Peer-to-peer lending has been growing in popularity in the UK as investors seek alternative ways to get a yield. This is where an online platform brings together lenders and borrowers, typically offering both parties better rates than banks. Until recently, investing in peer-to-peer loans has meant putting your money directly into them via a platform, but last May saw the launch of the UK's first investment trust that focuses on this area of debt - P2P Global Investments (P2P).
"The biggest market by a mile is the US," says Simon Champ, chief executive officer of Eaglewood Europe, which is owned by Marshall Wace and runs the trust's credit assets. "The US consumer loans we have invested in through LendingClub, Prosper and Upstart are driving substantial volume growth, and we could deploy all the money we have raised via these but we want to diversify. So we have money with UK platforms such as RateSetter and Zopa, and for business loans, Funding Circle."
P2P Global Investments expects to start originating loans via a continental European platform soon, and is also looking at getting exposure to Australian loans.
The investment trust doesn't just invest in peer-to-peer loans, however. It has also invested in the equity of seven of the platforms that originate them and expects to make further equity investments in peer-to-peer platforms in the coming months. Currently around 3 per cent of its assets are in this area, and it will invest up to 5 per cent.
"We are trying to give our shareholders some upside and also align ourselves with the platforms," says Mr Champ. "Investing in the equity enhances our lending ability - a platform is more likely to offer its loans to a company that has funded it. However, we very much take a passive approach: we don't sit on the peer-to-peer lenders' boards and try to influence their strategy."
P2P Global Investments has not said which peer-to-peer platforms it has put equity into. "We are approaching the point when we will say which they are, but the platforms are even more guarded about who invests in their equity than their loans," says Mr Champ.
It is standard for funds to publish their top 10 holdings on their monthly fact sheets, but P2P Global Investments does not list individual loans because it has exposure to around 60,000 small ones via platforms. However, it also does not publish the top 10 platforms through which it originates loans, and has only named eight of the 14 it uses.
"They see each other as rivals so while we are taking on new ones, if they see one is the top holding, others might not want to come on board, and we need to access as many platforms as possible," says Mr Champ. "So we will not publish this information while acquiring platforms. However, when we have completed this process we will make that disclosure."
Simon Champ CV Simon Champ is chief executive officer of Eaglewood Europe, which is owned by Marshall Wace and manages P2P Global Investment's portfolio of credit assets. He has been involved in the UK peer-to-peer industry as an investor and adviser, and built relationships with a number of platforms. Mr Champ previously worked at Liberum, of which he is a founder and former board director, where he advised new technology companies on equity and debt raisings. He has also worked at Dresdner Kleinwort and JPMorgan Cazenove, in equity sales and equity capital markets. |
Going forward, Mr Champ thinks that one of the biggest opportunities is in trade finance. "We have not invested in in any meaningful volume of trade finance loans because it is more challenging to get exposure," he says. "They typically have a maturity of four to six weeks so you need an awful lot of them to keep your money deployed. But once this area becomes scalable the durations are incredibly attractive, and would reduce the average duration of our portfolio.
"The yields these kinds of loans offer are also attractive because the banks price trade loans horribly. The disintermediation opportunity in this space is much bigger than with consumer loans, and I think trade finance, working capital and receivables finance could become the biggest peer-to-peer area."
He anticipates starting to invest in this area later this year, and says he is talking to some platforms about this.
Mr Champ says that the biggest causation of default is increasing unemployment, but "we are absolutely focused on the high end of lending so would weather any downturn extremely well. It might mean our trust is slightly lower yield that some, but we are confident we will still deliver positive returns if unemployment rises."
In November the trust declared its first half-year dividend of 6p, and it hopes to distribute more than 85 per cent of its net income as a dividend. Mr Champ hopes this will grow as capital is deployed and returns improve. He envisages paying smooth quarterly dividends, and, if there is any excess, paying a special final dividend. The trust is aiming for a yield of between 6 and 7 per cent.
The trust has proved popular, meaning its 'A' shares trade at a premium to net asset value of more than 12 per cent while its 'C' shares are on a premium of around 9 per cent. However, Mr Champ says they are not looking to implement controls as the premium "is a natural compliment of having done a reasonable job".
He also argues that having just raised £250m with a 'C' share issue it would not be feasible to do more share issues in the near future to try and bring it down. He says: "Let's do a good job with the £250m we have raised first."
