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.

Alternative finance isn't quite as alternative as it used to be. Peer-to-peer (P2P) lending sites, along with direct lenders, have proliferated. In the UK, they have lent a total of £15bn over the last few years, according to independent industry research firm Brismo, and a great deal more in America and China. Investors have turned to lenders largely because of the promise of decent returns in a low interest-rate environment.

Most headline rates are more than 4%, while according to Brismo yields from lending on the big platforms have averaged around 7%. But that's not a net figure, as you also have to factor back in losses from borrowers defaulting; that takes the net return back to around 4% per annum last year. Those numbers sound realistic. Indeed, both RateSetter and Zopa are offering investors roughly this rate.

Choosing the right platform

The trick is to pick the right platforms. Each one has its own rules, yield profile, and risk structure. This is where lending-platform aggregators come in. They do some of the hard work for investors, selecting the right lenders to work with and then assembling the various options into one master account for investors.

There are three relatively well-established lending aggregators, each with their own distinctive way of doing business. Orca has just launched its own Innovative Finance Isa (IF Isa) product and offers investors direct access to a variety of platforms through one online account. With Orca, all investments are held in the investor's own name, so there is no intermediary fund structure adding additional risks. If Orca were to become insolvent, investors would be given access to their investments.

Goji also offers an IF Isa, but has a slightly different way of aggregating investors' cash. It channels money through a number of bonds, which vary in interest rate and duration. This model effectively uses the bond as the main funding instrument, with money then invested in different underlying lending platforms.

The third major aggregator is called BondMason. This is similar to Goji, but much closer to a managed fund of platforms. In this structure the manager, BondMason, decides which platforms to invest in and then pays out a return. In the case of both Goji and BondMason your primary relationship is with the aggregator who invests and manages your money with Orca, investors funds go directly into a range of P2P platforms within one IF Isa.

So if Orca goes bust, you still have those underlying accounts; but both Goji and BondMason also have extensive protections in place, including living wills and plans to wind down assets, which means that even if the aggregating platform goes bust, you should (hopefully) get your money back.

The aggregators' returns also vary greatly. BondMason has delivered returns of more than 8% per annum, whereas Orca's Pure product has a projected return of around 4.3%. But these figures don't necessarily compare like for like. BondMason invests in dozens of different lending platforms and is biased towards property. It also doesn't have an IF Isa, although it can be used by Sipp investors. Orca channels money into just five underlying platforms and does have an IF Isa. Goji's bonds are largely aimed at professionals and are only available to investors who have taken advice or have a high net worth.

It's crucial to remember that these are risky investments. In a recession losses from defaults will shoot up and even the aggregators could be vulnerable. Accessing your capital might becoming more difficult as well. But for the more adventurous, income-hungry investor looking to do some research in order to boost an income, these aggregators might make sense especially if you can get the income tax free.

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An alternative finance platform, Buy2Let Cars, claims investors can get a bumper return from leasing cars to people with less-than-perfect credit histories.

Car loans are big business. In 2016, says Jim Edwards on Business Insider, UK consumers owed £58bn on car finance 30% of all consumer debt and 80% of new cars are sold with a form of leasing called personal contract plans, or PCPs. All the finance for that comes from banks or the carmakers themselves, but adventurous investors can now get a slice of the action via alternative lending.

Buy2Let Cars is the brainchild of Reginald Larry-Cole, a former car salesman who, as well as wanting to make money for himself and his investors, is on a crusade to bring affordable motoring to "everyday workaday people" people who can't get a lease deal through traditional means. Not people working 16 hours a week at the local takeaway with their income topped up by tax credits, says Larry-Cole. "Responsible people" thinknurses, teachers and police officers "who have found themselves in a situation where credit is poor but they still have disposable income."

The principle is simple. As an investor, you stump up the money for a car. Buy2LetCars buys the car, negotiating a healthy volume discount from the manufacturer. The car is leased to a customer who pays you an agreed monthly figure for three years. At the end of the three years the car is handed back and sold on the second-hand market. Larry-Cole has this covered with a separate venture, PayGoCars. This way, he says, you're getting the retail price for the car, not the wholesale price you might get if it was sold at auction. The investor reaps the rewards: a £7,000 investment will get you a 7% return; £14,000 gets you 9%, £28,000 gets you 11%.

The market is weakening

Very high returns imply very high risk. Buy2LetCars has a default rate of around 3% on lease payments, says Larry-Cole. But he insists that, since 2012, none of his investors has lost any money indeed, everyone has received the return they were expecting. All customers go through a credit check, and cars are fitted with starter interrupts and trackers. If a customer is late with a payment, they are given a series of automated warnings. If they don't pay up, the car won't start. And if the car is stolen, the tracker lets Buy2LetCars know where it is.

The business has matured and been tested at every step from acquisition to disposal, says Larry-Cole. Buy2LetCars has bought and sold more than 2,000 cars since it began, and has a fleet of 1,200-1,300 at any one time. The investor has a charge over the car so if the company goes bust investors carry on being paid the monthly payment and the money from disposal at the end of the lease. The fact you're buying into a depreciating asset is irrelevant, according to Larry-Cole. The customer has a contract to pay you the stipulated sum. And the discount he can secure from manufacturers is such that he's not worried about resale values.

Yet the outlook is deteriorating. The car finance sector is facing "exactly the same problems" as the mortgage market before the financial crisis, according to Morgan Stanley. And the latest figures from the Society of Motor Manufacturers and Traders (SMMT) suggest the new-car market is sagging. The yield may look enticing, but to us this scheme is scarily reminiscent of the peak of the subprime lending boom.

Funding Circle's IPO flop

Share trading app Freetrade launched its no-fee service to customers last week after three years in development. The smartphone app, which has a waiting list of more than 60,000 people, will offer investors UK stocks and ETFs. Users of its basic service will pay nothing; trades will be bundled up and executed at the end of the day. It plans to introduce a premium service for a monthly fee whereby trades are executed instantly. Rather than passing trades through an established broker, Freetrade has gained its own authorisation as a stockbroker and joined the London Stock Exchange, building a "full stack" brokerage from scratch to execute its own trades. It hopes to emulate US share trading app Robinhood, which launched in 2013 and is now valued at $5.6bn.

German digital bank N26 will become the latest entrant to the UK's challenger bank scene, when it opens its current account next month, says Harry Wilson in The Times. The smartphone-based bank will join the likes of Monzo, Revolut and Starling in offering the standard digital fare an app that lets you know instantly what you've spent, with fee-free foreign currency transactions and all the usual bells and whistles. You can choose your own PIN, temporarily lock your card if you misplace it, set savings goals and reach customer services via in-app chat messages. Berlin-based N26 has been active in Europe since 2015 and boasts 1.5 million customers across 17 countries.

Peer-to-peer lending platform Funding Circle floated on the London Stock Exchange last week and has since seen its share price slide by more than 20%. By last Wednesday it was trading at 339p, 22% down on the opening price of 440p. At one point the price fell as low as 327p a 25% loss. Funding Circle was launched in 2010 and has made more than £5bn in loans to small and medium-sized business, mainly in the UK, but also in the US and Germany. It has yet to make a profit.

BillButler is a smartphone app that aims to help you keep on top of household utility bills. Users add details of energy, water, TV and broadband accounts, among others, and can keep track of how much they're spending, pay them directly via the app, and split them between members of the household handy for people who share the bills. The app will also alert you if you can get a better deal elsewhere. It hopes to add home insurance and services such as Netflix by the end of the year.

Can you be trusted to be a sensible investor? The Financial Conduct Authority (FCA) has been pondering whether investors looking to put some money to work in alternative finance are capable of making sensible and informed decisions about the range of products on offer. If they can't, should their cash be channelled into more open, transparent, mass-market products, such as unit or investment trusts or exchange-traded funds?

I realise this all sounds a bit policy-wonkish, but when it comes to the world of alternative finance, especially peer-to-peer (P2P) lending, this regulatory attitude may be about to have a direct impact on your investments. A few weeks ago, the FCA produced a consultation paper entitled "Loan-based (peer-to-peer') and investment-based crowdfunding platforms: feedback on our post-implementation review and proposed changes to the regulatory framework".

These fussy new rules...

Most of the suggestions in the paper are good old-fashioned common sense, designed to make P2P lending more mainstream and less risky. But one key proposal stands out like a sore thumb. The regulators suggest that future P2P investment "promotions" should only be able to target the following groups: those certified or self-certified as sophisticated investors, those certified as high net worth investors, those under advisement from an authorised person, and those who certify they will not invest more than 10% of their net investable portfolio in P2P agreements.

So, to be clear, in the future, if you are a new customer at, say, Zopa, Ratesetter or Funding Circle looking to bolster your income, you'll have to prove you are independently wealthy or a finance professional, or certify that you only have 10% of your portfolio in online lending.

The reaction of many experienced private investors has been negative, to put it mildly. The industry website www.altfi.com, of which I am an executive director, asked for views. M. Thomas said the FCA "has once again demonstrated its antipathy towards individual investors and the original spirit of P2P (to cut out the middleman) these FCA proposals demonstrate a nanny-state mentality people must be protected against themselves".

Another unnamed pensioner added that "as a former company director, I'm well able to decide for myself what investments I make, and have no plans to reduce my current level of P2P lending (30% of my total). The FCA may wish to reflect on the fact that had its predecessor been rather better at monitoring the activities of Equitable Life, many of us would now have less need to consider some higher-risk investments in our retirement."

...wouldn't work

Many investors I've talked to with an interest in alternative finance are deeply troubled. Most simply intend to ignore the changes, even if they come in. And that, of course, is the real problem with any form of regulatory overreach. The intended beneficiaries simply ignore the good intentions and just fib and say whatever the regulator wants to hear. Witness the world of stockbroking, where investors already have to self-certify if they want to deal in securitised options such as covered warrants. Most retail stockbrokers send out pointless forms asking all the right questions about attitudes to risk. Most of them know full well that investors who sign the forms aren't entirely truthful but connive in the charade.

But even if these changes were easy to apply, I'm not convinced they are fair. Is P2P really that risky? In effect, the regulators are saying online lending is as risky as, say, crowdfunding. With all due respect to successful crowdfunding platforms such as Seedrs and Crowdcube, the risk from investing in start-ups is immeasurably higher than that from lending to consumers or even established small companies with clear credit track records. With the former, most experienced investors are used to the idea that a large proportion of their investee companies won't make it. With online lending, most credit investors (institutions are active in this space) don't expect losses to exceed 5%-10%, even in the worst years.

Even if policymakers are worried about risk, there is a better way of managing this downside sharper, smarter regulation. Or as Rhydian Lewis of P2P lending platform Ratesetter puts it, rather than block access, why not "eliminate the high-risk elements of P2P lending and keep it accessible"? Wouldn't it be better to close down rubbish platforms, force through far greater transparency about risks and impose heavy penalties for rule-breakers? Why should the wealthy or financial professionals be the only ones to benefit from an alternative to the lacklustre yields on offer at high-street savings institutions most of which haven't even passed on the recent increase in the Bank of England base interest rate?

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.

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.

Over the last few years the top three peer-to-peer (P2P) lending platforms Zopa, Funding Circle and Ratesetter have grabbed the limelight. They've dominated the news headlines and captured a disproportionately large share of the money coming into the sector. But there are some very worthy second-tier players who warrant attention, especially from the more experienced investor in search of a decent yield. Two in particular stand out: Assetz Capital and Folk2Folk.

Assetz is the bigger by some way. It has lent out £355m to date, while Folk2Folk has lent £176m. But they have several things in common. Both emerged from the "old world" of finance and lending. Assetz was set up by experienced property-market entrepreneur Stuart Law. Folk2Folk meanwhile, was set up by Cornish law firm Parnalls, which had been running a private mortgage book for many years. Both spotted an opportunity in P2P lending and moved fast, building businesses based on the personal touch. Assetz employs regional representatives who visit business customers and make credit risk decisions; Folk2Folk has physical branches these are mainly in the southwest, but it has recently expanded into North Yorkshire. Both lend to small businesses, and both lend only on a secured basis.

In each case, the record of defaults and late payments is pretty impressive. Folk2Folk says it has had no defaults and only a few late payments. Assetz has had slightly more defaults (current arrears over 45 days stand at 0.52%, although this went as high as 0.89% in 2014). Nevertheless, its losses to date do seem manageable. Those numbers will, of course, change in any future recession.

Assetz has stress-tested its default estimate and reckons it should allow for a four-fold increase in defaults, which is reasonable. Assetz is using that number to help manage a provision fund which aims to soften any losses to investors that result from defaults on this basis no investor has yet lost money from defaults or arrears. Folk2Folk does not offer a provision fund.

Both platforms offer a sensible choice of investments. Assetz has the biggest range of accounts, paying between 3.75% and 7% a year. The differential is largely accounted for by the duration of the investment the easiest access account offers the lowest rate. Folk2Folk offers products paying between 5.5% and 6.5% a year all of its loans have at least a 60% loan-to-value ratio. Folk2Folk offers its own innovative finance Isa (IF Isa), while Assetz says its own IFIsa is coming soon.

All of these accounts are at the higher-risk end of the market, so returns are not guaranteed. The real measure of success will be in a downturn when defaults and late payments will almost certainly shoot up and the quality of past lending decisions will be put to the test.

In the news this week

It's no secret that the blockchain is the hottest thing around right now, with the potential to transform almost any industry you can think of. However, it's also clear that investors' excitement is increasingly leading them to act first then glance at the fundamentals later. Last week, for example, one small UK firm found a way to leverage blockchain's potential without writing a single line of a smart contract. The group, an Essex-based Aim-listed company that invests in internet and IT businesses, saw its share price rocket by nearly 400% in one day when it announced plans to change its name from On-Line Plc to On-Line Blockchain Plc. The price fell back somewhat after the company said that its "development of a blockchain product is still at an early stage of investigation and development", but it remains more than 180% higher than before the name change. So much for efficient markets.

Peer-to-peer lender Zopa has successfully securitised a second tranche of loans, according to P2P Finance News. The securitisation packaging consumer loans and selling them to investors was arranged by Deutsche Bank and led by alternative-finance investment trust Peer to Peer Global Investments (P2PGI). Some 31,000 loans held by P2PGI, with an average value of £7,488 each, an average interest rate of 7.2% and a total value of £208m, were securitised. The proceeds will be reinvested into P2PGI's portfolio. It is the second securitisation of unsecured Zopa loans, after £138m was packaged up in September 2016.

Dave's payday loans

Over a quarter of Americans have "overdrafted" their accounts in the last year, according to a new app available in the US and one in ten have done it more than eight times. The app, called Dave, aims to cut the cost of going overdrawn an average of $34 a time by offering interest-free overdrafts. Users link the app to their bank account; Dave monitors their spending and warns if it looks like they are about to go overdrawn. It then asks if they want to borrow $25, $50 or $75 until they get paid. For this, the app charges $1 a month, but users can opt to give a "tip" of between 5% and 15%. Tips, Dave claims, can support the business "almost entirely". For every percentage point of a tip, Dave plants a tree in Africa through a partner charity.

It's been a busy time for funds investing in peer to peer lending. Funding Circle has succeeded in launching its first investment trust, raising £150mfor a fund that invests solely in its loans, with a target yield that will probably be around 6.5%. This is an impressive achievement, especially when you compare it to the other big bit of news, which was that investment manager Ranger pulled its imminent C issue of shares the target was to raise £135m.

Our guess is that we'll now see an extended pause for fundraising. The chart below from investment trust analysts at Numis shows the sheer weight of money raised over the last year we'd wager that we'll see no new issuance for at least another six months.

The table below, also from Numis, shows the seven funds now vying for attention in the P2P lending arena as you can see from the target dividend yield column, the range is between 6% and 10%, with an asset-weighted average somewhere between 7% and 7.5%.

The big table below gives average yields for a very wide range of funds, including those that invest in equities (equity income funds), as well as other alternative credit structures including infrastructure, and asset backed loans.

I've also included the yield for the iShares ETF that invests in a broad range of UK sterling corporate bonds the yield on this is currently running 3.43%, and is a good indicator of likely returns from investing in corporate bond funds.

On the theme of bonds, an investment trust called the Twenty Four Monthly Income fund is also separately included with a yield of over 6%. This is a fascinating comparison as this highly regarded fund invests in asset-backed securities, and especially mortgage-related securities ie riskier, more complex credits that are not entirely dissimilar to direct loans.

You'll also see at the bottom of the table yields from investing in three-year products provided by Ratesetter and Zopa, plus the average return for investing in Funding Circle's loans. Lastly, we've also included the best composite measure of returns from investing in P2P loans the LARI index run by AltFi Data, which looks at trailing 12-month returns from investing in loans on Zopa, Ratesetter and Funding Circle.

P2P funds compared to investment alternatives

Obviously, when comparing yields in this very simplistic fashion, we need to make some very important observations.

Bonds on average will probably be less risky than loans, because they're issued by major institutions with a solid credit rating. That means they will inevitably yield less.

Equities will also inevitably yield less, but that's because you also have the potential for capital gains. Direct-lending funds or P2P-lending funds are shares, and trade like equities but it isn't investing in equities (although there are some small equity stakes within these funds). You are highly unlikely to make very large capital gains from investing in P2P-lending funds, whereas invest in the right equities and you could easily make 5%-10% a year in bullish markets

Investing directly in platforms such as Zopa and Ratesetter does come with some protections both have their own funds that should protect your capital if defaults do start to rise. This back-stopping is not available in the listed funds.

Reits (real-estate investment trusts) in particular are an interesting contrast. These invest in commercial property, which gives these funds significant asset backing underlying P2P loans by contrast rarely come with the same level of explicit asset backing.

Given all these important observations/caveats, what to make of the range of returns from alternative funds?

In aggregate, it appears that you are receiving a roughly 4% premium in yield terms for investing in loan funds compared to bonds (relatively lower risk) and equities (higher risk). When compared to investing in individual P2P-lending platforms that premium shrinks considerably to just a few per cent and bear in mind that with both Zopa and Ratesetter you still get those protection funds.

As we observed last week, investors need to weigh up whether a direct investment in a platform is the better bet versus a fund. With a platform you get easy access to your money, no exposure to the stockmarket, the possibility of some protection for your funds, and no transaction costs. With funds, you get a diversified set of underlying investments, proper managers looking after risk, and global diversification.

We'd make one last observation: we're inclined to think that direct lending and P2P loan funds don't compare terrifically well with alternative credit vehicles such as funds that invest in asset-backed securities, secured loans and asset leasing. This latter mix of structures tend to return between 4.5% and 7% per annum and contain within them loans to much bigger organisations, usually with some form of explicit asset backing. This broad alternative credit spectrum they are nearly always loans to a corporate in one shape or another looks to offer a decent yield. The downside is that these alt credit funds are more complex, and invest in structures that sometimes confuse a rocket scientist but the yield is a decent return for the opacity.

This article was first published on AltFi.com

Over the next couple of weeks, we're going to shine a light on the fast-expanding mini-universe of London stockmarket listed funds investing in P2P loans and direct loans to small businesses.

Using numbers from investment trust analysts at Numis, we can clearly see from the various detailed tables below that this universe is now valued at over £1.5bn a remarkable number, given that just under two years ago there were no funds at all not the six that feature in the tables below.

Just to recap on why this sector has expanded as it has. The original fund and still the biggest by a very long stretch at a market cap of just under £900m was P2P Global Investments, managed by Eaglewood Europe and backed by hedge fund Marshall Wace.

If we look at the original investment strategy for this market leader, we can see all the arguments for investing in a fund. In simple terms, you get diversified access to lots of different platforms in the UK and globally, with customers that range from consumers through small businesses. In one fund, you in effect, get access to tens of thousands of different loans.

These are, of course, income-focused vehicles, with the yields (or at very least targeted yields) varying between 6% and 10%, depending on the underlying borrower.

Obviously, these rates seem very attractive when compared to the market leading P2P lending platforms such as Zopa, Ratesetter and Funding Circle. The first two are focused on consumer lending, and don't offer anything above 6%, whereas Funding Circle does offer the prospect of a blended yield of between 6.5% and 7%. Most of the funds here offer rates above that level, but you also need to remember that you are taking some specific risks with a listed fund.

In no particular order, we'd remind you that

You don't benefit from any protection fund offered by the likes of Ratesetter and Zopa

You're also investing in a share that is traded on the stockmarket which can be volatile in price and expensive to trade (broking fees, bid/offer spreads and fund management fees can all add up)

You are also particularly vulnerable to a fund moving from a premium to a discount. This sounds complicated, but simply describes the relationship between the total value of assets in the fund and the market value or capitalisation of the entire fund. If the market cap is valued at more than the underlying assets, the fund is trading at a premium, with the opposite a discount. Shifts between premiums and discounts can be dramatic and can damage your wealth. Take P2PGI for instance. If you'd have bought at the height of its premium you'd have endured a 19% premium, whereas now the fund trades at a small discount. For more details on this see the first table below.

There is no right or wrong way to invest in P2P lending. Some will prefer the direct platform approach, others (especially institutions) the fund approach.

What we would say is that there has been a dramatic de rating of the sector by market investors. Premiums across the sector were very high at one point probably unsafely so in our opinion. Now we can see that all six funds bar one, are trading at a discount. Our sense is that these vehicles should only ever trade at either the net asset value or slightly under.

The good news is that all the funds seem to be hitting their yield targets, with most paying out quarterly. But we'd also observe that the bid offer spread the difference between the buying and selling price per share is rather high in some cases with GLI Alternative Finance at over 2% (although it is the smallest fund in the space).

How have these funds performed? The next table below again from Numis tells a worrying story. It shows price returns over various periods not changes in the underlying net asset value of the loans. We've also included the various additional C issues for VPC and P2P (with Ranger currently also looking to raise extra money). Pretty much across the board we've seen noticeable price declines over the last month (figures are through to Thursday 19th November) and even bigger losses over the six month period. Over the last year P2PGI is down by 4.2%.

These are meant to be permanent capital vehicles which means that 1 or 6 month performance numbers should be taken with a pinch of salt and arguably shouldn't matter anyway for those with a 5 to 10 year time horizon and those price returns also ignore the dividends you would have banked. We'd also observe that changes in underlying NAV aren't substantial which all points to one important story many investors might have sold the shares because they thought the premiums were too high. We'd be worried if these price declines continued in the next six months and discounts started moving beyond 5 or even 10%. At the moment though we think the story is a simple one investors have become more realistic about the sector and stopped putting silly prices on the shares.

Another important fact is that all these funds operate with very different mandates. The table below shows the websites for each of the funds. We'd suggest that all readers visit these online, check out the monthly fact sheets and statements and really understand what you might be putting your money into. GLI Alternative Finance for instance is very focused on small business p2p platforms from within the GLI Finance stable. That's very different to Ranger which doesn't focus on p2p loans at all, and prefers to make direct loans. Both VPC and P2P GI are much broader in focus and lend to both consumers and businesses. These latter two funds are also very much bigger and truly global.

The one area where there isn't much variation is in charging nearly all the funds (again bar GLI Alternative Finance) charge a base management fee of 1% plus performance fees in some cases. This isn't extortionate but it's not cheap. Many bond funds for instance stuffed full of fixed income investments look to charge well below 1% although these securities are arguably easier to research and trade in. If discounts do start to grow we wouldn't be surprised to see pressure on those fund management costs, perhaps pushing them closer to 0.75%.

The one good bit of news summed up in the table below which also looks at fees is that the big institutions that backed many of these funds still seem to be on board'. Neil Woodford's fund management business is a sector champion as is Invesco, Aviva and M&G. We'd hope these big shareholders stay loyal, and over time we'd expect more funds to emerge.

Our bottom line? Next week we'll look at these funds in comparison against other obvious alternatives such as bonds and mainstream equities plus investing directly in platforms such as Zopa, Ratesetter and Funding Circle. But without wanting to steal the thunder of that forthcoming article, we'd say that the recent price declines are healthy and have helped put the whole sector on a sensible even keel. Big premiums to net asset value were always dangerous and we're glad that the sector is now trading back at a bit below par. If those income targets can be met, big institutional investors will probably remain committed although no one really knows what impact rising interest rates and even a recession could have on the underlying business dynamics of the fast growing p2p lending markets.

This article was first published on Altfi.com

George Osborne shied away in his Budget from including peer-to-peer lending (P2P) in the Isa framework, but platforms specialising in such lending remain quietly confident their day will come soon.

Hopes that Osborne would allow P2P lending schemes within an Isa perhaps even launch a special Lending Isa' (Lisa) specifically for them were raised by his 2014 Autumn Statement in which he said the Treasury would consult on the proposal. Expectations across the P2P world were high ahead of this week's Budget, but in the end Osborne put off reporting on the consultation till the summer.

Should the fast growing P2P lending sector worry that it is being fobbed off? Should it fear that the lack of a go-ahead from Osborne this week means the government has cooled on the idea? Giles Andrews, chief executive and co-founder of Zopa, launched in 2005 and the UK's oldest P2P lending platform thinks not. He believes it is understandable for the government to be taking its time: "Including P2P lending within the Isa framework is far more complex than just adding a new category, so it is better to get it right than to rush it through."

Osborne seems keen on allowing P2P lending in Isas if the details can be worked out. But with the general election looming, surely Andrews is concerned a change of government could mean the proposal being put on ice indefinitely? Again, he remains positive: "There is strong cross-party support for including P2P lending within Isas as it is being driven by the Treasury and will continue to be worked on irrespective of who wins the election."

The peer-to-peer lending sector through which loans from individuals are channelled to borrowers including companies in return for relatively high rates of interest may be tiny compared to conventional bank lending but it has experienced remarkable growth. According to a report published last December by UK innovation think tank Nesta, P2P lending to companies last year totalled £749m, while P2P lending to consumers totalled £547m. For the period 2012-2014, growth for the two have average 250% and 108% respectively, and Nesta expects this strong performance to continue.

The sector is tapping into huge disenchantment with high street banks among borrowers and savers alike. By cutting out the middle-man conventional banks platforms such as Zopa can offer borrowers slightly lower rates, and savers much better returns. The platforms themselves get their cut of the action by charging a fee.

Certainly, the potential returns for lenders look very attractive compared to the pitiful rates offered savers by banks. The longer you are willing to have your money away, the higher the returns. Zopa, for instance, is offering 4% for three years and 5.1% for five years.

Handsome returns but beware of the risks

Zopa's Andrews is clear about the risks associated with P2P lending: "It is a relatively low risk investment but still carries some risk as you may experience the occasional default and your capital is at risk."

He adds: "We [at Zopa] go to great lengths to reduce the risk of lending by having the best credit risk decision models of any bank or P2P lender in my opinion, diversifying your lending across many borrowers so the risk is spread and we have a Safeguard fund to cover any potential losses."

Andrews says regulation for the P2P sector is "extremely important" as it ensures only the most responsible platforms are operating and with common standards and procedures. It also provides a stamp of approval for consumers looking at platforms to lend or borrow from. "Regulation provides additional trust in the industry."

He hopes to hear good news from the Treasury on the Lisa' front this summer. "Including P2P in the Isa framework will be a game changer for millions of Brits who have suffered from poor returns since the financial crash. It would signal that P2P lending has become a mainstream way to invest.

"With cash Isa rates from banks at rock bottom, the real benefit to consumers for including P2P lending within the Isa framework will, I believe, be reliable and predictable tax free returns that will beat most other asset classes.

"We expect huge demand for lending through an Isa and see P2P lending becoming one of UK's most popular ways to grow your money as well as adding revenue to the UK economy through personal and business loans."

Read more Moneyweek articles on peer-to-peer lending:

Peer-to-peer lending is all very trendy but should we buy it?

The P2P lending market is throwing up some exciting opportunities for investors

How to profit from peer-to-peer lending

What Lending Club's float means for peer-to-peer lending

How you could make a small fortune from the peer-to-peer revolution