This is part II of a guest post by British investor â€˜GSV3Miac’. Read part I first.
Most of my concerns about P2P lending revolve around its relative immaturity. Even ZOPA, the oldest in the UK, has only been around 10 year or so, and have changed â€˜just about everythingâ€™ at least twice. Funding Circle (“FC”)have 3-4 years history, but there have been no two years where the business has actually been stable (maximum loan sizes, loan terms, Institutional participation, etc. have all changed pretty much continually over the period Iâ€™ve been investing). How well the companies, and their borrowers, would survive a real recession, can only be guessed at.
What do I actually invest in? Well practically anything if the rate looks good. My â€˜core holdingâ€™ is in RS, but there is nearly as much spread across the P2B platforms. For extra P2P related risk (and maybe reward) I also signed up to invest in the Assetz and Commuter Club capital raises (via SEEDRS). With EIS investments some of the money at risk is renated tax, which you had a 100% certainty of losing to the government anyway.
I do not plan to hold most of my investments (particularly in FC) for the full 5 years. After a few months the financial data is well out of date (much of it is already out of date when the loan is approved!) and unless you want to spend time checking how the company is doing, it is easier to sell the loans on and start anew.
Similarly if rates start to move dramatically, itâ€™s time to â€˜flipâ€™ or â€˜churnâ€™ .. selling a 7% loan part when rates move to 9% is possible, but might sting a bit. Selling a 7% loan part when rates have moved to 14% is going to hurt a lot, or might be completely impossible. If rates move the other way, selling a 7% loan part when average rates are 6% is not only easy, it may be profitable (assuming the platform allows marking up). You might wind up with un-invested funds, but as someone succinctly put it on the P2P forum, â€˜un-invested is a lot less painful than lostâ€™.
The future looks equally interesting .. we are promised P2P investments within an ISA (do NOT hold your breath, this seems to be moving at a glacial pace so far), which could result in a â€˜wall of moneyâ€™ arriving on the scene. We are promised P2P losses to be tax deductible (against income, rather than capital gains), which has an impact on the worth of a protection fund. We will inevitably see some new entrants appear as the P2P area grows and become more attractive (Hargreaves Lansdown, a very large fund management player, has already indicated they might get involved, I believe). We will equally inevitably see some more of the current players merge or vanish, and many of the loans default.
As I may have mentioned a couple of times, nothing has been very stable so far .. most of the platforms are still â€˜feeling their wayâ€™ with immature software (this is polite-speak for â€˜bugsâ€™), and business models/systems which are still evolving. The basic P2P premise of connecting people with money with people who want it, without too much activity in the middle, does not appear to scale too well when the number of each side get big (a million people bidding to fund a thousand loans each day is not something to contemplate lightly). Platforms need to grow to survive and they need to grow in balance â€“ if they double the number of lenders, they need twice as many willing borrowers, and vice versa .. Asymmetrical growth just annoys whoever is on the surplus side, distorts the rates, and results in no growth at all â€“ you need both a lender and a borrower to have any business. It is obvious, but very hard to manage.
My P2P advice? .. hmm difficult. Firstly donâ€™t play with money you canâ€™t afford to lose, or at least lose access to for a number of years. Getting out is harder (and more expensive) than getting in, even if the loans are still repaying. This is not the best place to park the money you may need in a big rush to have the roof repaired or the car undented. This is also not a place to try to put a lot of money in a hury .. like the stock market, dribbling it in is generally safer. Todayâ€™s â€˜wonderful dealâ€™ may look like rubbish with a few months hindsight.
If you havenâ€™t made adequate pension provision yet, go look at that (maybe a SIPP or similar) .. the government will top it up for you (using our tax .. they donâ€™t have any money they didnâ€™t take from us), and the new rules on what you can take out / pass on all look pretty attractive to me (albeit you canâ€™t get at it until you are 55+). Can you invest your SIPP in P2P?.. yes, sort of (consult your advisors).
As I said, I am in the happy position of doing this as much for fun as to pay my bills, so I can take risk I would be reluctant to point others at, and I can be picky about what I invest in (no, I donâ€™t like onshore wind farms, and Iâ€™d like to have little or none of my money building luxury flats in London!) rather than having to take the best rates regardless.
If you are sure you should be in P2P (I suspect youâ€™d have to be, to be reading this), do some research, (the P2P independent forum is a good place to start) and then spread your money around among different P2P platforms, and different loans. Depending on how much time you want to put in, there are â€˜easy to manageâ€™ options (like ZOPA or RS), or there are â€˜labour intensiveâ€™ options (FC, ReBS, etc.) .. each with different risks and rewards.
If your attitude to risk is such that you get upset when your shares go down, or your P2P borrower defaults after 6 payments, then think again. Remember there is no safety net, no FSCS cover to cough up Â£85k if it goes pear-shaped, or your P2P platform turns out to be run strictly for the benefit of the CEO.
If you are happy with all that, then go forth and (carefully) have fun, help small businesses, folks starting out in life, people needing a hand-up after some drama or trauma has befallen them. Hopefully we can put the banks back in their place, although we need to keep an eye out lest these P2P companies start acting the same way as banks i.e. getting confused about whose money it is, and what they are expected to do with it.