Savers, investors or lenders – which best describes the individuals putting money to work on peer-to-peer platforms?
The first droplets in the deluge – institutional funds beginning to crash into the alternative finance space.
The evolution of investor protection – what’s next on the horizon?
Exciting Developments
One of the key premises of the AltFi Summit in March was that 2014 was to be the year that institutional money would begin to pour into the sector – and that AltFi would thus serve as the meeting point for wealth managers, VCs, family offices, etc. and the major alternative finance platforms. With the recent listing of P2P Global Investments leading the way, the institutional money has now well and truly arrived.
A mandatory bank referral system – which may well have been sparked into life by the words of Vince Cable at AltFi – also appears to be on the way. While the Queen’s Speech did not explicitly confirm the referral system, as some had suggested it would, the general consensus is that this is merely a delaying of the inevitable.
ISA inclusion has long been a talking point for the p2p industry – and was agreed to by government in March. While the kinks and logistics are still being worked out, make no mistake – the peer-to-peer ISA is coming.
Broadly speaking – the above developments were not only long anticipated/lobbied for, but the arrival of each has either been necessarily gradual or has suffered setbacks along the way. For instance, and in a close parallel to the recent Queen’s Speech disappointment, many initially expected peer-to-peer investments to be allowed within ISAs as part of the Budget in December last year.
But a number of exciting recent occurrences have appeared with a suddenness that perhaps betrays their true significance.
First and foremost, the groundbreaking partnership between Santander and Funding Circle – which has been whispered about for roughly a year but which arrived in a flash. The relationship will essentially be one of reciprocated referrals – Santander referring SME borrowers to Funding Circle,Funding Circle directing its borrowers to the day-to-day services of Santander. The Spanish bank is essentially jumping the gun on what the UK government is considering making mandatory for all high street banks. As one astute observer recently commented to me – Santander would rather see its customers redirected to an alternative finance provider than to a direct competitor such as another bank. As for Funding Circle, the positive impact of the partnership could be enormous.
Furthermore, also on the peer-to-business front, ThinCats made history by becoming the first platform to allow lending through a SIPP. The platform is offering the unique product through a union with the financial portal SIPPclub. At present, ThinCats is the sole platform equipped to facilitate investments via SIPPs. However, it won’t be long until more platforms follow suit – indeed Samir Desai confirmed last week that it’s something Funding Circle is already looking into. As for the scale of the opportunity – perhaps the greatest benefit to the industry of SIPP inclusion will be its effect on financial advisers. Guy Tolhurst of Intelligent Partnership explained:
“We are witnessing an understandable trepidation from SIPP Operators towards the inclusion of p2p, a third thematic review with a focus on investment inclusion and FCA ‘investment restrictions’ have narrowed the SIPP route for p2p platforms. The vast majority of advisers still proceed with caution when recommending anything deemed as ‘non-standard’; implicit endorsements such as ISA and SIPP inclusion will undoubtedly help. However there is still a lot of adviser education and access to verifiable data required if we are to start seeing p2p becoming more intermediated; but with advisers having £590billion of assets under influence it’s hard to ignore as a route to market.”
Finally, in what is perhaps a less dramatic but nonetheless relevant event, the P2PFA has now announced a standard method of calculating defaults for its member platforms. This standardization will bolster transparency within the industry and will be welcomed by the major platforms – which understandably are keen to make sure that the disclosure of information always occurs on a like-for-like basis. Investors will be able to gauge with far greater certainty how the various platforms are performing. This is a natural and positive progression for a fast-maturing industry.
Savers, Investors or Lenders?
One issue that seems to crop up repeatedly: how best do we refer to the individuals putting their money to work in the peer-to-peer space? Whilst it perhaps isn’t a problem of great magnitude, it would be prudent for the sector to standardize its terminology (just as it now has with its default calculation methodology). For me, it’s a two-horse race between “investors” and “lenders”. The issue with the term “savers” is that it might lead platform users to misjudge peer-to-peer lending as directly comparable with a traditional bank deposit account. But as Rhydian Lewis of RateSetter acknowledged on the BBC Radio 4 Today Programme a few weeks back – peer-to-peer investments are very different to traditional savings accounts. The primary reason for this is that p2p investments are not underwritten by the state guarantee – the FSCS protection that covers traditional deposit accounts for any losses up to £85,000.
It will be an interesting evolution in terms to trace. I suspect though that “savers” may soon be phased out by the various p2p platforms.
The First Droplets in the Deluge
As referenced earlier in this piece, institutional money pouring into the alternative finance space is something that’s long been anticipated. There’s been a steady stream of major investments into the various platforms throughout the year – beginning with a £15 million investment into Zopa from Arrowgrass Capital Partners back in January.
By way simply of keeping up to date with the ever-mounting tide of money, here are the latest developments:
Roughly a month ago now P2P Global Investments closed a successful placing – raising £200 million from the issue. The Marshall Wace-backed fund will invest across the peer-to-peer space – targeting an annualized dividend yield of at least 6% to 8%. P2P Global Investments has already established relationships with Zopa, RateSetter and Funding Circle.
GLI Finance – the specialist SME finance provider – recently announced the sale of two CLOs – freeing up £20 million. Geoff Miller explained how the money will be deployed:
"We will be utilizing the cash proceeds primarily to acquire loan assets originated through our family of platforms, with part of the proceeds going towards further equity investments in both existing platforms and potentially the equity of further platforms."
I’m sure a number of up-and-coming platforms will be champing at the bit to volunteer as one of the “further platforms” alluded to by Mr. Miller. Look for stories relating to large investments into and via alternative finance providers to skyrocket over the second half of the year.
The Evolution of Investor Protection
The launch last week of peer-to-business lender ArchOver – tabbed as the world’s first secured and insured p2p offering – got me thinking about the various investor protection measures employed by the platforms. Investor security is a constantly evolving space within alternative finance; emerging platforms often come equipped with a unique twist designed to outdo the efforts of their predecessors. Below is a very general outline of the journey thus far:
2005 – the world’s first peer-to-peer platform Zopa arrives on the scene and sets the mould for how platforms protect investors. The cornerstones? A stringent vetting process for borrowers and diversification on loans to spread the lender’s risk.
RateSetter launched in October 2010 and introduced something new – the provision fund. Comprised of a fee paid by the borrower as part of every loan, the provision fund has ensured that no saver has ever lost a penny on the RateSetter platform. It wasn’t long before other platforms emulated the scheme. Zopa now boasts a “Safeguard fund” of its own, and a number of more recent entrants also feature a contingency fund of sorts.
Next in the cycle came the advent of securitized lending. 2011 signaled the arrival of both MarketInvoice and ThinCats. Marketing Invoice – the leading online invoice funding platform – allows investors to purchase invoices from blue-chip debtors for roughly 80-90% of their value. That investor will then be paid the full value of the invoice over generally a 30-90 day term. The security here is the invoice itself. ThinCats is the second largest peer-to-business lending platform. All of its loans are secured against an appropriate asset. Assetz Capital were the first peer-to-peer lender to move into the property development arena – thus offering what they believe to be a superior form of security in a charge over land or property.
Wellesley & Co., who began operations less than a year ago, arrived on the scene with another new innovation: skin-in-the-game lending. Wellesley & Co. risk their own capital as part of every loan on the platform, and in the event of a default they dip into the platform’s provision fund only after all independent investors have first been reimbursed.
Most recently we’ve even seen an insurance element materialize. Lending Works were the first platform to pioneer an insurance-based model. The Lending Works Shield insures against borrower defaults, cybercrime and fraud. The Shield is a combination of a reserve fund that protects against borrower defaults and an insurance policy that protects lenders in the event of a major economic downturn. As mentioned above, ArchOver – which launched last Friday – is providing the first insured and secured peer-to-peer lending product. The platform registers a first charge over the borrowers accounts receivable – which must be maintained at 125% of the loan. That debtor book is then insured through Lloyd’s of London.
With new methods arriving as recently as last week, further innovations in investor protection are inevitable. Yet another thing to stay abreast of within the vibrant world of alternative finance.
To contact Ryan with questions, please email ryan@altfi.com
