Is The P2P Leopard Changing Its Spots?

This year alone, of the Big 3, Ratesetter has got into corporate loans, Funding Circle has introduced a new higher-risk band and Zopa’s rate spread (a proxy for risk appetite) has increased. This trend is also reflected outside the leading players.

Platforms are growing rapidly.

As Sam Griffiths of AltFi Data – he who knows more about the numbers than anyone - wrote:

    “The key theme that we found as we examined the trends in loan origination is diversification – platforms are evolving and maturing, lending different types of loan to different types of borrowers at a greater range of rates.”

So there is no doubt that the leopard is changing its spots.

The more challenging question is “what does this mean for investors”?

We are all familiar with the bureaucratically-mandated phrase we see all over the investment management world – “the past is not a guide to the future”.

Of course like all PC, tick-box, state-speak, scratch the surface and not only is it valueless, full of pomposity but signifying nothing, but it’s also wrong.

The past is our only guide to the future!

Well unless you have a crystal ball.

The simple question is how much of a guide to the future the past is.

In a slowly-changing world without much discontinuity the past is a very good guide to the future.

In a rapidly-changing world with discontinuities the past is far less of a guide to the future.

Generally the “risk disclaimer” is seen around investments by way of managed funds. A fund manager will show their past performance and have to say it’s not a guide to the future – well were that to be true why do they show past performance and why would we read it?

But active investment management and P2P are very different beasts.

In the first case an investment manager is actively trying to choose investments to beat an index [and the vast majority don’t succeed]. In this case there can be little predictability – several years of outperformance can come to naught overnight.

However, P2P is much more akin to manufacturing. It creates loan assets. Other things being equal (and they rarely are) a P2P will be more like a factory, a machine, churning out similar products one day to the next. Like all manufacturers they are subject to problems of quality control but we can expect more predictability of performance barring discontinuities.

These assets themselves have a large margin of safety in terms of yield over the alternative of cash deposit rates. If you consider cash the relevant benchmark then – for the sake of argument - risk-adjusted, you might expect to be getting many percent over the benchmark as the neutral “performance”. So there is already a nice fat buffer against minor issues in quality control.

But as Heraclitus and the Buddha pointed out everything changes.

Whilst the leading platforms would appear to offer excellent returns today, and we assume tomorrow, in a rapidly growing and changing industry investors need to stay alert to when this changes.

In all investment activity you don’t actually know what your return is until you get your money back. 

Cash out X, cash back Y.

The longer the gap between X and Y the greater the risk and the greater the unknowability.

Personally I would be very cautious about committing unsecured money to longer and longer maturities for a few basis points more return.

Things go wrong in time, and the more time the more that things can go wrong – not just the expected but the unexpected.

Think back ten years – the financial world looked very different. What will it look like ten, or even five, years from now?