London Investor Show – Peer-to-peer (P2P) Lending
On Friday I attended the London Investor Show at Olympia run by the London Stock Exchange. This event is mainly targeted at IFAs and individual investors, with a number of small investment companies and services providers exhibiting.
I attended an interesting talk by Paul Moore, the Chairman of Assetz Capital. Paul is previously well known as the HBOS whistle blower, as he raised serious concerns regarding the growth of HBOS before the financial crisis but was ignored by the board and subsequently removed from his position as Head of Conduct Risk for the group.
Paul has recently joined as Chairman of Assetz Capital after conducting what he referred to as “robust and detailed due diligence on the group and their offering”.
Assetz are a Peer-to-Peer (P2P) lending platform, linking investors with those that need to raise capital. P2P lending is a rapidly growing proposition with a number of platform providers coming into the market. It is seen as a powerful new source of banking in a fresh new market, which can compete with existing banks and financial institutions.
What is P2P lending?
P2P lending basically takes banks and institutions out of the lending market and links individual savers directly to those who need funding. It gives investors direct access to the loan market. P2P lending companies work as intermediaries for loans to property developers and businesses through a network of investors.
Multiple investors join together as a syndicate (through the platform provider) to fill the loan with an asset held as security for the loan by an independent trustee.
The platform provider manages all of the paperwork and repayments to investors but will not have any control or charge on the security asset.
The UK market
P2P is a relatively new concept in the UK but the sector is far more developed in the USA. The largest lender in the US, LendingClub, has facilitated $2.7bn worth of loans so far with $203m issued in September this year alone…it’s biggest month to date.
The UK market for the whole of 2012 was judged to be worth £500m and is predicted to grow to £1bn per year by 2015. This shows there is a large amount of potential and scope for growth in the UK market.
Who are Assetz?
The Assetz group have a number of different arms and have been involved in property funding and investment for a number of years. Assetz Capital launched their P2P lending proposition in March this year (2013) and have lend £6m to date. They mainly lend to small businesses and for property development, with the average interest rate so far being about 11%.
What do they do?
Assetz are a platform provider who link those with money (savers) to those who require funding (borrowers). They source opportunities and undertake due diligence and credit risk assessments on those that need the money. They also provide investors with key information to help them make an informed decision about whether to lend their money. In return Assetz take a 1% fee – for example with a loan of 11% pa, 10% goes to investors and 1% to Assetz.
Investors sign up to the platform and can then choose from a wide range of projects to lend money to.
Assetz set a number of criteria which must be met before they will accept a borrower. Loans are accepted with an average loan-to-value (LTV) or 60% and aim for 1% or less rate of default (most banks works to about 1.5%). All funds and security assets are held on trust by Grant Thornton through a 3rd party fiduciary agreement.
What does the investor get?
Investors get a better return that they would leaving their money in the bank or from most corporate or Government bonds, and receive a fixed interest rate on the loan which can give more security for regular income than most equity investments.
Assetz believe that P2P lending sits somewhere between bonds and equities on the risk scale. This is mainly because investors can pick and choose which loans to lend against and build a diversified portfolio to diversify risk. They can pick some higher risk/higher return loans alongside lower risk/lower return loans.
There is also likely to be a liquid secondary market, allowing investors to sell on their loans to other investors through the platform should they wish to exit.
Why is this exciting?
Well this is tipped to be the future of lending. Instead of putting your savings into a low risk/low return savings account or government bond, you can pick and choose loans which offer greater returns (up to 11% pa) whilst still being relatively low risk. It is also possible to invest from as low as £20, making the sector extremely accessible.
But this sector is currently unregulated (it will become regulated by April next year) and open to abuse. Investors have no recourse to the FOS (unless they feel they were misadvised to invest) and no protection from the FSCS. It is essential to work with a well-run provider and ensure that there are safeguards in place should the borrower default on the loan. This is by no means a risk free sector, but it’s definitely one to be aware of and will be making headlines before you know it.
There are a number of providers in the market and a simple internet search (and basic due diligence) is a good place to start.
All the best,
Luke