Don’t give up on P2P lending
The P2P lending sector has had a torrid year and the rules are being tightened. But it’s hardly game over, says David Stevenson.
Peer-to-peer (P2P) lending has had a miserable 2019. This sector, which includes big players such as Zopa, RateSetter and Funding Circle, as well as smaller competitors such as Assetz Capital, should be sitting pretty in our new, glorious age of low interest rates for longer. Yields of between 3% and 7% per annum should be very attractive for those willing to take on some extra risk.
Yet the year was marked by the debacle that was Lendy, a P2P property platform now in administration. Lenders will reportedly be forced to shoulder platform-wide losses even though their loans were supposed to be segregated on a loan-by-loan basis with individual borrowers. And Lendy isn't the only platform to hit the buffers recently Funding Secure has also gone down, driven under in part by highly unusual loans to a major art dealer. One news report even suggested that a loan had been secured against a library of 5,000 Italian books.
Regulators crack down
These failures have sparked a regulatory backlash . The Financial Conduct Authority (FCA) introduced new rules on 9 December, which ordered the major platforms to introduce tests that "assess investors' knowledge and experience of P2P investments where no advice has been given to them". On paper these regulations sound sensible and cautious, but the practical effect is that all the effort required to get private investors' attention is proving costly and time-consuming. We've already seen some dramatic changes.
Many platforms are responding by dumping private investors altogether. Major property platform LendInvest has already stopped opening new lending accounts for private investors. Instead, it has chosen to focus on big institutional funders via deals with HSBC and National Australia Bank, as well as mortgage securitisations via the wholesale markets. Abandoning the private investor doesn't seem to have caused too many sleepless nights for LendInvest: its lending base now totals well over £1.8bn.
Last week alternative mortgage lender Landbay decided to close to private investors and focus on institutional money only. ThinCats, which funds small and medium-sized enterprises (SMEs) has also decided to ditch private investors. Other lenders have reacted in a slightly different way. Not long ago Zopa, for instance, decided to become a bank, which should open a whole new range of funding opportunities.
One way we can see these trends playing out is to look at the data for the sector provided by specialist research firm Brismo. It aggregates and analyses data for many of the biggest online lenders in the UK and its figures suggest that overall lending in the big platforms has only returned 3.79% after losses and fees for the last 12 months and just 0.27% for the last month. Those returns are significantly down on the 5%-6% returns seen in previous years.
Data from Brismo also points to a slowdown in lending. In the property sector, for instance, most of the online platforms have barely originated much more than a few million pounds apiece over the last three months, although LendInvest, by contrast, has lent £167m over the same period.
So, is it game over for P2P lending and alternative finance? Brismo's data suggests otherwise. Some platforms are still very much in business and lending actively. Over the last three months Zopa's main rival RateSetter has continued to originate plenty of loans: £170m has been lent over the last three months and £776m over the last year (for Zopa the equivalent figure is £881m).
Where to look now
Second-tier players such as Assetz Capital (specialising mostly in property-backed SME lending) have also continued to prosper, with just under £50m lent out over the last three months. It is hiring staff across the country.
Another stalwart is regional lender Folk2Folk, which continues to grow, especially in the south west, while property-based lender Fiztrovia Finance has grown fast, lending out over £100m in development loans in just a few months.
If all the new rules stipulated by the FCA unnerve you, but you're still interested in the sector, it may be worth looking at the more conventional routes into the sector. LendInvest's two retail bonds, for instance, (one maturing in 2022 the other 2023) are trading at a tiny fraction below the issue price and yield well over 5% in both cases.
In terms of equities, the two biggest listed lending funds on the stockmarket, Pollen Street Secured Lending (which used to be called P2P Global) and VPC Speciality Lending Investments are respectively yielding 5.8% and 10%. Furthermore, their share prices seem to have stabilised after big selloffs: both funds have returned around 10% in price terms over the last 12 months.
Back in the world of online lending, both Zopa and RateSetter continue to offer investors yields of 3%-6%, depending on the product. And if these rates aren't substantial enough for you, you could even think about more adventurous options. European online lending platforms such as Mintos, based in Latvia but available Europe wide, are worth a look. Since its inception Mintos has lent out over €4bn (from 222,000 investors in over 69 countries) via third-party credit specialists throughout the developing world. This is a much riskier option, but the returns tend to be in the double digits. What's more so far at least there have not been very many defaults.