high, 20-30% is common and less than 10% is possible. The valuer probably has PI cover so you can theoretically sue him, but this is rarely successful, best you can expect is a settlement of a small percentage offer from their insurer. There's also a question whether a valuer commissioned by a borrower or even a platform owes a duty of care to lenders, and the valuation is always on a different basis, market has changed etc. Loan structures are also complex, personal guarantees are rarely successfully, tenuous debentures enforced etc etc
Ironically property development is one of the few areas that makes sense for p2p, borrowers want short term money which should be realised in a matter of months so charges and rates are critical or sensitive, it's just how value is determined, security enforced and where in a long list of creditors you fall that are of concern. 

masonic

bigadaj said:

Ironically property development is one of the few areas that makes sense for p2p, borrowers want short term money which should be realised in a matter of months so charges and rates are critical or sensitive, it's just how value is determined, security enforced and where in a long list of creditors you fall that are of concern. 

If only the reality of development finance came anywhere close to the ideal. I do like to bang on about the fictitious concept of LTGDV and the faulty notion that there is a linear relationship between money spent on the development and increase in value towards GDV, when in reality the value of the development drops as soon as ground is broken by one developer and stays pretty low until near completion. There are also other entirely unpredictable risks those of us with a few years experience will have seen: the risk the developer has borrowed all of the funds for the project in one way or another and, having no real skin in the game, will simply walk away at the first sign of trouble; that they will breach their planning permission or building regulations, leading to a very costly rectification being required; that they will fail to pay their contractors, leading to such problems as holes being drilled in the water pipes in revenge before the walls are sealed up; to name but a few. That's on top of all the usual risks associated with valuations and lending to sub-prime borrowers.

Aceace

bigadaj said:

If you think any quoted ltv on a p2p property loan is reliable then you aren't being sufficiently cynical in my opinion. If you look at defaults on most platforms, where a property has to be sold admittedly at short notice, the realised value can be a fraction of the quoted value, 50% is often quite high, 20-30% is common and less than 10% is possible. The valuer probably has PI cover so you can theoretically sue him, but this is rarely successful, best you can expect is a settlement of a small percentage offer from their insurer. There's also a question whether a valuer commissioned by a borrower or even a platform owes a duty of care to lenders, and the valuation is always on a different basis, market has changed etc. Loan structures are also complex, personal guarantees are rarely successfully, tenuous debentures enforced etc etc
Ironically property development is one of the few areas that makes sense for p2p, borrowers want short term money which should be realised in a matter of months so charges and rates are critical or sensitive, it's just how value is determined, security enforced and where in a long list of creditors you fall that are of concern. 

Again, perfectly valid points, but it's way too strong to think that these problems are generally the case. They certainly proliferate amongst the poorly run / fraudulent platforms. However, there are plenty of professionally run platforms where the issues you mentioned simply don't happen. That's not to say that it won't/ can't happen even on the good platforms, but, IMO, the occurrence of these will be so rare that they will have an acceptably small effect on one's overall return from a well diversified portfolio from well researched platforms. I haven't seen a single occurrence of LTVs being ridiculously out on any of my favourite platforms.
Again, that's not to say that there haven't been some losses on some of those platforms. They should be expected amongst the higher rate paying platforms. I've suffered a loss on one of my loans on ABLrate,  but this is acceptable to me as my XIRR on that platform has remained above 12% throughout.

ValueInvestor123

The landscape of investing in alternative P2P/P2B platforms is changing. Only the fittest ones will survive. The cleaning up process has started that will weed out the weak/fake and reward those that change/improve. Another thing is that platforms have to grow and attract institutional investors. Otherwise, they will not survive. But what do institutional investors look for when they look at an alternative investing platforms? LendingCLub gave the following criteria: risk-adjusted returns, cash flows, short duration, diversification, and low correlation with other investment options. Therefore, this should be something what we smaller investors look for too. Recently, I added one more market player to my list that fits the criteria: Viventor. I know it experienced quite a few troubles in the past, but has been moving in the right direction recently.