Peer2Peer Finance News November 2022

Rhydian

P2P investing stands out in record year for alternatives

PEER-TO-PEER

lending is standing out amongst alternative investments as it offers more transparency, taps a growing market and sets to benefit from higher interest rates.

The P2P lending market is expected to grow significantly to be valued at $1.14trn

(£1trn) by 2031 globally, according to Transparency Market Research. As the investment opportunity grows, it is also important to consider what it offers investors.

Research from Peer2Peer Finance News earlier this year found that Innovative Finance ISAs (IFISAs) returned

an average of 9.01 per cent over 2021. It has managed to deliver stable returns through difficult economic conditions.

In addition, the asset class is seen as offering a greater level or transparency than some other alternative asset classes such as private equity or hedge

funds, even though these might have the chance for greater rewards, albeit with more risk.

“The problem with whisky and arts, as it is with most alternative asset classes, is finding the data and information you need to assess whether it’s a good opportunity or not,” said Neil Faulkner, chief executive and head of research at P2P ratings firm 4thWay. “It is one of the reasons P2P lending stands out.

“P2P is an unusual, innovative idea in that it is so transparent and you can measure it so much more easily than most other alternative investments or innovations in investing.”

He added that the vast majority of P2P investors have enjoyed stable returns through the years, proving that the sector can offer investors value.

Peer2Peer Finance News’ research found

and 1 network.

Green Park House, 15 Stratton St, Mayfair, London W1J 8LQ info@royalcrescentpublishing.co.uk

EDITORIAL

Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk

Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk

Marc Shoffman

Senior Reporter marc@p2pfinancenews.co.uk

Hannah Gannage-Stewart

Reporter

PRODUCTION

Tim Parker Art Director

COMMERCIAL

Tehmeena Khan Sales and Marketing Manager tehmeena@p2pfinancenews.co.uk

SUBSCRIPTIONS AND DISTRIBUTION tehmeena@p2pfinancenews.co.uk

Find our website at www.p2pfinancenews.co.uk

Printed by 4-Print Limited ©No part of this publication may be reproduced without written permission from the publishers.

Peer2Peer Finance News has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any peer-to-peer finance product, or any other security, product, service or investment. This publication does not purport to contain all relevant information which you may need to take into account before making a decision on any finance or investment matter. The opinions expressed in this publication do not constitute investment advice and independent advice should be sought where appropriate. Neither the information in this publication, nor any opinion contained in this publication constitutes a solicitation or offer to provide any investment advice or service.

Thecurrent state of British politics means that things are likely to have moved on substantially by the time this magazine hits your desk or letterbox.

At the time of writing, Liz Truss had resigned as prime minister, with the Tory party gearing up for yet another leadership election.

It will be interesting to see how the markets react to the new prime minister’s economic policies, given the leading role they played in Truss’s ousting.

A more balanced budget will undoubtedly calm traders, but the fact is that the new leader is still facing the mammoth challenge of fixing a weak, inflationary economy amid wider geopolitical issues.

There will be no quick fixes here, especially as the possibility of a general election will continue to loom over markets.

It makes sense for savvy investors to diversify their portfolio away from the stock market and I believe we’ll see increasing adoption of alternatives among retail investors. I’m not just talking about peer-topeer lending but all types of private capital and real assets, which could provide more stable, long-term returns.

I think the P2P sector could – and should – do more to promote itself as a legitimate asset class alongside more established alternatives, particularly due to its higher levels of transparency. As our front-page story shows, P2P has plenty to offer investors in these uncertain times.

SUZIE NEUWIRTH

EDITOR-IN-CHIEF

We hope you’re enjoying the latest edition of Peer2Peer Finance News! We have now moved to a paid-for subscription model. If you would like to continue reading the magazine, please go to www.p2pfinancenews. co.uk/subscribe/ to find out about subscription options.

Published by Royal Crescent Publishing

P2P

that in 2020, the average annual return on IFISA accounts was 9.04 per cent. During the 2020/21 financial year, the average target return being offered across 32 IFISA accounts was 8.72 per cent. In 2019, it was 8.45 per cent, and in 2018 it was 8.3 per cent.

Best year for alternatives

Many alternative asset classes had a stellar year in 2021, delivering investors record-breaking returns.

For example, hedge funds had their secondbest annual performance since 2010 according to figures from Eurekahedge.

The company’s hedge fund index was 9.38 per cent higher at the end of 2021, reversing losses from November. Among the different

strategies, those focused on North America and Japan had strong performance, returning 14.7 per cent and 9.18 per cent, respectively.

Meanwhile, short volatility strategies and commodities delivered 15.42 per cent and 15.24 per cent, respectively.

PitchBook data showed that real estate funds recorded a rolling oneyear horizon internal rate of return (IRR) of 24.8 per cent, the asset class’s best performance since the second quarter of 2011. As more investors turned to real estate in response to rising inflation and interest rates, funds have continued to offer decent returns in 2022 as well, registering a 7.32 per cent return in

the first quarter of the year, according to latest data from PitchBook.

Real assets continued to improve their performance last year, reaching 20.7 per cent rolling one-year horizon IRR, according to PitchBook, which was also the highest seen

Source: Eurekahedge

since 2021. There was however, significant variance among sectors. For example, oil and gas real assets returned 43.7 per cent at the end of 2021, becoming the best performing real assets sector.

Anikka Villegas, analyst at PitchBook, noted: “Given the correlation between oil and gas prices and fund returns, this may not come as a surprise, as supplydemand imbalances resulting from Covid-19 price plunges, production lulls, and rebounding post-pandemic demand boosted prices in the second half of 2021.”

Meanwhile, infrastructure returns reached 15.3 per cent, boosted by the demand for supply chain-related assets impacted by

the pandemic. Metals, timber and agriculture returned -1.2 per cent over the period, hurt from pandemic disruption.

Private debt performance in the last quarter of 2021 was 3.2 per cent, taking the oneyear horizon IRR to 14.9 per cent, well below the 37.6 per cent posted for all private capital funds.

While these figures show that alternatives had a strong 2021, it is difficult to compare them directly to returns in P2P lending. One of the reasons is a lack of transparency, with data relying on sporadic self-reporting from firms themselves and disclosures from investors. The other problem is the use of IRR as a metric, which has been widely

criticised as it can be artificially bolstered by funds and therefore not give a true indication of what investors actually receive in the end.

Accessibility a problem Although, based on the available data, many alternative asset classes have delivered significant returns, most of the funds PitchBook covers are out of the reach of retail investors. But for those that want to invest in alternative asset classes such as private equity, venture capital, property or infrastructure, listed investment companies are available.

However, the returns for these have been under more pressure as they

are also impacted by share price movements. Still, they managed to record positive returns through the year.

The infrastructure sector delivered a net asset value return of 7.45 per cent over in 2021, according to the Association of Investment Companies data. The sector’s share price return over the same period was 7.38 per cent.

Private equity investment trusts had a great year, delivering a 29.85 per cent average NAV return and a share price return of 34.14 per cent.

Direct lending funds’ NAV return in 2021 was 9.77 per cent and their average share price return was 12.33 per cent.

UK logistics focused real estate investment trusts also had a stellar year with an average NAV return of 19.34 per cent and a share price return of 50.9 per cent.

Other areas investors have recently turned to for uncorrelated returns were litigation and equipment finance, and art investments, according to Neel Aryan Birla, head of investor relations at Hedonova, an alternative investment fund with allocations to hedge funds, art, private assets and P2P lending, among others.

Birla said litigation finance has historically delivered around 44 to 55 per cent, with equipment finance returning between 32 and 36 per cent. Over the last year, contemporary art has also been doing very well. The Artprice100 index was up 36 per cent in 2021.

Lower fees

One other advantage of P2P lending is that it can be lower cost for investors. While there are generally fees attached to borrowing on P2P platforms, many platforms do not charge fees to invest in P2P loans. This is very different from other alternative investments, where allocations are typically through a fund that charges an annual management fee and a performance fee.

the

P2P platforms more competitive as interest rates soar

RISING interest rates could pose an opportunity for peer-to-peer lending platforms, as mainstream lenders withdraw products and savers search around for yield.

The Bank of England hiked interest rates to 2.25 per cent on 22 September and has signalled larger rate increases on the horizon.

The policy move has resulted in banks and other traditional lenders limiting the availability of credit or significantly increasing the cost of borrowing.

However, P2P platforms have lower operating costs than their competition and are not subject to the same capital requirements. Furthermore, as they are funded by the crowd, they are not tied to the Bank’s base rate.

“Over the last few weeks, our competitors’ offerings

have either vanished into thin air or have hardened by “eye-watering” amounts,” Paul Sonabend, executive chairman at Relendex, said.

“Relendex is seeing high quality business, that in more normal times would have gone to a bank or other established lender, being offered to our platform.

“Perhaps unsurprisingly, it would appear that whilst in a low-inflation environment savers are often complacent about maximising their savings returns, with inflation at current levels it has become important for

them to find decent yields and savers are now more actively seeking out the better returns offered by our industry,” he added.

While P2P platforms already have an offering that competes with traditional finance, some are going even further and taking the opportunity to increase their comparative appeal.

“With our focus on servicing the residential development market and our ability to react quickly, we have decided to offer locked-in interest rates at the point of drawdown, which will remain locked in for the duration of the

facility,” Alan Fletcher, partnership director at Invest & Fund, said.

Kuflink chief executive Narinder Khattoare is more cautious, but notes that has seen more borrowers head to the platform.

“The plus side from P2P is that there are fixed rates on both sides, the key here is not to overexpose ourselves and lend knowing that both parties are able to exit the loan,” he adds.

Neil Faulkner, head of research and chief executive at 4th Way, said it was not the rising interest rates that would ultimately increase the number of P2P users, but “the industry's growing track record in treating borrowers fairly and providing investors with highly satisfactory returns.”

Kuflink readies for new product launches

KUFLINK is planning to roll out two new products in 2023, as part of its ambitious growth plans.

The peer-to-peer property lending platform is currently working on developing buy-to-let term mortgages and consumer secured loans.

“We are currently working on two new asset classes, although

launch of these has been delayed due to the current economic climate, we are confident of bringing these to market during 2023,” Paul Auger, head of products at Kuflink, told Peer2Peer Finance News

Kuflink has been on an expansion plan of late, launching new products including a new self-invested

personal pension pool. It is aiming to double its loanbook by next year as it scales rapidly with a series of new hires, upcoming product launches, and newly streamlined processes.

Earlier this year, Kuflink passed the £200m milestone of total funds invested to date.

The platform

previously revealed to Peer2Peer Finance News that it is in talks with institutional investors and may announce a new funding partnership in the coming months.

“We’re very close to signing terms with an institutional lender to give us a wider choice and availability of funds,” said Auger.

Agricultural finance platform offers up to 13pc returns

ECONOMICCONDITIONS

are deteriorating across Europe, while rising mortgage rates are set to dampen the property market. Investors looking to shore up their portfolio away from the volatility of the stock market now have a challenge on their hands.

This is where Lande Finance comes in. Launched in 2019, the Latvia-headquartered peer-topeer lending platform specialises in agricultural finance. European investors, including those from the UK, can lend to small- and mediumsized (SME) farmers, with the loans secured against collateral such as land, grain or machinery.

This is an ethical investment product that provides much-needed finance to Europe’s farmers, while offering investors sensible portfolio diversification and inflation-beating returns of up to 13 per cent.

“When we analysed the market, we saw that there are many real estate platforms and payday lenders but we thought that P2P investors may like a new product and asset class,” says Nikita Goncars, chief executive at Lande Finance.

“It’s a different part of the economy. Grain and agriculture are a basic human need. While property deals may slow down during the crisis, you can’t delay food intake.”

The war in Ukraine has caused the price of fertiliser, fuel and grain to surge, which has created a mammoth challenge for Europe’s farmers.

“As a result of higher prices, farmers need additional working

capital to start the season,” says Goncars. “One of the products we are implementing is called ‘buy now, pay at harvest’ – it’s a little like ‘buy now, pay later’, whereby farmers can obtain finance from us to buy their fertiliser at the start of the season and then repay us when they’ve sold the grains.”

This means that investors can do social good while earning bumper returns.

“There was a huge report commissioned by the European Investment Bank on creditworthy SME farmers which showed they are underfinanced by €46bn (£39.8bn),” Goncars explains.

“Banks cannot fill this funding gap even if they wanted to due to stricter regulations following the 2008/9 financial crisis, so it is down to the crowdfunding sector to solve this issue.”

Lande Finance attracts investors from all over Europe, including the UK. In fact, two of the platform’s five largest high-net-worth investors come from the UK, despite the company never having marketed itself in the country to date.

Anyone can invest in Lande Finance, with a minimum threshold of just €50, although the average investment size tends to be around €3,000.

Impressively, Lande Finance has been profitable from the start and used the proceeds from its lending activities to build its platform. It has now raised additional equity funding from angel investors to expand into other countries.

It has identified 12 potential markets in Europe for its growth plans, with Romania first on the list for a launch in the spring.

Investors can be further reassured by the fact that Lande Finance has received the very top rating from UK-based P2P ratings and research firm 4th Way.

4th Way heralded the platform’s high cover against losses, particularly given the high interest rates on offer.

“This is a huge responsibility for us but we appreciate it,” says Goncars.

For more information on Lande Finance, email info@lande.finance, visit https://lande.finance or contact Nikita Goncars directly on +371 20381802

A moment in time

RateSetter was one of the Big Three platforms, until Covid hit and it was acquired by Metro Bank. Kathryn Gaw finds out what really happened behind the scenes of P2P’s most consequential deal…

ITHAS BEEN TWO YEARS

since the first major acquisition of the peer-to-peer lending world. On 14 September 2020, Metro Bank announced that it had completed its acquisition of RateSetter in a deal worth an initial consideration of £2.5m, with up to £9.5m to be paid out after the completion of the deal.

Peer2Peer Finance News can reveal that the remaining £9.5m has now been paid, meaning that the platform sold for a total of £12m.

Already this is starting to look like the bargain of the century for Metro Bank. Earlier this year, the challenger bank announced that its consumer lending business had exceeded £1bn for the first time – driven largely by the performance of the RateSetter brand. In 2020, consumer lending represented just two per cent of Metro Bank’s loan book, but during the first half of 2022, it claimed a 10 per cent share.

These past two years have seen RateSetter’s management, loan book, technology and expertise merge into Metro Bank. Former RateSetter chief executive Rhydian Lewis now has an office at Metro’s HQ in London’s Holborn. His new title is managing director of consumer finance at Metro Bank, where he oversees the aforementioned

£1bn department. He also sits on the bank’s executive committee. Most of RateSetter’s former staff have remained with the brand at its new corporate home.

In 2021, the RateSetter business reached profitability for the first time during its first full year as a Metro Bank brand, with a profit before tax of £4.1m.

All the figures suggest that the merger has been a success for everyone involved. But what is the story behind the numbers?

We sat down with Lewis to get the inside track on the most consequential P2P acquisition to date. Starting at the very beginning.

2020

At the beginning of 2020, Lewis was preparing RateSetter for an initial public offering (IPO). This was something he had been openly mulling since 2017, as part of the platform’s plan to solidify its position as an “investor brand”. After successfully navigating a slew of new P2P regulations in late 2019, 2020 was set to be the year that RateSetter finally went public on the London Stock Exchange.

And then Covid-19 struck.

“The planning to raise money ahead of a listing coincided almost to the day of the first lockdown,” says Lewis.

“And the P2P industry was not

mature enough to receive the level of liquidity support that it needed.

“We had to do the responsible thing and look at the interests of protecting our customers and to the interests of our stakeholders and the platform’s stability.”

Practically overnight, the economy was thrown into turmoil and P2P platforms had to make some tough decisions about whether to pause lending, ban withdrawals, or carry on as normal and hope that things would work out. As one of the largest consumer lending platforms in the country, RateSetter was particularly vulnerable to the sudden risk of borrower defaults.

Lewis remembers this as an incredibly complex time. The fundamental value of the platform had not changed, but

the short-term risks threatened to reduce liquidity beyond an acceptable level. The coverage ratio of RateSetter’s provision fund fell from 113 per cent to 74 per cent within a single month. When the coverage ratio falls

of the P2P investing side of the business,” explains Rhydian. “But of course we saw a collapse in demand in that period.

below 100 per cent, it triggers a nine-month stabilisation period. This, coupled with lower demand for borrowing and investing, meant that Lewis had to make some very difficult decisions.

“We knew that the borrower side of the business was very high quality and had growth potential beyond what was visible in terms

“We had to deal with an extraordinary level of uncertainty, which required immediately thinking of what was in the best interests of our customers – both investors and borrowers. With borrowers it was about supporting them through forbearance and then the mandatory breathing space. And for investors, it was about how to protect them as best as possible.”

Lewis’ priority became getting the platform through the “extraordinary times” of March and April 2020. In May 2020, he entered into talks with Metro Bank.

In February 2020, Metro Bank

“ I have no regrets”

had publicly stated that one of its strategic objectives was to shift its balance sheet towards higher-yielding lending by offering more consumer loans. Metro also said that it wanted to enhance its digital offering. An opportunity emerged.

“Metro approached us,” Lewis confirms. “RateSetter offered a great way to do that in a way that would be faster than an organic route and Metro would be buying a business with the people who have the right skill sets and experience and technology.”

Lewis describes the acquisition talks as “very professional” with “thorough” due diligence. Talks concluded with an acquisition announcement on 3 August 2020.

The rapid pace of negotiations and the relatively low price of the deal sparked no shortage of industry chatter. Early estimates suggested that Metro would pay between £25m and £50m for RateSetter, which was described as a “knockdown price” by industry analysts. In the end, RateSetter sold for less than half of the most conservative estimate.

Lewis won’t be drawn on whether he believes Metro Bank got a bargain. “Timing is everything,” is all he will say. “I have no regrets.”

“Things conceived in extraordinary times are different from those conceived in wonderful times,” Lewis adds.

“I think it's worth passing one's mind back to what the atmosphere was actually like in the first lockdown. There was a period in the first lockdown when no one had seen this before.”

2021 2021 began with the end of RateSetter’s nine-month stabilisation period. By then,

the retail investment side of the business had already been closed off and was in runoff. In February 2021, Metro Bank acquired RateSetter’s loan book for a cash consideration of £384m. While we don’t know the total value of the loan book in February 2021, by June 2020, RateSetter had a loan portfolio of approximately

“ Metro had the foresight and courage in a very uncertain time to acquire”

losses, the provision fund could be used to repay investor capital.

By the time of that Metro Bank bought the loan book, no capital losses had been incurred by any of the platform’s investors, therefore the provision fund remained unused.

For Lewis and his team, the rest of 2021 was spent integrating with Metro Bank – a process that seems to have been relatively smooth for all involved. Lewis believes that this is due to the aligned cultural values of both businesses.

“RateSetter has always had a real focus on customers,” he explains. “And Metro is famous for its customer focus. So I think that was a cultural bridge, which is important because there has to be something to meld the two organisations.”

“Quite often acquisitions don't work,” he adds. “But Metro have integrated a fintech very well, which reflects well on Metro.”

However, despite the success of the deal, Lewis doesn’t believe that anything similar will happen again in the P2P world.

“This was a moment in time,” he says. “Metro had the foresight and courage in a very uncertain time to acquire.

“It was a landmark transaction. Will there be others? Yes. Will they work as well? I don't know, because I think that what drives us is that there was a mutuality to what was needed for RateSetter and Metro.

£850m, representing more than 84,000 lenders.

In acquiring the loan book, Metro Bank also acquired the RateSetter provision fund, which Lewis refers to as “the insurance

policy” of the platform. This pool of money was funded by a small investor fee, which was automatically taken every time an investment was made. The idea was that in the case of any

“I feel very proud of having integrated with the bank. I think the growth that RateSetter has managed to generate under Metro's ownership has been certainly in line, if not exceeding expectations.

“It's been a great success.”

“ There was a mutuality to what was needed for RateSetter and Metro”

Beyond the returns

ITIS NO SECRET THAT

peer-to-peer lending returns have outperformed both the cash savings market and the stocks and shares market over the past five years. Despite unprecedented economic volatility, the average annual returns for P2P lending platforms have remained relatively constant at approximately seven per cent. This includes years when the stock market suffered double-digit losses.

As interest rates start to rise again, it is a good time to remember that P2P lending has always delivered consistent results.

In fact, since Kuflink’s P2P business was founded in 2016, investors have seen zero losses of capital and interest, while collecting returns of up to seven per cent, every year. The platform is currently targeting returns of up to 7.44 per cent with a minimum investment of just £100.

This consistency is one of the reasons why investors keep using P2P lending platforms such as Kuflink. But Paul Auger, head of products at Kuflink, believes that P2P investors typically want more than just market-beating returns.

“Kuflink and its investors are a family with mutually aligned interests,” says Auger. “Our purpose is to give people returns on their money where traditional avenues have failed. We are also helping a sector where the country requires a lot of investment to build homes due to the surging demand.”

To date, Kuflink has raised more than £225m to fund UK property – a sector which badly needs more funding. The ability

to support the British economy and British businesses clearly appeals to investors. But they also want to invest their money with a company that listens.

Auger believes that Kuflink’s focus on excellent customer service has helped the platform to retain loyal investors.

“We are rated as excellent on TrustPilot and feel our surveys, along with live chats, telephone services and email facilities, help us pick up on areas we may need to improve to make our investor experience as wonderful as possible,” he says.

“Our investors always compliment our staff on how quickly they respond and the extra human touch that isn’t always available to them from other businesses. We are always open to suggestions for improvement, which we always try to implement.”

Kuflink also ensures that the investor journey is as transparent as possible, so that platform users

can track the progress of their investments and see how their money is growing. Auger says that many investors have told him that they like to engage with the platform “as a hobby as well as an investment vehicle”. This has inspired Kuflink to go the extra mile to ensure that investors are getting everything that they need from the platform.

Ultimately, this means “security, diversification and a proven track record,” says Auger. Not just higher returns.

“P2P has slowly been gaining popularity over the years, mainly due to the security and returns offered to our investors,” he adds. “Platforms such as ours, are popular with investors as our offering is asset backed and we have a proven track record in challenging times as well as the good times.

“We believe in financial freedom for our investors and strive to provide an investment vehicle that outperforms traditional savings accounts in every way possible.”

lending platforms have proven to be a highly stable means of investment for many years now, often outperforming the returns on more traditional investments, the industry remains disenfranchised when it comes to certain core investment schemes.

In particular, self-invested personal pensions (SIPPs), which offer flexible investment options

WHILE PEER-TO-PEERin a tax-free pension ‘wrapper’. In theory, these could be readily available on P2P platforms, but in practice they are few and far between.

This is in part because of a reticence on the behalf of P2P platforms to deal with some of the more complex rules, such as the connected party rules, which mean SIPP investors cannot lend to a ‘connected person’, such as a spouse or close relative.

Inadvertently, lending to a connected person is seen as a greater risk in P2P but there are ways to mitigate that risk, such as the use of loan pools. It is also the lender’s responsibility, not the platform’s, to avoid lending to connected persons, so adequately communicating that requirement would mitigate the risk to the platform.

However, even if a platform were happy to navigate the regulatory

Lucrative SIPP money will remain elusive until the peer-to-peer lending market matures, reports Hannah Gannage-Stewart

requirements, and a few are, the greater barrier to SIPP money entering the P2P market is demand.

There is little awareness of P2P among SIPP investors and there is little will among SIPP administrators, who facilitate these products, to educate investors on the potential benefits of diversifying into P2P.

While there are vast sums of money tied up in pension funds, they are also the domain of traditional finance and bringing that money into the P2P space, while not impossible, is a challenge.

Despite the challenges, P2P

property lending platform

Kuflink announced it had launched a SIPP pool earlier this year. It is one of very few P2P platforms to offer investments within a SIPP wrapper.

Kuflink chief executive Narinder Khattoare says having built up a pool of loans running into tens of millions of pounds to secure the pensions against, he is seeing growing traction from high-net-worth investors who want to diversify into P2P.

“I can't say there's a huge demand out there,” he says, but “at the moment, we've got about three or four people that have come in and put in sizeable chunks of money. There’s one individual in particular who has put several hundred thousand pounds into it and she's told us there’s another

half a million to follow.”

He says other investors stand to invest millions in the platform’s SIPP, so while it may be a small number of investors that take up the opportunity, the funds deposited can be substantial.

However, Kuflink’s journey to that point demonstrates why many P2P lenders have opted to steer clear. Khattoare says it took a long time, from initially considering SIPPs, to launching the SIPP pool.

Kuflink had to build up the loan pool, build up a team of people that understand the market and build a rapport with the SIPP provider Morgan Lloyd.

The latter can be one of the biggest challenges for P2P lenders in this space, as the tax-free SIPP wrapper can only be offered via

one of a few administrators, and they are not always keen to connect investors with P2P platforms.

Morgan Lloyd is one of the biggest SIPP administrators to work with P2P lenders, although there are others – Westerby Trustee Services is on Proplend’s roster alongside Morgan Lloyd, for example.

But it is not easy for P2P platforms to forge that partnership. Usually, it will be driven by the investors, and as few of the high-net-worth, generally sophisticated, investors that make up the SIPP-invested demographic are P2P literate, this is an infrequent occurrence.

Neil Faulkner, chief executive and head of research at 4th Way explains that administrators often do not see the due diligence involved in P2P as worthwhile. “It’s a lot of work when you're not even sure how many of your investors are actually interested in it,” he explains.

Faulkner says Morgan Lloyd classes P2P as a “niche” investment class, so while they do facilitate SIPPs invested in P2P platforms, they are clearly still not looking at widespread demand.

“They're willing to take the chance and put in the effort and become known in that space, as it might attract a niche investment,” he adds, but says that the cost of managing such “niche” investments, due to the increased due diligence, is far higher than with a standard investment.

“You're talking about a cost of £1,500 a year or so, as a flat fee just for having a SIPP. You need to be investing at least £100,000 pounds if you're investing in things like P2P lending through a SIPP because they are much more expensive.”

That said, Faulkner blames that cost on the archaic attitudes of traditional financial industries. While P2P did see some major

collapses early on its inception, Faulkner points out that the market has proved itself to be “incredibly stable” and have “resoundingly positive overall returns for investors” in more recent years.

“You can look at decades where it doesn't matter how bad recessions have been, they still managed to stay in the plus,” he says.

Crowd Property chief executive

Mike Bristow has got SIPP money on the platform’s books but is clear that it will take a major change of attitude among both investors and administrators for SIPP money to enter the market in any meaningful way.

“The only way that the market would shift in my view, is if there were fundamental SIPP pension holder demand to say ‘I need an

“ Everyone thought the pension market was the golden goose with the golden egg, but it's so difficult to get that client on board”

alternative asset class, such as P2P’,” Bristow asserts. “Then if a few of those large SIPP providers made a play on that as a differentiating factor, pensions transfers started flooding towards them because of that access into alternative asset classes, therefore more and more SIPP providers would need to open those asset classes up in their offering as well.”

Most P2P platforms prefer to offer ISAs, which unlike SIPPs are relatively easy for investors to transfer.

“It's actually incredibly difficult to move a SIPP,” Bristow explains. “Obviously, you can take cash out

of your ISA at any point, whether you put it back in or not, or just take it out, that's totally up to you. But pension money, once it's in, it's in, right until you reach a certain age.”

There are pros and cons to that. On the one hand, it is difficult to attract the SIPP money in the first place, but on the other hand it is sticky once it is in. Providing the investor does not choose to endure the difficulty of moving it, it is a large, reliable, longstanding investment.

“I think, everyone thought the pension market was the golden goose with the golden egg, but the fact is it's probably not because

it's just so difficult to get that client on board,” Bristow adds. “Whereas ISA money is much easier to get your hands on because, you know, if you've got an ISA, wherever it is, whether it's stocks and shares or cash or whatever, you're in control of that, and you can move it quite quickly.”

Relendex had considered entering the SIPP market, but executive chairman Paul Sonabend explains that after consideration, it has decided not to. “None of it makes any commercial sense,” he says. “Why create a whole new layer of intermediaries and associated fees when investors already have the IFISA tax advantage and can lend directly?”

It seems that, while SIPPs are still a while off becoming a mainstay of the P2P offering, any movement in that trend would be a clear marker of maturity in the P2P market. A trend towards more SIPP money coming into the market would signify greater trust in the platforms among administrators and a greater comprehension of P2P among sophisticated investors.

Meanwhile, a few early movers may be making their mark but an industry-wide drive to attract SIPP money looks unlikely while the gatekeepers remain content, as it remains profitable to offer primarily traditional investments.

“ We've got about three or four people that have come in and put in sizeable chunks of money”

Bridging the gap

SoMo’s Simon Cottrell talks to Marc Shoffman about rates, recoveries and regulation

SOMO

INVESTORS ARE

benefiting from an increase in interest rates as the cost of borrowing rises.

Simon Cottrell, head of recoveries and investor relations at SoMo, explains how the peer-to-peer bridging lender is adapting to the new economic and regulatory environment.

Marc Shoffman (MS): What trends are you seeing from investors?

Simon Cottrell (SC): We are finding a huge migration back to us from investors who maybe diversified elsewhere or who have maintained their levels of investment with us. In addition, they may have invested in stocks or cryptocurrencies.

With uncertainty in the stock market, we have found investors are now boosting their portfolios with us. While our borrowing rates are going up, so are the rates investors are receiving, which makes us a more attractive proposition.

For that reason, we are enjoying growth and huge demand. As soon as we launch a loan it is snapped up quickly. We tend to deal with people who are disappointed that they can’t invest.

MS: What is your approach to lending?

SC: We fund short-term bridging loans. Our offering is based on bricks and mortar, the open market value of the property. We look at what it is worth on the day we do a loan and

use our years of experience to apply sensible limits on the loan-to-value, which is capped at 70 per cent.

There is a moderate element of defaults but technically we are not referring to a legal default, people just go overdue. That is because the exits are either the sale of the security or they will refinance. The borrower will eventually redeem the loans. It is the nature of the business.

We have never lost any capital to date, and we are at around 1,000 loans. That’s a positive and reassuring statistic. Because we have experience of the mechanics of an exit, we can predict what will occur during the underwriting process. We won’t agree a loan unless we can see a realistic exit at the end.

MS: What impact will regulatory changes have on your platform?

SC: We predominantly deal with high-net-worth and sophisticated investors, that is 90 per cent of our customer base. The platform also has institutions, corporates and pension funds.

We have always been on top of regulation and have an experienced team in compliance. It makes us stronger as there are others who may fall foul or cannot accommodate the changes, which creates an opportunity for us. The regulatory changes don’t faze us.

Rules on risk disclosure and appropriateness tests help reassure investors. It will confirm if someone should or shouldn’t go through the process if they are unsure. We would rather deal with people investing in things they can afford to put money into. The regulations allow us to deal with the customers we should be working with.

Our minimum investment is £5,000. That takes away a huge

proportion of the market who are looking to invest. It is proper highnet-worth individuals and people with experience in this market.

MS: What feedback do you typically receive?

SC: Our feedback is extremely positive, primarily because our rates have gone up. There are stories of other investments on other platforms that have fallen foul. We are sympathetic but investors should know what they are going to get, there is consistency in our approach. We are extremely reactive to any questions and communications with investors.

MS: How has the platform reacted to the rises in interest rates?

SC: As the Bank of England base rate goes up, you would expect interest rates to go up in line with that. The market in terms of borrowing rates has stayed the same for a while. That is because we must still be competitive so our rates match the competition. Those have crept up now.

Our borrowing rates go up and then we pass on the increases to investors. It has moved up slightly and we are kind of back to where we were in the middle part of last year.

MS: Are you expecting more or less demand?

SC: The demand at the moment is extraordinary. You could probably fill each loan four-fold. That is great for us but frustrating for some investors as they can’t get on the platform to make an investment.

We are very cautious and haven’t waivered from underwriting. The platforms doesn’t match demand with loans, we maintain a steady path and don’t feel any pinch from any competition.

MS: Are you working on any new products?

SC: As a business we are always open to looking at new products. We have been looking at marketing our product to people at auctions, where you need to turn around a loan quickly. We do an element of that but it is growing.

We have also been looking at London as its own niche market as well as development finance.

In terms of the core business, we are doing very well. Our model works, if we see an opportunity that fits and can accommodate it, we will move forward.

MS: What are your expectations for recoveries?

SC: The main impact on borrowers at the moment is they may find it more difficult to refinance. We are very fair with our borrowers and give them good notice on when loans are due. We see how they are getting on with exit plans and make them aware there is a risk they will go overdue if refinancing takes a while.

Borrowers are offered solutions but we always advise they look at all options. There are more loans going overdue as refinancing opportunities are slower, but we are very flexible. We look at each case on its own merits, and can consider an extension.

There hasn’t been an adverse effect on the business but we are keeping an eye on it. A quarter of our loans go overdue. Half of those will have resolved the situation in three months and the rest within six months.

There are a small number of occasions where we have to go into recovery. In that scenario we still manage to return capital to investors and interest in most cases.

Assetz Exchange is a property investment platform delivering long term stable income for investors, primarily through the purchase and leasing of housing for social good. Regulated by the FCA, it provides the opportunity for investors to create a diversified property portfolio and alternative funding options for the housing sector.

www.assetzexchange.co.uk

T: 03330 119830

E: info@assetzexchange.co.uk

Folk2Folk is a profitable UK lending and investment platform. More than half a billion pounds has been invested via the platform with no investor losses to date. Loans are a maximum of five years, secured against land/property at a maximum 60 per cent LTV, with a fixed rate of typically 6.5 per cent, per annum.

www.folk2folk.com

T: 01566 773296

E: enquiries@folk2folk.com

Invest & Fund is an established alternative finance platform that has deployed over £190m on clients' behalf and has repaid over £115m to lenders with zero per cent bad debts written off. Lenders can achieve a diversified, asset-backed portfolio with gross yields averaging from 6.75 per cent per annum with an option to lend through an ISA or a SIPP for tax-free returns.

www.investandfund.com

T: 01424 717564

E: lending@investandfund.com

JustUs is an innovative peer-to-peer lender that provides a range of consumer and property-backed loans. It has lent out more than £20m and paid more than £1.4m in interest to lenders to date. Investors can enjoy returns of up to 10.69 per cent, with all products eligible to be held in an Innovative Finance ISA for tax-free earnings.

www.justus.co

T: 01625 750034

E: support@justus.co

Kuflink is an award-winning lender and online investment platform. With over £220m invested through the platform, investors can customise their own portfolio investing in specific loans or in a pool of loans diversified across a number of opportunities. Earn up to 7.44 per cent (compounded) per annum, with an IFISA available.

www.kuflink.com

T: 01474 33 44 88

E: hello@kuflink.com

LANDE is a crowdfunding platform that gives investors access to secured agricultural loans. It has created a unique scoring model, accessible infrastructure, and a variety of products so that farmers are able to access financing quickly and easily. With LANDE and its investors as partners, farmers can become more independent and sustainable, while improving their yield, efficiency and profitability. Projects offer interest rates of up to 13 per cent per annum.

https://lande.finance

T: +371 20381802

E: info@lande.finance

Lendwise is the UK’s only peer-to-peer lender that is dedicated to impact investing in education finance. Investors finance education for borrowers at universities and business schools across the UK and globally. Investors define their own risk appetite and use Lendwise’s AutoLend feature to diversify their strategy across a pool of loans, which can be invested in an IFISA wrapper earning average returns of up to nine per cent per annum. www.lendwise.com

T: 0203 890 7270 E: lenders@lendwise.com

SERVICE PROVIDERS AND INDUSTRY ORGANISATIONS

The European Crowdfunding Network (EuroCrowd) is an independent, professional business network promoting adequate transparency, regulation and governance in digital finance while offering a combined voice in policy discussion and public opinion building. It executes initiatives aimed at innovating, representing, promoting and protecting the European crowdfunding industry. www.eurocrowd.org

E: info@eurocrowd.org

Q2 creates simple, smart, end-to-end lending experiences that make you an indispensable partner on your customers' financial journeys. Its modular platform gives you the ability to manage lending simply throughout the entire loan lifecycle, from application, onboarding, servicing to collections. The result is a better experience for both borrowers and lenders. https://eu.q2.com

T: 020 3823 2300

E: info@Q2.com