A risky P2P opportunity for 2018

Last year was a tough one for the peer-to-peer (P2P) finance sector, though investors still received a decent yield. So where should you be looking for 2018? David C Stevenson picks a risky punt.


Smaller P2P lenders, such as Hadrian's Wall, are holding back the losses so far
(Image credit: Gannet77)

Last year was a tough one for the peer-to-peer (P2P) finance sector, which received a great deal of negative publicity with many observers predicting an imminent meltdown. Nevertheless, data from the biggest platforms suggest that investors still received a decent yield. Returns from investing directly in the biggest platforms, including Zopa, Ratesetter and Funding Circle, averaged 5.4% including losses from defaults, according to analytics firm AltFi Data.

Many people, however, prefer to invest in P2P via listed vehicles such as funds, bonds, or the shares of the P2P platform providers. Most of the latter have been hugely unsuccessful in share-price terms, while the biggest listed funds P2PGI and VPC, with assets of £1.1bn between them have also had a torrid few years. For example, P2PGI moved from a premium of 15% to a discount of 15% ie, the share price now trades at 15% below the net asset value (NAV) of the fund's investments. However, P2PGI has a new management team that is intent on getting the yield back above 6% with a radically different loan book. The fund now shares the same manager as the Honeycomb trust, which still trades on a 15% premium. I suspect the premium on Honeycomb is excessive but, equally, the discount on P2PGI also looks too high.

The smaller funds have defied the cynics and produced decent returns. Funding Circle's SME Income fund trades at a small premium (around 2%) to NAV, and has delivered returns equivalent to a 5.6% yield on the current share price. Funding Circle isn't the only fund trading at a premium the smaller Hadrian's Wall and RM Secured Lending funds also trade above their book value. Both have delivered steady returns, targeted at between 5% and 7% a year.

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A retail bond first in 2017

As for bonds, Lendinvest a property lending platform issued the first listed retail bond from a P2P platform, raising £50m at a yield of 5.25%. This was well received and is now trading at a small premium of 2%. All in all then, it's clear that 2017 was a mixed time for P2P behind the headlines, with some obvious failures and a few stars.

So what should investors look out for in 2018? One riskier opportunity to watch is Ranger Direct Lending (LSE: RDL), a London-listed, US-focused fund. Ranger is slightly different from peers, as it lends money directly rather than through an internet platform. It should have been the pacesetter for the sector, as it operated in the deep, broad US small and medium-sized businesses market and has met its dividend target of 10% a year. But earlier this year its shares collapsed after it was hit by the bankruptcy of one of the businesses it lent through. Worries about the quality of its lending practices have multiplied and the shares are at a 34% discount. Contrarian institutional investors are now circling the stock. There could still be worse news to come from Ranger, but the running yield at 12% looks like decent compensation.

News bytes ripple makes waves

Ripple, the cryptocurrency created to give banks and payment providers a way to make cheap, quick, cross-border payments, received a boost when three big Japanese credit-card companies signed up to use its technology, writes Ben Judge. Ripple's price has increased by over 35,000% in 12 months, to $2.28, making it the best-performing cryptocurrency of 2017 and the second biggest by market capitalisation, overtaking ether. Bitcoin remains by far the biggest, with a market cap of $230bn, despite a near-30% fall in value since mid-December.

Bitcoin's usefulness as a means of exchange is hampered by the inability of the underlying blockchain to process a growing volume of transactions quickly enough and at an acceptable cost. The average transaction fee hit a high of almost $34 in December as the price of bitcoin peaked and now stands at around $15. The latest plan to tackle this barrier revolves around moving payments to "layers above the base bitcoin protocol", says Kyle Torpey on Forbes.com. The Lightning Network is "a system of smart contracts built on top of the base bitcoin blockchain that allows for fast, cheap payments directly between two parties". It claims to be able to scale bitcoin up to billions of users.

Funding Circle, Britain's biggest peer-to-peer (P2P) lender, could be preparing for a stockmarket flotation. The P2P platform "has told investment banks that it will hold a beauty parade towards the end of the first quarter of 2018", says Mark Kleinman on Sky News. Some investors believe the company could be worth in excess of £2bn, says Kleinman. However, it is still early days, says Emily Gosden in The Times: an initial public offering may not take place until "early 2019". Funding Circle was set up in 2010 and has since lent over £3bn to small businesses.

David C. Stevenson

David Stevenson has been writing the Financial Times Adventurous Investor column for nearly 15 years and is also a regular columnist for Citywire. He writes his own widely read Adventurous Investor SubStack newsletter at davidstevenson.substack.com

David has also had a successful career as a media entrepreneur setting up the big European fintech news and event outfit www.altfi.com as well as www.etfstream.com in the asset management space. 

Before that, he was a founding partner in the Rocket Science Group, a successful corporate comms business. 

David has also written a number of books on investing, funds, ETFs, and stock picking and is currently a non-executive director on a number of stockmarket-listed funds including Gresham House Energy Storage and the Aurora Investment Trust. 

In what remains of his spare time he is a presiding justice on the Southampton magistrates bench.