This is part I of a guest post by British investor â€˜GSV3Miac’.
About the author.. I spent 25 or so years in software engineering, programming everything from IBM mainframes to microchips in early Hotpoint washing machines. I must have been halfway competent (or not) since I wound up managing a software development group, a large IBM computer centre, workstations of networks and PCs. When my (American owned) factory shut down I spent the last year (in between managing the closure) retraining as an IFA. I qualified, but I never actually practised â€“ I took my redundancy / pension and headed for the hills (of Shropshire). That was a while ago, so donâ€™t expect me to know chapter and verse on the latest tax wrinkles! *grin*
How did I get into P2P (misnamed .. itâ€™s largely P2B these days .. much of is headed for B2B!) lending? Blame my mother .. she died, and left me a sum of money which was not expected, and not really critical to my future. Having no children (there being, IMO, no people shortage on the planet) it is probably all headed for charities one day, so I thought I might as well have some fun with it. Before I did that, I had, of course, gone through the approved checklist .. i.e.
â€˜Emergencyâ€™ easy access cash account(s) .. tick.
Pay off the mortgage .. tick.
ISA(s) .. tick
Pension Provisions .. tick
Stock market investments / bonds / shares / funds ..tick
OK, anything left can be risked a bit. (I accept that stocks and shares and even cash has =some= risk attached, but now we are looking at â€˜high wire with no netâ€™ type options .. VCTs, EIS schemes, and yep .. P2P lending). If you want to plan for ultimate disaster (Ebola pandemic, nuclear war and global financial meltdown) then probably investing in long dated canned food, and an underground shelter on an island upwind from everywhere, is your best bet. More modest (and likely) risks can be mitigated by spreading your investments around a lot, and by being conservative in your assumptions of what you might get back.
I started my P2P journey (in 2013) with Funding Circle (henceforth â€˜FCâ€™) and ZOPA, both of which I had heard about from a friend, and I dipped my toes in rather gingerly at first. ZOPA had been going for some time, and I probably missed their best years (when you could decide who to lend to, and later when you could at least still decide at what rate youâ€™d lend). ZOPA had just introduced their â€˜safeguardedâ€™ lending, and started fixing the rates, so even their name (â€˜Zone Of Possible Agreementâ€™) no longer made sense. I stopped lending with them after less than 6 months .. the rates were just not attractive (and unpredictably so). On the plus side, the exit from ZOPA was fairly cheap and painless.
As an alternative to ZOPA I went to look at Ratesetter (RS), which still lets you set the rate(s) you are willing to lend at over 1,3 or 5 years (or monthly). No control over who gets it, but at least some control over what they pay; and (like modern ZOPA) there is a provision fund which should hopefully protect you from bad debts. Exit from RS can be quite expensive though, so best to lend for no longer than you are sure you can do without the money for. Basically they charge you the difference between the rate you would have got for the actual period you lent for, and the rate you got by lending for a longer period. I still like them, for simplicity with just enough control to make it interesting, and I lend / recycle in the 3 and 5 year markets depending on the rates at the time (typically I expect at least an extra 1% for signing up for the extra 2 years).
FC, being a P2B platform, where you decide both who to lend to and at what rate, turned out to require a lot more work. I initially made the mistake of thinking I could use Autobid, but I quite quickly found out it would buy things on the Secondary Market (SM) which sane human beings would avoid (and were, in fact, selling). It also bought in 1% or 0.5% (of your total fund) chunks, which might prove hard to sell later, and it bid (when it got round to it) at the rate you told it to, not the best rate available. To get the best rate you usually need to be there at the end of the auction (or be psychic) .. not easy if you have a life (and even harder if you are working). After a few defaults, and some purchases at auction which I found I could later have bought at better rate on the SM, I turned off autobid.
In October 2014 FC announced beta testing of their â€˜Application Program Interfaceâ€™ which would allow easy (automated) interaction with the website (getting loan data, bidding, selling etc.) It has yet to arrive, at least for non-institutional investors, so if you want those facilities you need to write scripts / programs of your own (which many folks have, me included).
The pluses of FC are really the sheer volume of loans going through the platform (15-20 a day, most days) and the very active / liquid secondary market (partly driven by the autobid function) which allows â€˜flippingâ€™ (buying too much if the price is right, and selling it later at a profit) to flourish. There are no official underwriters on FC, but flippers provide much the same function, and very few loans fail to get funded at some (maybe rather high) rate.
Downsides? Well in the early days their credit control was awful (see their own statistics for defaults on early loans), and their website still has issues (my account has not added up right for years now). They also have (for the last year or so) a special deal going with the large/institutional investors who get â€˜first pickâ€™ (at an agreed rate) on most of the loans. Not well received by me (or others who think about it a bit). Finally, as mentioned, you (ur robot) really need to be there for the end of an auction to get the best deal.
So where else to look? Well I have a small presence with Rebuilding Society (ReBS) which has a similar model to FC, with slightly higher rates. The SM at ReBS is not very active/liquid (you can charge a 5% premium, but there are not many takers), and the loan volume is a couple of order of magnitude behind FC. Most loans wouldnâ€™t fill, were it not for a few large players.
Like FC, most loans are unsecured. Well, the directors are required to give personal guarantees (so they canâ€™t extract Â£1m dividend from their Ltd Company, then liquidate it, buy the assets for 99p, and start up again), but unless they have significant un-emcumbered personal assets (and you know where to find them), that is not a lot of help â€“ if the company really goes bust, the directors usually manage to be personally bankrupt in quick succession.
Secured loans .. well it sounds like a good idea, so I have recently had a look at Assetz Capital (â€œACâ€) and ABLRate (hmm, no acronym springs to mind .. â€œARâ€ maybe?). Both these also have much smaller deal flows than FC, and slightly different business models. Both are lending against specific assets (which FC now does too, largely with property loans). In theory this is good, but in reality if the borrower stops paying, you will probably have some considerable hassle/delay selling the property/aircraft the loan was secured against before you can get your money back. For me, at least, the jury is still out.
One of the downsides with AC is that all loans are (now .. new model!) initially bought by underwriters, who extract some of the value before selling them (at â€˜parâ€™) to regular lenders. My pockets are not deep enough to underwrite, so Iâ€™m missing out on some of the money the borrowers are willing to pay. I liked the FC/ReBS models, where everyone can bid to set the rate.
Call me old fashioned, but one of the things I dislike about much of the P2B market is that, aside from fixed rate loans (and who fixes the rate, one wonders?) lenders can end up getting radically different rates for the same loan (same risk). In the case of FC, for instance, you can autobid 6% for an A+ loan, whereas someone bidding at the last minute could easily get a marginal rate of 10% (or in extreme case 14.9%). Doesnâ€™t seem fair to me .. Iâ€™m an advocate of the â€˜bond auction styleâ€™, where all the successful bidders get the highest marginal rate. Dynamic bidding, where if you are knocked out you get automatically rebid at the next lower rate â€“ down to your minimum â€“ achieves something similar but not identical (there are probably two winning rates with dynamic bidding .. instead of just one).
AR is supposed to offer something like this, but itâ€™s too early (with too few loans) to tell if it is actually what Iâ€™d hope for.
In part II you’ll read what challenges GSV3Miac sees in p2p lending and his advice to fellow investors.