Feature Alternative Lending

Should P2P and alternative credit funds be part of your Brexit strategy?

The polls are neck and neck. It’s too close to call either way but should the United Kingdom vote to leave the European Union it is fair to say the implications for investors could be profound. Sterling could weaken, uncertainty could cause a correction in stock markets, a rally in bond yields, a cloud of uncertainty over commercial and residential property and a run for safe havens such as gold.

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But what about funds or direct exposure to p2p/marketplace lending?  Investor interest in this space has massively increased in recent years with two main routes for exposure: through a platform such as Ratesetter,Zopa or Funding Circle or via one of the many investment trusts or funds invested fully or partly in platforms loans.

Examples of these include P2P Global Investments and VPC Speciality Lending – both investment trusts – but also several open-ended funds such as CF Woodford Equity Income and Invesco Perpetual High Income which have some small exposure to the two trusts.

General risk aversion is likely to increase in the short term of a vote ‘Leave’ making sovereign debt yield much less than its current meagre returns. Higher quality bonds would also be expected to strengthen with equities hit hardest, especially in the UK.

Monica Tepes, director of investment company research at Cantor Fitzgerald, says in the event of a Brexit most of the market would sell-off in the short term.

“I see no reason why the P2P/direct lending sector would be immune. However, fundamentally it would make sense for those that have UK exposure to be hurt more (if you think that Brexit would hurt the economy and therefore SMEs and consumers and lead to higher default rates).

Another important consideration is the effect on the UK currency as many experts have warned this could be one of the first causalities of a vote to ‘Leave’. The Bank of England and many others have warned that sterling would be a likely suffer a significant double digit correction.

Tepes says while P2P Global Investments VPC Specialty Lending have broad international exposure they hedge their currency exposure back to sterling so do not benefit from a boost in movements in foreign exchange of their non-sterling investments.

In contrast, she says the £155m alternative credit investment trust Ranger Direct Lending could see a boost to its income pay out.

 “Ranger Direct Lending should fare better, as it has exposure pretty much only to the US and it doesn’t hedge back to sterling so you would have dollar exposure in an environment where sterling is expected to weaken significantly.

Also I would expect those with higher gearing levels to suffer more – again the more geared are P2PGI and VPC, while Ranger has no gearing although it is considering introducing a relatively small ZDP.”

The above seems to already be reflected in the current ratings to some extent – Ranger is on about an 8 per cent discount while P2PGI and VPC are on around 15 per cent.

Polar Capital’s Nick Brind, who manages the Polar Capital Income Opportunities fund which has stakes in P2P Global Investments as well VPC Specialty Lending is bullish on the asset class in the event of a Brexit.

“I can see no reason why P2P/market Lending would not be a good portfolio addition especially if the shares were weaker on the day. I don’t think a vote to Leave will ultimately have a significant impact on returns,” he said. 

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Monica Tepes

Head of Investment Companies Research

Cantor Fitzgerald

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