In this new series of interview posts, we get to know the investors in peer to peer lending. We’ll be sharing their experiences and insights over the coming months. Thanks to all contributors.
Geoff is a 55-year-old UK-based investor. He has professional experience in the asset management industry and has been investing in peer to peer lending (P2P) for 10 years, since the early days of the market.
We talked to Geoff about his experiences within peer to peer lending, his views on the asset class and much more in this in-depth interview.
Orca: How long have you been investing in peer to peer lending?
Geoff: I have been investing since 2008.
Orca: Why did you start investing in P2P?
Geoff: I started looking at P2P lending in order to seek to help release the banks’ bottleneck in the flow of money to companies and individuals.
I was looking to place money with a better interest rate than I could receive through traditional savings products and liked the entrepreneurial nature of the fledgling P2P market (Zopa). I like their attitude and their ‘new’ model of funding – their ethos and ethics.
Orca: How do you invest in P2P and why?
Geoff: Most of my investments are passive, but I do have a strong holding in loans that I choose myself from those offered by the platforms. I like the automatic nature of investment on the larger platforms, but when it comes to lending to companies, I like to pick and choose.
Platforms Geoff invests across:
Zopa, RateSetter, Funding Circle, Funding Knight, Lending Works, LendingCrowd, ArchOver, Growth Street
Geoff: Each platform has a different offering and reach. This enables me to diversify across the lending markets: consumer, small company, established company, all sectors. My investments are from 1 month through to 5 years, with the majority being 1-2 years. I am diversified across platforms as well. If a downturn occurred in any one sector then only a part of my portfolio would be affected, e.g. the Carillion collapse.
Orca helps investors diversify across the P2P market, find out how we do this by clicking below
Orca: What’s your strategy with P2P lending now and in the future?
Geoff: I look mainly for protected returns, but occasional higher risk for a company that I am already lending to, in order to counter the higher exposure to it.
I look for the shorter term in order to maintain liquidity of the entire portfolio and so I don’t lock in low interest rates for a long period.
I take an income from my P2P investments, but this is automatically reinvested.
I will seek other platforms when my holding feels high enough on a particular platform. I am withdrawing from one platform but that has minimal investment within it.
Orca: What sort of things do you look for in a P2P lending platform/product?
Geoff: I look for
- how bad debt is handled in practice,
- how easy the product is to use,
- the markets that are available – I won’t lend into the property sector for instance where I can avoid it, nor the oil, gas, fracking, weapons, companies with MOD contracts etc,
- transparency on figures (book of business, number of borrowers and lenders, default rates etc),
- how the lending and borrowing experience is presented to new people,
- quality of communication (emails),
- liquidity of the product both in terms of being able to quickly place money in interest bearing loans / accounts and being able to liquidate these should I need to,
- ability to lend from my company,
- ease of use of the site for personal and lending through my company.
When researching a new platform (1-2 times a year) I will create an account and watch them for a couple of months to get a feel for of all this.
Orca: How do you view P2P within your broader portfolio?
Geoff: I am overweight in stocks and shares through pensions, so P2P offers a diversification from that. I look at P2P as a safer home than further stock market investments. I feel we are overdue a large (20 – 30%) market correction, and the world is becoming more turbulent due to necessary changes in economic approaches. That will impact stock markets across the board, but companies and people will still require a liquid lending market.
P2P feels no more riskier than other investments, especially with the protections in place. Even after the 2008 financial crisis where several loans were hit very badly, and other bad debt, I have received much better returns than other savings products by a factor of 5 to 6 over the past 10 years, averaging 6% ish.
Orca: What’s your perspective on the current state of the P2P market?
Geoff: The market is saturated with providers now. This tends to favour the borrowers as the competition drives interest rates down. Rates are 200 – 300 basis points (2-3%) lower than a few years back due to this.
P2P companies are in an interesting dilemma in that they have to satisfy two diametrically opposed set of clients: borrows who want lower rates, lenders who want higher rates. Until there is competition for lenders i.e. a product with higher interest rates, rates for lenders will continue to fall. The heady days are gone.
Most of the big players have evolved to offer the same product, with differences usually around protection. New players (e.g ArchOver, Growth Street) offer a completely different product which adds nicely to a portfolio mix. But as these become popular and larger, the overheads on how they run their model will mean it will need to change.
At some point we need to see profitability on the companies. In the next two years I think there will be a shake out of players who are not providing an ROI to the people who invested in those players as a company.
The transparency has been good from most platforms where it needs to be. ArchOver is very good at the communication re a couple of defaults, and even helped one default get back on its feet again by restructuring that company.
Orca: How do you see the P2P market evolving?
Geoff: I see more homogenisation across the larger platforms with these becoming ‘off the shelf’ offerings, similar to the standard saving products. FSCS protection will come in the near future to these I believe.
Some will over-stretch themselves into new Alt finance areas. This could prove a distraction from P2P. There is a bandwagon in all this, but not a bubble like the .com boom.
There will be more small-size entrepreneurial companies starting which concentrate on the service to Business rather than sole lending of funds. Lending will still be a core part of those platforms, but they will offer a better relationship with their customers to help them grow. This can mean better returns and may have a positive impact on bad debt.
Orca: Who do you think P2P lending appeals to most?
Geoff: I think P2P is broadly neutral in its appeal / reach across all sectors of society.
The main characteristic of those who use P2P is that they have some money left over at the end of the month to invest. That pool of people has reduced significantly over the past 8 years, and I believe is set to get even smaller. House prices, rent, energy costs, communication costs, other cost of living and wage stagnation are all driving this. And those things are not set to change for a long while yet; 10 years at least.
P2P also appeals to people with large portfolios, who are looking for alternative homes for cash. But since the market is saturated, these people are already heavily involved / exposed.
Orca: What advice would you give to a prospective P2P investor?
Geoff: Enjoy it! Understand that the risk is more to do with yourself not understanding the products rather than the products being overtly risky.
Before investing, learn about how the products work, the protection you are given against bad debt, but also understand that the predicted rates after bad debt and fees are still better than other savings products.
Also look at how bad debt is recovered. Some companies do an excellent job, and publish those figures, some do not, or haven’t experienced any yet so don’t have evidence of that recovery process.
As with most investment advice one can receive, look to diversify across P2P companies, lending markets etc. If one wants a Building society style product, use Zopa and RateSetter. If one wants to help Business, try Funding Circle. If one wants to be a little more ‘hands’ on and open to innovation, try Growth Street or ArchOver.