Risk and risk management
And, for want of a better term, industry sentiment and general gossip
Below is a quick roundup of the highlights from a sweeping and illuminative debate.
First up, somewhat inevitably: the subject of institutional investment and its impact. To set the scene, Cormac Leech of Liberum first inquired as to the retail/institutional money split for each of the attending platforms. In summary, and in rough terms, the results:
Funding Circle – 30% institutionally funded.
Landbay – 0% institutionally funded, but with the expectation of hitting 80% institutionally funded by the end of the year – owing to
LendInvest – 70% institutionally funded.
Abundance – 99.9% retail – Ecology Building Society being the exception.
MarketInvoice – 45% institutional, 55% high net worth, no retail (for now).
Zopa – 30%-40% institutionally funded in the past couple of months, around 30% over the past year, and between 10% and 15% all time.
Institutional money is being used in a variety of different ways, with variation depending largely on platform type. For James Meekings of Funding Circle, for example, it’s about maintaining a strong supply cycle of capital. Similarly for Giles Andrews of Zopa, institutional money is a useful tool in managing growth – the easiest analogy being a tap that may be turned up, down or off at relatively short notice.
Giles also views institutional demand as a strong “validation” of the investment model that is P2P lending. Indeed, he believes that the intense spotlight of institutional due diligence provides an added layer of security to retail investors – in that they are assured that a given platform has weathered the scrutiny of a professional investment firm.
The topic of bank activity also reared its head. Don’t count Christian Faes of LendInvest among the supporters of the notion that a large bank could simply set up their own online lending operation and overrun the industry. As he and his peers outlined, it might look easy to run an online lending business, but nothing could be further from the truth. Especially for a legacy issue encumbered bank. On the Goldman Sachs lending initiative, opinions were divided. Most agreed that the investment bank stood more of a chance than the big high street brands, but the overriding tone was marked by skepticism.
In the context of Zopa’stie up with Metro Bank, the P2P bosses were asked if a household name bank would soon follow suit by deploying capital via one or more of the platforms. The table’s collective answer was that it depends on the sector. For retail and for SME lenders, it feels highly likely. For mortgages, argued John Goodall of Landbay and Christian Faes, less likely. The reason is that the big banks have not retreated from the mainstream mortgage market in the way that they have from unsecured consumer and SME loans. Commercial mortgages are capital efficient assets to hold, so it’s harder to imagine the banks redirecting funds through an online platform.
Risk and risk management
The Yorkshire Building Society’s recent warning about the riskiness of P2P products likely served as the impetus for the platform chiefs to break down exactly how risky the sector is. For Anil Stocker, CEO of MarketInvoice, it’s flatly wrong to speak of (well-managed) peer-to-peer lending companies as riskier than traditional avenues of capital allocation. The rapid turnaround of MarketInvoice’s book, owing to the short term nature of the loans, allows the platform to adapt to what is and what is not working with unique rapidity. Anil claimed that MarketInvoice has made more loans than any other P2P site in the UK. The data accumulated through these loans, and more importantly the company’s ability to harness that data, serves to continuously improve the lending process.
Bruce Davis of Abundance, who was broadly in agreement, added that P2P lending undoubtedly provides investors with a level of risk – and in a good way. The commensurately higher returns are inflation beating, FSCS covered deposit account returns are not.
We also touched on stress testing, an ordeal that both Landbay and Funding Circle have recently undertaken. James Meekings shared the results: independent stress testing showed that Funding Circle could expect a 50% jump in loss rates, shrinking net yields from 6.5% to 5.5%. Zopa of course has lived through the conditions that Landbay and Funding Circle have attempted to replicate, in the 2008 downturn. During that spell, net yields on Zopa fell by between 75 and 100 basis points.
A brief but interesting segment of discourse lingered on the term “peer-to-peer” and how/whether it ought to be used. Many of the lenders have long since veered away from the term in marketing to borrowers. The products being offered, from a borrower standpoint, don’t appear markedly different from traditional forms of finance. They’re more flexible, and often faster, but the platforms generally steer clear of “P2P” so as not to confuse prospective customers.
Marketing the “peer-to-peer” proposition to investors proved more divisive. Bruce Davis prefers to position Abundance Generation as a retirement income product. Giles, on the other hand, likes the “P2P” hook when talking to investors. He believes it’s a simple method of communicating to lenders that Zopa investments are fundamentally different/social/fair.
Industry Sentiment and general gossip
The juiciest tidbits from the breakfast, broken down into bite-sized chunks:
On re-intermediation: The platforms understand the value of P2PGI-like vehicles. They’re not only connecting the platforms to deep reserves of capital, they’re doing it by producing a fundamentally different product to the underlying loans. Investors in P2PGI are buying into an equity product, one that is made up of a managed pool of carefully selected loans. Many of those institutions wouldn’t be able to access the platforms directly.
On re-intermediation, take two: More skepticism surrounds Orchard-like aggregators, because they don’t provide a different method of accessing the underlying product. It’s still debt, but with an added layer of fees between investor and borrower. The more capital that the platforms are able to attract directly, the less clear the need for aggregation becomes.
On ISAs: The platforms are now eagely awaiting confirmation as to what product they need to build (but it feels likely that it will be a lending ISA). Once the legislation is implemented, “LISA” investors will have to select a single platform to invest in – they won’t be able to assign different parts of their LISA allowance to multiple platforms.
Abundance may look to other assets in the future, rather than maintaining an exclusive focus on renewable energy.
Bruce also suggested that the Abundance model may be considered Sharia compliant.
MarketInvoice will look to unveil a retail facing investment product next year.
Both the P2PFA and UKCFA have fielded interest from overseas applicants.