The peer to peer market has been through a period of rapid growth and is really coming of age. There are, as with most teenagers, some growing pains to deal with, but it’s indisputable that change is on the horizon.
Most peer to peer platforms came about when tech advances meant using internet technology could provide a way of getting a large crowd of people to invest amounts they could afford to lose into loans for individuals and businesses. This is why the entry level investment was set low. ThinCats was set up slightly differently when a group of private investors took their “club” online and it means we do things a little differently – we have higher minimum investments of £1000 in keeping with our focus on our sophisticated investor base and we use sponsors to provide an added due diligence. But we do share common peer-to-peer principles.
To date, peer to peer has filled a gap in providing funding for new ideas and businesses that the big banks won’t finance. But changes are afoot. For some time peer to peer has been an investment of choice for sophisticated individual investors and now a huge amount of institutional capital looks set to hit the sector. If we look across the pond to America, where institutional finance is more established in the peer to peer sector, we can see that it was the source of 80-90% of loans on the biggest platforms. Could peer-to-peer become mainstream in the UK? The evidence suggests so, indeed this could be a game changer for the industry.
Institutions like to intermediate, pooling money to spread risk and undertaking further due diligence to justify their fees. In return, they bring a lot of capital and will open up peer to peer borrowing to a much wider market, making it possible to secure much larger loans. This all sounds very positive but there are some fundamental drawbacks too. As peer-to-peer platforms grow they are moving away from the ‘crowd funding’ ideal invented by Zopa and there is a danger that the private investors will get squeezed out.
Change is inevitable. It’s self-evidently true that having ten large professional investors is much easier to manage than 10,000 individuals who each have their own individual investment objectives and views. It may be that in the not-too-distant future the only way for small investors to get involved is through a managed fund. This will remove their autonomy and their ability to invest in the businesses that they select. It will also go hand-in-hand with a reduction in returns to lenders as huge amounts of money compete over a limited pool of opportunities to lend and drive down rates because the funds will also be taking their cut of the profits.
In light of a move away from the principles of true peer to peer platforms, the question of what the market will look like in five years’ time, as it moves to maturity, is a complex one. So long as barriers to entry remain low there is likely to be a steady stream of new platforms offering ‘traditional’ peer-to-peer lending but they will always be niche players and their success will depend on deal flow and access to lenders.
At ThinCats, we are looking at how we can preserve and expand the base of investors who made us what we are today and try to match the new institutional investors. The next six months will be pivotal.