Why investors should scoop up discounted P2P funds before putting cash into platforms

There is plenty of negative noise around P2P/marketplace lending at the moment that appears to be behind loan volumes failing to meet the stellar growth rates of recent years as well as prompting institutional investors to greater reticence toward the asset class. This is more so the case in the US than in the UK and Europe but the trend globally is clear.

Analysis by AltFi Data shows loan origination has more or less been static across the UK P2P lending industry in 2016. This somewhat contrasts with the rapid growth seen in 2015 and 2014. Any number of explanations are given for this including a broad risk-off attitude from markets as well as the ongoing fiasco at the major US platform Lending Club.

However, for professional and private investors alike who are not dissuaded from the adverse headlines, and attracted by the high yields on offer from investing in the market, there is a clear argument to avoid investing directly on platforms. While this is the normal route for many, buying shares in the investment trusts offering exposure to loans originated from the platforms that are heavily discounted at present arguably makes more sense.

Take for example, the likes of P2P Global Investments which at £868m is the largest investment trust offering exposure to the space. It is currently discounted 20.3 per cent to its net asset value.

Performance of discount/premium since launch

Source: AIC

This means that over time in addition to the 7.4 per cent yield on offer, a narrowing of this discount or perhaps even a move to a premium could significantly bolster returns.

The table below helps to illustrate this.  It shows what will happen to the share price following a 20 per cent return in net asset value alongside changes in the discount/premium. It clearly shows that buying at a discount massively adds to the total return.  

Source: AIC

P2P GI is not the only sizable discount on offer in the space. VPC Speciality Lending is currently trading on a whopping 20.3 per cent discount having also once traded on a premium.  

Performance of discount/premium since launch

Source: AIC

Of course there is always the risk that the discount moves out further. This could be caused by investors going off the trusts even more. Or it could be broader negative sentiment towards equity markets that sees index level selling of the FTSE 250 – in the case of P2P GI – or FTSE All Share selling in the case of VPC Specialty Lending.  This would add to weakness in both trusts’ share prices, and potentially widen the discount.

However, as AltFi reported last week P2P GI has started to defend its discount by buying up its shares using spare cash. Last week it bought £2m of its shares at an average price of 827p, says Monica Tepes, analyst at Cantor Fitzgerald.

This did temporarily lower P2P GI’s discount to 17.5 per cent although it has since moved back to over 20 per cent.