19 July, 2017

P2P Investing: Guidance on Principal Considerations

With 12 years of market maturity there are now a range of different peer-to-peer lending (P2P) investment options. Generally, the primary benefit of P2P investing remains consistent; stable yield which closely resembles fixed income investments. However, different products deliver unique benefits and risk profiles which may be more appropriate for specific investors. The purpose of this post is to provide some guidance on the principal decisions investors face when considering P2P.

1.    Direct P2P Investing vs. P2P Funds

Unlike traditional fixed income products such as corporate or government bonds, investing directly on P2P platforms is considered relatively illiquid. Large P2P platforms such as Zopa, RateSetter and Funding Circle do have active secondary markets enabling investors to withdraw from their investments early, however this is not guaranteed. Currently, there is an oversupply of capital on the P2P market so in current conditions investors can withdraw from their investments within hours, however, as the loans are not listed on a common market selling assets is dependent on new investors or buyers on the platform.

The illiquid nature of P2P has posed an issue for large institutional investors who are used to highly liquid investments. Listed investment trusts such as P2P Global Investments and VPC Specialty Lending have resolved this issue by establishing investment trusts which invest in P2P loans.

In addition to the fees accompanying these investment trusts, a further downside exists. Direct P2P investing is largely shielded from external market factors such as general market sentiment or interest rate rises. The large investment trusts are currently operating at a large discount to their NAV demonstrating this increased volatility.

In the past two years, we have also seen a number of non-listed pooled investment structures emerge which again are tasked with actively selecting loans originated by P2P platforms. Goji’s Crowd Bond targeting both retail investors and financial advisers is an example of this which has the added benefit of being Innovate Finance ISA eligible.

Table 1: Investment Structure Benefit Breakdown

Direct P2P Investing Listed Investment Trusts Non-listed Pooled Investments (Goji)
Transparency High Low Low
Yield High Medium Medium
Customisation High Low Low
Volatility Low High Low
Liquidity Medium High Low
Historical Performance High Medium Low
Platform Diversification Not applicable High High
Fees No additional fees Fees apply Fees apply

2.    Active vs. Passive Investment (Manual vs. Autobid)

Assuming direct P2P investing, there is one distinction which separates the P2P platforms. P2P platforms such as ThinCats and Lendy require investors to actively select the loans they wish to invest in, while others such as Zopa and RateSetter automatically match capital across a large number of borrowers, creating a passive investment.

By actively selecting loans investors can implement their own investment strategy which may yield greater returns. Although achieving alpha is possible, investors are responsible for diversifying their portfolio which can be time consuming.

Passive investments allow for capital to be allocated to a range of non-specified borrowers. As an example, Funding Circle allows investors to either actively select opportunities or invest passively using the Autobid function. Active loan selection provides a choice of loans graded between A+ to E while the Autobid function automatically invests across loans graded A+ to E.

3.    Credit Performance

As with all investments, generally, the higher the return the higher the risk. The credit performance of a P2P platform can be evaluated using both historical and current data. Fortunately, the large P2P platforms are fairly transparent with detailed statistics and loan by loan data being made available. This has allowed us at Orca to independently analyse a number of P2P platforms with the results displayed on the Orca platform. Currently it’s free to sign up so there is no risk in doing so.

It’s important to note that historical data should be reviewed with respect to the loan term. A loan issued in the first half of 2017 with a 5-year term is considered to be in its infancy and is unlikely to have defaulted. This may create the perception of artificially high returns and low default rates for loans issued in recent years. For the years that all loans are 100% complete (defaulted or repaid) we can fully review the performance of the platform in that given period.

4.    Operator Health

A platform risk exists in P2P. Effectively, if a platform becomes insolvent or has a large cyber breach or fraud exists, investors’ capital is at risk. To mitigate this risk, in-depth due diligence needs to be conducted not just on the quality of the loans originated by the platform but on the platform itself. To mitigate this risk further, it’s wise for investors to diversify across multiple P2P platforms. Detailed financials and background information on the platform directors can be found on the Orca platform.

Investors seeking to hold their investments in an Innovate Finance ISA (IFISA) should check out the Orca IFISA tracker page which is continually updated when new IFISAs come onto the market.

5.    Borrower supply

Peer-to-peer lending, at its core, is a balancing act of lenders and borrowers; if there is an oversupply of investors there may not be enough borrowers to fulfil the demand. On active or manual loan selecting platforms, investors may have to wait for loans to become available and specific loans may be competitive. Cash sitting in an account waiting for lending opportunities earning no interest reduces the overall return, and the advertised rates assume cash is lent immediately.

The cost of borrowing, particularly in the consumer lending market where Zopa operates, is very low and traditional lenders are competing with the P2P platforms for borrowers. This has led to these platforms struggling to meet the investor demand. On the RateSetter platform, interest rates have suffered and on the Zopa platform new retail investors have been refused due to an oversupply of capital.


Investing in peer-to-peer lending can provide stable returns and as this asset class has matured a number of options have emerged. Although not an exhaustive list, a number of factors have been noted for investors to consider when investing in P2P. Feel free to get in touch with any comments or feedback – [email protected] .