Ask the Investor: Nicholas Interview
This is the third in our series of peer to peer investor interviews. These interviews are designed to help newbies to the asset class get comfortable before investing. In this interview, we spoke with Nicholas. He is 43 years old, and has been investing in the asset class since 2016. He has a background in financial services. Find out how he invests and why he thinks P2P hasn’t broken the mainstream yet!
O: How long have you been investing in peer to peer lending (P2P)?
N: 2 years
O: Why did you start investing in P2P?
N: I was attracted by the principles behind P2P and having worked in banking during the financial crisis I could see the obvious potential for this form of finance to flourish in a post-crisis banking world. I particularly like the property P2P segment given the asset-backed nature of lending and feel more comfortable holding this type of exposure during a potential downturn in the economy, versus consumer or business lending exposure.
O: How do you invest and why?
N: I invest in both passive and active P2P products, these being the products where my capital is automatically spread across the loan book and products where I can manually select the loans I wish to invest in.
At the lower end of the risk spectrum, where I’m comfortable with the platform’s approach to risk management and track record, I’m happy to invest passively across the loan book.
At the higher end of the risk spectrum, with increased deal complexity and greater concentration risk, I prefer a more active approach where I select the loan(s) in question.
O: What’s your strategy with P2P lending now and in the future?
N: I plan to increase my P2P exposure over time under the IFISA umbrella as it offers attractive risk-adjusted returns, low correlation with other asset classes and a tax-free income source. My current exposure to P2P relative to my overall investment portfolio is small, so I’m comfortable with increasing this exposure in years to come.
O: What sort of things do you look for in a P2P lending platform/product?
N: Strong management team, exceptional risk management and careful due diligence which is clearly defined and easy-to-understand.
O: How do you view P2P within your broader portfolio?
N: My P2P investments are complementary to my broader portfolio. P2P accounts for approx. 10% of my total investment portfolio.
O: What’s your perspective on the current state of the P2P market?
N: Overall, the P2P market is reasonably sound. Rising interest rates, falling property prices and squeeze in real household incomes may start to impact some P2P segments in the coming 18-24 months. I am concerned about the standards and the lack of investor understanding in some segments of equity crowdfunding.
To date, however, I’ve not suffered any bad experiences in P2P.
O: How do you see the P2P market evolving?
N: Consolidation in certain verticals and successful platforms becoming more dominant.
O: Who do you think P2P lending appeals to most?
N: Wealth accumulators probably mid 30s +
Those with experience in managing own portfolios and good understanding of risk-adjusted returns.
O: What advice would you give to a prospective P2P investor?
N: Really do your homework on management teams, platform, product, liquidity, default scenarios, risk mitigation features.
Alternatively, consider platform aggregators such as Orca which has carefully vetted the P2P lenders on its platform and offers diversification benefits.
O: What are the key challenges facing retail investors in the current climate?
- Savings returns are very low.
- Many younger investors have not experienced a severe bear market and might not fully appreciate the benefits of diversification.
- Under appreciation of saving requirements for a comfortable retirement.
O: Why do you think P2P hasn’t hit the mainstream yet?
N: There’s insufficient education and understanding of P2P lending. This leads to a lack of appreciation of the benefits of diversification and correlations with mainstream savings products. I suspect the current longest equity bull market in the history of financial markets might have something to do with this!
Special thanks to Nicholas for taking part in this interview and sharing his views and experiences. For any questions, email [email protected] or use the Live Chat. We’re here to help.