P2P Lending: Rise of the Aggregators
It’s important to think about how to invest when considering peer to peer lending (P2P) as an investment choice. This includes investing directly or through other structures, like aggregators. As the aggregator market has taken off in the U.S, with platforms like NSR Invest, Orchard and AlphaFlow providing institutions, intermediaries and privates with solutions, we explore how the U.K P2P market is evolving and becoming an environment ripe for aggregation.
UK P2P Landscape is Evolving
Altus Consulting produced a report last year entitled ‘Peer to peer: the meteorite approaches’. In the report, they predicted that by 2020 ‘the majority of P2P business, both retail and institutional, will be transacted through aggregators.’ The paper exhibited a striking comparison between the U.K landscape today and the landscape in 2020, illustrated below.
Figure 1: ‘Peer to peer: the meteorite approaches’, Altus
As can be seen, 50-60% capital derives from retail investors, all of which directly occurs between investor and platform. Up until 2015/16 the market was very much dominated by private retail, but as major lenders started attracting institutional investors, such as the investment trust P2PGI, the breakdown of investor type has shifted, reflecting a marketplace that is creeping towards that of the U.S, albeit still very different (as discussed below).
Figure 2: ‘Peer to peer: the meteorite approaches’, Altus
By 2020, Altus predicts that P2P will be an asset class dominated by aggregation. 70-80% of capital is expected to flow through aggregators, with all investment trusts and new fund structures utilising this intermediary to invest across platforms. As for the self-directed retail audience, only 20-30% are expected to invest directly across platforms; a telling prediction. However, it’ll be incumbent upon the aggregator to provide a solution which adds real value because the aggregator business model relies on charging the investor, which currently major P2P platforms do not do; platforms make money on the spread between the borrower and investor rates, also listing fees and early access fees.
So, in order for this prediction to materialise, aggregators, like ours at Orca, need to demonstrate value. Positioning building a diversified portfolio with ease at the forefront of the proposition may be attractive to investors, particularly for those who are time precious; a well-diversified portfolio is very time consuming and relies on performing due diligence on several platforms, many of which have entirely different models. This is before the requisite opening of individual accounts and portfolio monitoring. An aggregator removes this hassle, and removes the risk of a poorly balanced P2P portfolio.
US vs UK P2P Aggregator Market
While the U.K market has been primarily self-direct retail-centric, the U.S market has fed off the appetite of institutions. Hedge funds, private equity firms and banks provide the bulk of lending through P2P, or “marketplace lending” platforms, commonly transacting through aggregators. Institutional involvement in the U.S is higher than the U.K, accounting for approximately 55% of the capital lent in 2016, or $19 billion, compared with approximately 30% in the U.K. Interestingly, however, the “big three” U.K platforms – Funding Circle, Zopa and RateSetter – have experience increased institutional activity in recent years: 60% of Funding Circle total volume year-to-summer 2017 can be attributed to institutional investors. What’s interesting about this, is that as the market continues evolving, with institutions becoming more active, this could signal a shift towards a more aggregator-centric market that serves institutional investors the way the U.S does. More than this, we are seeing a strong and favourable sentiment towards passive P2P products in the U.K. Funding Circle recently halted its active product, favouring its passive ‘autobid’ product due to customer demand; good signals for the aggregators in the market who offer a passive strategy.
There are five prominent aggregators in the U.S, with varying customer bases but similar propositions. Below is a table displaying some comparable metrics.
|Orchard||Execution, portfolio management, portfolio monitoring and reporting platform||Institutions|
|NSR Invest||Fund, portfolio management, portfolio monitoring and reporting platform||Individuals and advisors|
|Lending Robot||Fund, portfolio management, portfolio monitoring and reporting platform||Retail for platform, fund for HFs, IFAs and trusts.|
|AlphaFlow||Fund, portfolio management, portfolio monitoring and reporting platform||Accredited Investors|
|Peer Cube||Portfolio management, portfolio monitoring and reporting platform||Individuals|
Comparing P2P Investment Structures
There are a variety of structures that enable you to invest in P2P. Investing directly across platforms is still the most popular, however the emergence of listed and non-listed investment funds/products have added to the menu of choice. Building a well-diversified P2P portfolio is becoming increasingly important, and the risk of being over-exposed, by investing across only one platform, is becoming a primary consideration. This is why options for investing are necessary.
BondMason Client Ltd invests its own money into selected loans from approved partner P2P lenders, before making available corresponding Receivable(s) (cash receipts) for purchase across BondMason.com. BondMason has a high minimum investment of £5,000 and is not regulated by the FCA. The provider targets a gross return of 8% per annum, charging up to 1.5% annual fee depending on the amount invested. Perhaps a downside is the slight lack of clarity around which providers are included in the portfolio, at least during due diligence prior to transferring funds into your investor account.
Goji’s ‘Diversified Direct Lending Bond’, is, as it says, a bond. The Bond is a variable return, fixed term, investment that aims to provide a steady return in excess of 5% net of fees. Goji Financial Services Ltd invests proceeds raised across a diversified portfolio of loans originated by peer to peer and online direct lending platforms. Goji’s Bond primarily targets financial advisers but retail investors can also invest directly. There is a minimum investment of £1,000.
Listed investment trusts such as P2P Global Investments and VPC Specialty Lending have attempted to resolve the issue of illiquidity in P2P lending. However, such structures do not truly alter the underlying liquidity of the P2P portfolio and, due to their listed nature, exhibit a lot more volatility. While direct P2P investing is largely shielded from external market factors such as general market sentiment or interest rate movements, the prices of listed vehicles can move around quite dramatically. The large investment trusts are currently trading at large discounts to NAV. A further drawback of investing through this structure is the increased costs of active management, leading to higher fees paid by investors.
With the Orca solution, investors automatically construct a portfolio comprised of major U.K P2P platforms, gaining exposure up to 6 P2P platforms and 75% of the market in terms of loan volumes (portfolio composition depends on amount invested). Investors are diversified across three tiers: platforms, sectors, and borrowers. The portfolios are designed in such a way that investors are exposed to the different borrower sectors, namely consumer, business and property. Portfolios are likely to yield an indicative net return of 5% per annum. The principal difference in the Orca structure is that the investment is held in the investor’s name. Funds are not pooled together to be subsequently invested by Orca as an asset manager. This adds flexibility to the Orca product as a self-select option could emerge over time and investors are protected should Orca as a business fail. Portfolio monitoring is provided by Orca analysts, and research is freely available so investors can view the due diligence we perform on the platforms and market more broadly.
In conclusion, there are now multiple ways to gain exposure to P2P lending, but what’s clear is that aggregators are well poised to solve the issue of a well-diversified portfolio. For investors who want a relatively hands-off approach, going indirect via a trust, bond, aggregator or other, could be a solution that delivers strong diversification without the hassle. It’s important to weigh up P2P within your broader portfolio, of course, and consider the risks associated, such as the lack of Financial Services Compensation Scheme coverage.