By Daniel Lanyon on Friday 17 June 2016
It has been a tough month for investors in P2P and direct lending trusts in terms of market sentiment but the outlook is stronger than ever for closed-ended funds in the space, argues Eaglewood’s Simon Champ in our exclusive interview.
Greater opportunities exist for P2P/marketplace lending investment trusts following recent market turmoil for platforms in the wake of scandal at the largest US platform Lending Club, according to Simon Champ, manager of the P2P Global Investments trust.
The news last month that chief executive officer of Lending Club Renaud Laplanche was being pushed out over allegations of impropriety sent shock waves through the P2P/marketplace lending industry as many investors pulled back from buying its loans and dumped its stock. An internal investigation found loans’ underwriting had been falsified under Laplanche’s watch and he had failed to flag up a conflict of interest in holding money in separate investment fund that was buying Lending Club’s loans.
Performance of Share Price over 3 months
For funds that buy Lending Club’s loans, such as the largest investment trust in the UK space offering this exposure - the £868m P2P Global Investments, this was concerning. One the one hand this puts into question the credibility of the source of some of their loans but also it could make investors in shares of the investment trusts more bearish on the nascent asset class altogether.
As the table below shows, discounts to net asset values (NAVs) of the five main trusts have widened as a consequence of the news.
|Trust||Discount 1st May (%)||Discount 17th June (%)||Current Yield (%)|
|VPC Speciality Lending||-8.63||-16.9||9.5|
|Ranger Direct Lending||-9.35||-9.5||10.5|
|Funding Circle SME Income||-0.34||-1.6||-|
|GLI Alternative Finance||-4.53||-6.8||8.5|
However Simon Champ, who manages the P2P Global Investments trust, says while this is disconcerting, closed-ended funds such as his have been given a strategical advantage over other institutional investors.
“The recent market turmoil has created better opportunities in negotiating multi-year contracts with platforms. We have 18 platforms and we therefore have 18 opportunities to create new terms with some of them that might mean we could buy cheaper and earn stronger yields, for example, and confirm our position with the leading platforms as a premium buyer,” he said.
“But we could also achieve greater returns because some of those platforms are raising rates. I want to be exposed to the ones that are raising rates.”
“It is at times like these, when our capital is sought after, that we can use that advantage to strike a better deal with the platforms that will maybe offer better returns to our shareholders into the future. That has got to be a good thing.”
P2P Global Investments tends to buy only the loans rated most highly by platforms from lenders with good credit ratings that are therefore lower yielding than ‘riskier loans.
The worry of capital flight has prompted several platforms to raise interest rates across their loan books and this means, all things being equal, they are more enticing investment propositions. As investment trusts have ‘permanent capital’ they do not have to meet redemptions from investors unlike open-ended funds.
Therefore, there is the opportunity to barter more choice deals with platforms over several years as platforms desire return, and regular business. By ‘dangling’ this reality to platforms in current market conditions, platforms may be more inclined to offer better rates to investment trusts than to hedge funds, for example.
“The platforms are eager for cash in order to grow. They might do better deals with us. So I’m quite excited by the outlook that we can do quite well with the new capital that goes down over the coming months. Recent events highlight the value to investors of a strong fiduciary manager. There are great opportunities created by dislocation that we are uniquely positioned to take advantage of,” Champ said.
There is still the issue of the share price however and the rhetoric of Champ and the trust’s chairman Stuart Cruickshank - speaking at last week’s Annual General Meeting - is that now is not the time to use capital to defend the share price by buying back shares but instead to deploy capital to the platforms strategically.
“The shares being at a discount concerns me greatly, but it seems to be more a reflection of the market view of finance in general, and lending club, articulated through my share price, than it does anything to do with our underlying return,” he said.
However, this could potentially start to happen, they indicated, when cash is fully deployed and the trust is fully leveraged.
“We have about £400m to be deployed to get to 100 per cent leverage, we could arguably see that capital go down at better rates than we saw before. It [P2P GI] is going to through a phase of getting towards full deployment. We have had positive returns in all 23 months we have been around. There aren’t many funds that do that. We are confident of achieving our targeted returns at full deployment.”
This will include Lending Club loans says Champ, as he is satisfied the results of an external audit in the wake of Laplanche’s exit demonstrated their loans were sound. Lending club said it was going to be raising rates on its prime loans by an average of 40 basis points.
“Our Lending Club loans are performing in line with our expectations. We monitor them daily. It has not been a normal month in terms of sentiment and the wider market but our loans continue to perform.”
The latest platforms the fund has signed up are in New Zealand and Australia and Champ says they are also open to new platform exposure as well as new areas of alternative finance such as trade finance.
“We are looking at new platforms but you cannot 'de-worseify’ [as opposed to diversify] and add for the sake of adding. It does not necessarily create value. There are strategic areas we would like exposure. Europe remains behind the curve. We don’t yet invest in places like Central Europe, Sweden, Norway Denmark etc and it would be good if there were a good platform but there isn’t.”
“Trade finance is an area of banking that is wonderfully ‘dis- intermediateable’. We haven’t yet seen scale of reliable quality platforms involved in that area that can give us the scale we want as yet.”
The fund is also looking to move more into loans from small and medium sized businesses.
Champ says he has a strategic goal to bring down US consumer down to about 50 per cent of the book. It is currently close to 60 per cent.
“We want to bring that down, and bring secured lending up. We want to add more in Europe too, in time, as and when quality prime opportunities arise. In a world where $9trn of sovereign bonds are trading at a discount, where the European Central Bank has started buying corporate debt, and billions of dollars of corporate debt trades at zero, which is amazing, here we are saying we believe we can achieve 6-8 per cent returns from lending to prime borrowers. It is quite a rare message.”