Exclusive research conducted by AltFi has found that investors have been rewarded for holding exposure to lending originated from peer-to-peer platforms.
Institutional investors such as Aegon, Alcentra and the European Investment Bank to name but a few have been increasingly allocating cash to SME lending, invoice financing and property loans via online marketplace lending platforms in the UK such as Funding Circle.
In recent years this part of the mushrooming private debt market has become ever-popular, increasingly for institutional portfolios, but critics worry that online loan assets, originated to be distributed, are untested in a market cycle.
In 2018’s choppy markets this fast-growing alternative asset class dubbed alternative credit by many investors, has held up as most portfolios have turned south.
More than 90 per cent of UK funds investing in bond and direct property have underperformed the UK marketplace lending market over the past three years, according to exclusive research from AltFi.
While there are several important differences between investing in open-ended mutual funds and directly with lending platforms, including different liquidity criteria, speed of capital deployment and daily pricing, the figures are stark.
Looking at the numbers between 30 June 2015 and 30 June 2018, the most up to date comparable data, we can see the UK net returns to investors over the three years are 18.92 per cent for peer-to-peer lending. This number is calculated after fees and losses and represents a market share weighted investment across the major platforms. This is measured by the Link Marketplace Lending Index
A handy explainer of the methodology from Brismo, which power the index:
“[It] measures the returns available from tech-enabled lending in the UK. Index values are published as an annualised return, measuring what an equal time-weighted exposure to every loan originated by the participating platforms would have generated over the preceding 12 month period. The return has been calculated after fees and is expressed net of losses. Index calculations are based on loan-level data from: Funding Circle, Market Invoice, RateSetter, and Zopa.”
Taking the figure of 18.92 per cent and comparing it with the net returns - capital appreciation plus income payouts after fees - for mainstream bond and direct property funds in the Investment Association's universe it is clear P2P has performed strongly for investors in the vast majority of cases.
There are 214 bonds funds within the IA’s universe across the IA Sterling Strategic Bond, IA Sterling Corporate Bond, IA Sterling High Yield and IA UK Gilts sectors with comparable track records.
The IA Direct Property also has 14 further funds with long enough track records. These total £189bn of investors’ assets.
Data from FE Analytics show that to make it into the top decile of funds within this pool of 228 funds a portfolio would need a return of more than 18.91 per cent.
During this period where investors’ appetite for income bearing assets has continued to strengthen, P2P lending has also seen a swelling in assets.
According to Brismo, UK P2P lenders originated just over £1.1bn of loans in H1 2015. In the intervening three years, the market has nearly tripled. In H1 2018 they have originated over £3bn.
P2P lending has outperformed many well known and large funds over this period including the £23bn M&G Optimal Income fund which returned just 12.26 per cent over the period.
The £62m Pimco GIS Income fund was the best performer over this period with a net return of 37.34 per cent.
Whilst institutional capital continues to flow to marketplace lending, with growth rates in volumes still around 20 per cent per year, many investors are still nervous.
Ian Barras, a multi-asset fund manager at Janus Henderson, says that the space is broadly attractive for investors looking for alternatives to fixed income but that track records are often too opaque with alternate lenders.
“Private credit is good place to be, it’s just a question of how you access it. You also have to look out for quick growth, any business that tries to lend too quickly puts itself at great risk,” Barrass said.
“There's too little transparency. It is very difficult to do credible DD [due dilligence] on them. Also, one of the problems with the credit sector is that a lot of people who have been in the credit markets long term [lending markets] don’t have attributable track records,” he added.
This makes it difficult to see if you have genuinely good lenders operating, he said.
“For all we know some grizzled veteran could have lost hundreds of millions of pounds. There just isn't that same transparency that there is for equity fund managers in terms of track record,” he added.
While the alternative lending sector is clearly continuing to grow with ease, in terms of volumes of loans, for some investors to enter the market better transparency of performance is vital.