Platform lending has been with us for around eight years now – ever since the launch of Funding Circle, in fact – but for many investors, it remains an untried concept. Yes, this corner of the financial services industry has grown rapidly since 2010, in terms of those who lend and borrow through the available platforms, but it still seems like a new kid on the block when compared to more traditional investment destinations, such as bonds and property funds.
But according to research published recently by Alternative Finance news site, AltFi.com in association with its sister operation, AltFi Data, Peer to Peer (P2P) lending is outperforming more traditional asset classes when returns are measured over a three year period.
An Evolving Market
The first wave of UK P2P lending sites were originally developed to provide a direct alternative to bank savings accounts, which were (and still are) paying very low rates of interest. Much of the early marketing was aimed at ‘retail investors’ who simply wanted a better return than that offered by their banks, and were prepared to lend collectively to business and/or individuals.
Since then the market has evolved. Today’s ecosystem includes a range of traditional P2P sites along with more specialist platforms, The Route – Finance’s Private Debt Platform being a case in point. The investor base has expanded too. In addition to retail investors, market lending has become an investment destination not only for High Net Worth Individuals but also for institutions. When measured collectively, platform lenders are making a significant contribution to the business and personal loans marketplace. For instance, members of the P2P Finance Association – which represents many but not all of the platforms working in the sector – originated loans of £3bn in the first half of 2018.
That in itself implies that market/platform lenders are doing their job in terms of delivering superior returns to investors. AltFi’s research has put some figures on that assumption.
According to AltFi Data’s Lending Returns Index, P2P platforms delivered a net return of 18.92% to investors between June 2015 and June 2018. This was based on an analysis of data from Funding Circle, Market Invoice, Rate Setter and Zopa, and the figure has been calculated after factoring in losses and fees. The average return not only compares favourably to average returns from bank savings accounts that typically offer 1.5% per annum or less (even after the Bank of England’s hike in rates) but also with many popular funds.
For instance, AltFi cites the example of the M&G Optimal Income fund, which returned a premium of 12.6% to investors over the same period.
But the report goes further than making a comparison between the P2P average returns and named funds. Using data from the Investment Association across more than 200 bond funds – with the numbers crunched by FE Analytics – AltFi notes that to make it into the top ‘decile’, a fund would have to offer a return of more than 18.91%. By that measure, P2P platforms are outperforming 90% of bond funds over the past three years.
These are, of course, averages. Not all P2P providers are the same in terms of their lending and risk criteria and the policies of each platform, to a greater or lesser degree, have an impact on the return to lenders. Or to put it another way, the rate of return depends on what the loan will be used for ( and in the case of businesses, that feeds through to risk) and the creditworthiness of the borrower. There are other factors too. Some platforms secure loans against assets, such as property, others don’t. Again, this will impact on the risks associated with the loan and the returns that are payable.
So in practice, the return from a platform – measured annually – might be as little as 2.0% or more than 10% per annum. Generalist platforms such as Funding Circle and Zopa – which target returns 7-8% and 4.5% respectively sit towards the middle of that range.
So from an investor perspective, it is important to assess the various platforms operating in today’s market, in terms of the likely returns, the degree of risk and also the time period over which money will be tied up. A platform that will be suitable for one investor may not be suitable for another.
For its part, The Route – Finance’s Private Debt Platform specialises in special situations lending. The borrowing businesses are all subject to a thorough due diligence programme to assess the viability of their business plans, their track record as business owners and their creditworthiness. Because their borrowing requirement tends to fall outside the criteria of traditional lenders, they are prepared to pay a premium to access the funding they need. This enables The Route to offer an above average return to its Members who fully understand the risks and the opportunities. As such, it is a platform that is positioned squarely to serve High Net Worth individuals as part of broader wealth management service.
As the AltFi research indicates, market lending platforms collectively represent an attractive opportunity for investors. At an individual level, it is important to choose a platform that aligns with the investment objectives and the circumstances of the investor.
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