By Simon Sinclair on 12th June 2019
The absurdity of Lendy's behaviour and business model shouldn't put canny investors off the returns to be made from the good operators in the sector, writes CapitalStackers' Simon Sinclair.
At the time of writing, most people are confidently still buying cars, despite the horrifying knowledge that there are dodgy car dealers out there who would rip them off on sight.
Potential car buyers don’t besmirch the entire industry—they simply seek out the decent car dealers and buy cars from them, because they know that to avoid buying cars altogether would be an absurd over-reaction.
And yet this is precisely what is in danger of happening in the P2P industry, in the wake of our own dodgy car dealer, Lendy.
However, through the mist, calming voices of reason are beginning to make themselves heard, interpreting Lendy’s problems as specific to the platform, rather than the sector.
“Lendy’s collapse was a function of how they operate rather than the nature of the construct,” wrote Bondmason’s chief executive Stephen Findlay.
“Time will hopefully ensure the sector will consolidate leaving the good players.”
Orca Money’s chief executive Iain Niblock said he felt Lendy was a “typical example of poor P2P”, but hoped this wouldn’t lead to a “knee-jerk back-flip from the FCA, with constrictive regulations resulting in the ‘peer’ being removed from ‘peer-to-peer’”.
As Niblock says, P2P has a valuable role to perform in the post-1997 business climate. It was “created to provide reasonable returns to people wanting to lend their money and to provide access to capital for people wanting to borrow money”.
Of course, Findlay’s investment management company is in the news this week for their decision not to invest any new funds into P2P for the time being. However, this is more because the influx of institutional money threatens to diminish returns.
“If it’s done appropriately, the model has a viable future,” he said.
“The challenge is finding those that are doing it in an appropriate way.
“The difficulty is that it’s an emerging asset class with lots of different business models which can be difficult for investors to understand.
“There are some good operators out there doing good things.”
So how does the sharp investor tell the good operator from the bad?
For one thing, there is a scale of real-estate lending of which Lendy very much occupied the white-knuckle end—high-risk lending at credit card rates riding the buckaroo of pre-planning permission development schemes. It’s hardly surprising that so many of their borrowers were in default. What was surprising was how poorly they were managed and how unwilling Lendy seemed to be to report on it.
More surprising still, perhaps, is the calculation of returns which neither seemed to adequately cover investors for the risk they were taking, nor attract responsible borrowers (what kind of company is prepared to pay perhaps double what a challenger bank would charge? How desperate would they have to be?).
In my view, investors should never consider exposing themselves to a property deal until it is far more advanced than those Lendy tended to offer.
The astute investor should not touch a deal until planning permission is in place, and also until there is enough funding committed at the outset—from a bank, for example—to build out the entire project.
On any scheme where these simple concepts don’t apply, existing investors are entirely dependent on new investors coming on board to pay the contractor and prevent the project from failing. This is a totally unacceptable way to run a platform dealing in development lending.
Why should investors take the liquidity risk when there are banks willing to do it and for a more attractive price, further improving viability?
This should be the first rule of anyone looking to invest in property development through the P2P sector.
The second fundamental is reporting. The provision of regular, detailed and accurate information from the borrower and independent monitoring surveyor is a must. So, at all times, the people whose money is on the line are fully aware of what risks they’re taking. That way, they can make intelligent, mature and informed decisions.
Precisely the sort of decisions that were denied to Lendy’s investors.
So if you’re looking to make money from P2P, don’t throw the baby out with the bathwater. Just keep away from the baby that’s weeing in the bath.