P2P Global Investments sees NAV growth shortfall, slashes management fee

By Daniel Lanyon on Wednesday 27 July 2016

Alternative Lending

The investment trust saw its growth in net asset value fall short of its projected run rate to meet its target yield in the first half of 2016 but the portfolio’s lead manager Simon Champ is optimistic the fund can outperform.

The Lending Club turmoil alongside Brexit induced borrowing and currency volatility were the main causes of weaker than expected portfolio performance for the £869m P2P Global Investments trust, according to Simon Champ, the lead manager of the portfolio.

Aside from the more perilous market conditions apparent around the world in the second quarter of 2016, the marketplace lending and P2P industry was further hit with shockwaves in this period. The departure of Renaud Laplanche, chief executive officer of Lending Club, and concerns over the overall strength of demand and the availability of lending capital had a negative impact on sentiment to the industry, evident by the performance of Lending Club and OnDeck’s (the two publicly listed marketplace lenders) share prices.

The net asset value (NAV) total return of P2P GI, which buys loans origanated by these and other platforms, in the first half of 2016 was just 2.37 per cent. This is below the required run rate to achieve the company’s target dividend of 6-8 per cent on NAV for the full year. During the second quarter of 2016,  when the news of Laplanche's departure hit, P2P Gl's delivered a growth of net asset value NAV of 1.08 per cent.

Champ says a combination of holding more cash ahead of the UK’s vote to leave the European Union to deal with currency volatility, turmoil at US platform Lending Club and less attractive capital leverage options were the main reasons the portfolio did not manage to hit its run rate in 2016 so far.

The first two reasons served to slow deployment of cash and thirdly the ability to get leverage went through a "hiatus", Champ says because of Brexit, with banks not wanting to sign deals in advance of the vote. 

"The [past] quarter was undoubtedly challenging, although we take some comfort that we mitigated some of the risks and protected investors' capital from some extreme volatility in currency and fixed income markets to deliver a positive return in NAV in each month,” he said.

“The company has taken a number of actions, including shielding the assets from currency swings, positioning ourselves to take advantage of now rising yield opportunities offered by platforms to ensure we can achieve a return of 6-8 per cent when we are fully leveraged and deployed," he added.

Owing to the terms set out in the rules of the investment trust, all non-sterling earnings the portfolio makes are hedged back into sterling in order to minimise currency volatility. More than half of the portfolio is in non-sterling assets. As sterling both rallied strongly into the 23 June vote as the opinions suggested a vote to Remain and then subsequently plummeted following the leave result in the past quarter, volatility was much than in previous periods.

This posed a problem for investors in the fund as it increases the cash drag effect as it requires greater cash levels to satisfy margin calls. On the day of Brexit Sterling lost 10 per cent against the dollar although it has since recovered somewhat. The P2P GI management team have reiterated the targeted return will happen when the portfolio is fully leveraged and deployed, which they expect by the end of 2016. 

P2P GI sees four areas which should improve returns in the coming months:

1. Reduced cash drag as currency markets stabilise and the need to hold cash for foreign echange margin reduces.

2. Increased leverage driven by improving availability, breadth and pricing of debt, thus reducing the marginal cost of leverage.

3. Increased interest coupon on loans as key platforms raise rates across the US, plus one off income uplifts from incentive programmes from some platforms.

4. Cash management optimisation via investing a portion of the portfolio in fixed income instruments. 

P2P Global Investments was the first, and is still the largest UK-listed fund, to offer exposure to the marketplace and p2p lending space. Alongside other closed-ended portfolios such as VPC Speciality Lending, Ranger Direct Lending, Honey Comb and Funding Circle SME Income Fund, it was launched to take advantage of the growing disintermediation of bank lending by smaller more agile lending platforms launched in the post-financial crisis era.

Launched in May 2014, the fund has a majority of its exposure to US consumer debt (46.16 per cent), followed by the European consumer debt at 18.6 as well 20.37 per cent in cash and money market instruments.  This represents a sharp shift toward less US consumer exposure compared to a month ago of more than 10 percentage points and an increase in cash.

The P2P Global Investments trust has also slashed its management fee, according to documents filed to the London Stock Exchange, from 1 per cent charged on gross assets, to 1 per cent on net assets, with leveraged assets charged at 0.5 per cent. The fund will continue to charge a performance fee of 15 per cent of NAV returns, subject to a high watermark.

An interim dividend of 11p per ordinary share for the three-month period to 30 June 2016 has also been announced. However, of the 11p, 9.5p will be paid from the investment trust’s revenue reserve and 1.5p from the special distributable reserve which relates to previously recognised gains.

The dividend will be paid on 26 August 2016 to shareholders on the register as of 5 August 2016. The ex-dividend date is 4 August 2016.

The total underlying loan portfolio delinquency remained within the Investment Manager’s expectations, although there are some variations platform by platform.

The fund has not beaten the broader market as measured by the Liberum AltFi Returns index (the LARI) year to date, according to AltFi Data.

Performance of fund vs Lari index

Source: AltFi Data

Charles Cade, head of investment company research at Numis Securities says during Q2 2016 both Lending Club and Prosper raised the average interest rates offered to their borrowers across the entire risk spectrum of loans. This led to an immediate non-cash, mark-to-model valuation reduction on existing Lending Club loans in which P2P is invested which reduced NAV by 0.18 per cent.

“However, the higher interest rates on newly originated loans at Lending Club and Prosper presents an opportunity to earn additional yield for a given credit risk in future." he said.

Cade adds there has been some “indigestion” in the p2p lending sector since mid-2015, and the fund has moved from a significant premium to a discount of 17 per cent as a result

Performance of discount/premium since launch

Source: AIC

He says P2P’s the fee reduction could put pressure on other listed funds, notably VPC Specialty Lending and Ranger Direct Lending to slash fees.

“P2P’s growth reflected its first mover advantage in the direct lending space, highlighting the opportunity created by the disintermediation of the banks. However, the fees appeared high, particularly given the target leverage of 100 per cent of net assets. his leverage increased the fund’s risk, but a significant portion of the benefits accrued to the manager, both through the base fee and performance incentive. In this context, we welcome the decision to reduce the management fee on leveraged assets from 1.0 per cent to 0.5 per cent, although we believe that it should also introduce a hurdle on the performance fee.”

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