P2P Investing Summit Special Report - 29 April 2021 by Alternative Credit Investor

The peer-to-peer investing report Published in association with the P2P Investing Summit April 2021

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JOIN THOUSANDS OF ENLIGHTENED INVESTORS IN UK REAL ESTATE DEVELOPMENT Shojin opens the door to a new way of investing into lucrative real estate projects. We bring together an expert community of property professionals whose shared experience and commitment enable them to unlock unrivalled opportunities. All projects we offer are backed by the highest levels of due diligence and we only present projects that we invest in ourselves.

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Capital at risk. Shojin Property Partners is authorised and regulated by the Financial Conduct Authority (No. 716765). Shojin Property Partners is a trading name of Shojin Financial Services Limited (company number 09697161) and our registered office is at 47 Marylebone Lane, London, W1U 2NT.

INTRODUCTION

Introduction from report editor Kathryn Gaw

ur latest P2P Investing Summit could not have come at a better time. After more than a year of uncertainty, the end of the Covid-19 pandemic is within touching distance. The economy is slowly re-opening, and peer-to-peer lending platforms have begun to resume their usual lending activities again. But the pandemic has shaken up the industry. The P2P sector of 2021 looks quite different to the P2P sector of 2020. Some platforms have chosen to exit the space, while new brands have launched. Several platforms now have a track record of delivering governmentbacked loans to businesses, as part of the coronavirus business interruption loan scheme (CBILS). Others have entered into partnerships with challenger banks and other institutions, allowing them to scale up their lending activities and attract a new audience of investors. Most significantly, the P2P sector has

survived its first economic downturn – and the alternative lending community has finally proved its worth. P2P was born out of the ashes of the 2008 financial crisis, as an alternative to bank lending and stock market investing. Since then, the sector has matured considerably. Innovative finance ISAs (IFISAs) have brought tax-free P2P investing to the masses, and seasoned investors have been impressed with the consistent, inflation-beating returns on offer. Default rates have been lower than expected, despite the devastation of the pandemic, proving once and for all the value of platforms’ rigorous, fintech-led credit checking processes. This is a great time to revisit the industry and see what it has to offer for the modern investor. We hope that this report and the accompanying summit will shine a light on the sector, and give it the respect that it so deserves.

Introduction from our platinum sponsor, Shojin Property Partners

n the current low-yield environment, the alternative investment market has experienced considerable growth and is now worth over $15trn (£10.8trn). Whilst sovereigns and institutional investors naturally represent the lion’s share of this sector, there is increasing activity from mass affluent and retail investors globally. Online platforms have opened the doors for individuals to invest directly into institutional grade deals on a fractional basis. These investors can achieve higher

returns, while aligning with professionals who carry out extensive due diligence and oversight on their behalf. The leading platforms are starting to collaborate by bringing in standardised risk metrics and deeper liquidity, which is enabling the sector to evolve and move into the mainstream. Today, all smart investors are exploring an allocation to this part of the market. Shojin is excited to join Peer2Peer Finance News to explore how this sector is developing and raise awareness of some of the huge opportunities it offers.

PANDEMIC

P2P investing during the pandemic

N 2020, THE UK’S peer-to-peer lending community had to weather its first major economic downturn. As the Covid-19 pandemic spread across the world, national lockdowns and travel restrictions followed, and oncethriving economies ground to a halt. By the end of 2020, the FTSE 100 had fallen by 14.3 per cent – its biggest decline since 2008. Moneyfacts data found that the average stocks and shares ISA lost 13.3 per cent of its value during the course of the 2019/20 tax year, while the majority of cash ISAs were offering less than one per cent in interest. The P2P lending market was not immune from the economic fallout of the pandemic. But Peer2Peer Finance News research found that despite temporary account closures and even a few platform exits, P2P returns remained relatively steady. Our analysis showed that the average innovative finance ISA (IFISA) returned 8.45 per cent in 2020, and 8.72 per cent during the 2020/21 tax year – well above the rate of inflation, and with significantly less volatility than a stocks and shares ISA portfolio. As the end of the pandemic approaches, P2P has emerged as a steadying force during a time of prolonged chaos. Business lending platforms were among the first to offer payment breaks and other forms of support to small- and medium-sized enterprises (SMEs), and some of the larger platforms even joined the government’s coronavirus business interruption loan scheme (CBILS), to offer state-backed loans to SMEs impacted by the lockdowns. Investment activity remained relatively robust, and one year on from the first national lockdown, many platforms have been able

to revise their anticipated default rates downwards, proving the value of platforms’ risk management processes and recoveries teams. As we look back on a difficult year, it is clear to see what the P2P sector did right – and what it got wrong – when faced with its biggest challenge to date. Here are the industry's key moments during the pandemic. 1. P2P lenders join the government lending scheme The UK officially went into lockdown on 23 March, forcing the closure of many businesses and putting jobs and livelihoods at risk. The government announced that it would be rolling out a series of statebacked lending schemes to offer lowcost loans to struggling firms, starting with CBILS. By 17 April, Funding Circle had become the first P2P lending platform to be accredited to offer CBILS, joining a group of established lenders including banks and building societies. By November, Funding Circle had become the fifth largest CBILS lender, largely thanks to a raft of new borrowers. Assetz Capital, Folk2Folk and LendingCrowd were also invited to join the scheme along with a slew of former P2P lending platforms and alternative lenders such as MarketFinance, LendInvest and ThinCats. Together, they lent hundreds of millions of pounds to British businesses over the course of the year. The inclusion of P2P platforms on this list of approved lenders was seen as a tacit endorsement of the alternative finance sector. However, there was a downside to CBILS inclusion. Under the terms of the scheme, platforms could only tap institutional investors for funding

– not retail money. This meant that some retail-friendly platforms such as Funding Circle made the difficult decision to stop taking any retail money during the pandemic in order to focus on delivering CBILS funding to SMEs. Not all platforms took this approach. Assetz Capital and Folk2Folk continued to accept retail money for their non-CBILS loans throughout the pandemic. 2. Platforms manage withdrawal requests When investors began to realise the scale of the pandemic, they did what investors usually do in times of crisis – they withdrew their money. This happened across the board, and P2P was not immune. RateSetter and Assetz Capital were among lenders who chose to queue withdrawal requests due to increased demand, while Funding Circle and

PANDEMIC

others opted to close their secondary market, at least temporarily. Assetz also introduced a lender fee in May 2020, after experiencing a substantial drop in its income as a result of the pandemic. The fee was gradually reduced as lending volumes returned. 3. The IFISA space shrinks Several platforms paused new lending at the start of the pandemic, and that meant that there were fewer options for IFISA investors during the 2020/21 tax year. Before the pandemic, IFISA volumes were rising dramatically, with billions of pounds being held in the tax wrapper. But Peer2Peer Finance News research found that just 40 per cent of authorised IFISA managers were still offering access to their IFISA products during the last year – a substantial reduction on the previous year. Although retail investors had less choice in their IFISAs, the demand

was still there. Assetz Capital and Folk2Folk were just two of the lenders who reported record inflows of IFISA money ahead of the 5 April 2021 deadline. The majority of that money came via transfers from other platforms, which suggested that existing IFISA investors were keen to keep on using the tax wrapper, despite the reduced choice and a lack of marketing. 4. Some platforms wind down, but investors suffer no losses While most platforms adapted to the pandemic by pausing new lending activity or slowing withdrawals, others struggled to see a path through the crisis. Octopus Choice paused lending early last year and has since decided to close. Meanwhile, Growth Street initiated a liquidity event on 17 March 2020, stopping investors from accessing invested funds.

The business lender said this was due to a larger than usual volume of money not being reinvested amid coronavirus uncertainty, making it harder to fund withdrawal requests. It has since decided to close and has repaid all investors. The House Crowd also opted to close in February 2021, citing “financial issues”. However, despite these platform closures, investors in Octopus Choice, Growth Street and The House Crowd were told that they would not lose any money during the winddown process. The House Crowd said it does not expect its administration process to have a material impact on investors, while Octopus Choice and Growth Street told their investors that they would be repaid any outstanding capital and interest. It is worth mentioning that Financial Conduct Authority rules introduced in December 2019 required all P2P lending platforms to lay out a detailed plan for client money in the event of a wind down. As a result, all of these platform closures were able to be managed in an orderly fashion, without placing investor funds at risk. 5. New lending partnerships emerge The pandemic appeared to show banks the value of specialised lending, and the expertise of P2P consumer and business lenders in that space. Starling Bank partnered with Funding Circle to deliver £300m in CBILS loans, and alternative investment manager Intriva Capital bought Lending Works, promising to scale up its consumer lending business in the UK and Europe. In August 2020, Metro Bank announced that it would acquire ‘big three’ P2P lender RateSetter to boost its own consumer lending profile. By April 2021, Metro Bank would start offering RateSetter branded loans in its bank branches, marking the first time that P2P loans had been sold on the high street.

IFISA

IFISA returns have proved their consistency T HE INNOVATIVE FINANCE ISA (IFISA) was introduced to give taxpayers more choice when it comes to choosing tax-free investments. Cash ISA rates have reached a series of historical lows over the past decade, while stocks and shares ISA portfolios are by their very nature subject to volatility. IFISAs, on the other hand, could allow the average investor to access inflation-beating returns by investing through peer-to-peer lending and crowdfunding platforms. IFISA investments are not immune to risk – the key risk being that in case of a loan default, investors could lose all their capital. But research by Peer2Peer Finance News has found that despite the risk of defaults, IFISAs have actually maintained surprisingly steady returns over the past four years. For the 2020/21 tax year, the average target return being offered across 32 IFISA accounts was 8.72 per cent. Due to a lack of historical platform data, just 18 accounts were available for like-for-like analysis across the 12

months of 2020. With this in mind, the average actual return for IFISAs in 2020 was 9.4 per cent. In 2019, the average actual returns across 17 IFISA accounts was 8.45 per cent. And in 2018, the average actual returns across 16 IFISA accounts was 8.3 per cent. The IFISA was launched in 2016, but delays in regulatory approvals meant that most P2P lending platforms were unable to offer their own IFISA products until 2017 or 2018. These figures suggest that IFISA investments have held their value across the past four years, even amid a period of extreme economic uncertainty. Peer2Peer Finance News has counted 39 IFISA accounts which

are open to retail investors for the 2020/21 tax year. However, some of these IFISA providers only offer the tax-wrapper on individual bond products, which are subject to availability. This meant that target returns were not available for all IFISA accounts. Among the 32 IFISA accounts which shared target returns with their investors in 2020/21, eight were targeting double-digit returns, up to a maximum value of 16 per cent per year. The lowest target return recorded for the financial year was three per cent. By contrast, data from Moneyfacts found that during the 2019/20 tax year, the average cash ISA rate was 1.18 per cent, falling to 0.63 per cent for the 2020/21 tax year. The average stocks and shares ISA saw 13.55 per cent growth in the 2020/21 tax year, but a 13.3 per cent decline for the 2019/20 financial year. According to a recent study by P2P analyst 4th Way, a balanced portfolio of all P2P accounts would have returned at least 4.5 per cent to investors in 2020, with most investors earning between five and eight per cent. The data suggests that IFISA investments can offer returns that are both higher and more stable than cash ISA rates, with significantly less volatility than stocks and shares ISAs. This is true even during a period of unprecedented economic uncertainty, which has forced many businesses to close, at least temporarily. By working closely with borrowers and keeping investors informed, P2P lending platforms have been able to minimise the risk of defaults while continuing to deliver average rates of more than eight per cent per year, tax free.

Year

Average cash ISA returns

Average stocks and shares ISA returns

Average IFISA returns

2020/21

0.63 per cent

13.55 per cent

8.72 per cent

2019/20

1.18 per cent

-13.3 per cent

8.45 per cent

Sources: Moneyfacts, Peer2Peer Finance News

PROMOTED CONTENT

The golden age of property investing Lucrative returns from property development investments are no longer the preserve of the super-rich, as Shojin Property Partners’ chief executive Jatin Ondhia explains

E ALL KNOW THAT the big money in real estate is made during the development stage, however this is a very difficult area for most people to invest into. Whilst very profitable, investing in real estate development carries many risks and requires significant expertise to carry out the appropriate level of due diligence, which is both time-consuming and costly. Get it right however, and you could enjoy very strong returns on investment. For far too long, property investment was the preserve of the super-rich. The best us mere mortals could wish for was a buy-to-let investment. Given the government clampdown in this space, between higher taxation and tougher regulations, this is no longer as attractive as it once was. While rental yields have come down, returns on property development have remained strong. The UK is facing a crisis with a shortage of housing, and the ones to bring us out of it are small and midsized developers who can deliver schemes quickly. However, the same developers face a funding problem. A senior lender may provide 65 per cent of funding, but the remainder has to be contributed by the developer. Developers are like any other business, they need capital to grow and take on larger projects, so this presents a lucrative opportunity for smart investors. Investment into real estate takes two main forms. An “equity” investor sits alongside the developer in the capital structure, sharing the risks of the project and sharing profits, typically taking home returns of 20 to 25 per cent per annum. A “mezzanine” investor sits above

equity in the structure, to take a fixed return. Mezzanine carries less risk than equity but can still deliver returns of 14 to 16 per cent per annum. Variations of this include a hybrid of the two called “preferred equity”, where you might take a fixed return plus a share of profits. The biggest barriers to entry for investors into property development are money (you need lots of it) and expertise (to do the due diligence), but this is all changing. 20 years ago, it would have been unthinkable to have lots of investors in a single project, the administration would have been too burdensome, which is why only very wealthy people would invest with very large ticket sizes. Now, thanks to online investment technology, crowdfunding and peer-to-peer lending platforms have launched to fractionalise these investments,

enabling more investors to share the returns. However, with so many new platforms springing up, how do you know which platform to invest with? This brings us to the second barrier, expertise. While many platforms have shot up, not all of them have the skills or expertise in this sector and therefore risk may be underestimated. When you invest with a platform, you want to be sure that they have experience in real estate development and are able to carry out detailed and comprehensive due diligence. However, it should not stop there. A good platform should continue to monitor each project throughout its life, attend all professional team meetings and report back to investors regularly. This is important so that if the project is veering off track, they can use their expertise to help bring it back on track. A good platform should be confident enough to invest its own money into the scheme and sit in a first-loss position. That means that if something did go wrong, they would lose some money first before investors take any losses. A platform should also be truly aligned with investors’ interests by sharing profits at the end rather than taking hefty upfront transaction fees from investors. The world of investment is changing. Platforms are enabling investors to disintermediate traditional asset managers and access deals directly to benefit from enhanced returns. This is the democratisation of investments. There is a golden period of opportunity in real estate development right now, and it is getting the attention of smart investors globally.

IFISA

Every IFISA that is open for investment right now O VER THE PAST YEAR, the innovative finance ISA (IFISA) market has shrunk somewhat, as the pandemic saw many platforms pause new lending or pivot towards government-backed lending schemes. However, there are still plenty of options out there for savvy investors. Last year’s ‘Big Three’ IFISA providers – Funding Circle, Zopa and RateSetter – may be missing from the IFISA market this year, but Peer2Peer Finance News has counted 39 IFISA accounts that are accepting new investment right now. In alphabetical order, they are: 1. Ablrate A business-lending platform which once specialised in aircraft leasing,

and now offers asset-backed loans on property, capital equipment, and eco-projects. Target rates: 10-15 per cent Minimum ISA investment: £100

2. Abundance An ethical investment platform which helps to fund community bonds and green projects across the UK. Target rates: up to five per cent, depending on the investment chosen Minimum ISA investment: £5 3. ArchOver A business lender which allows investors to back secured loans in British businesses, or to offer shortterm advances to borrowers without security. Target rates: up to 10 per cent

Minimum ISA investment: £250 4. Assetz Capital The largest IFISA provider in the 2020/21 tax year, Assetz lends directly to businesses, with a particular focus on the property sector. Target rates: up to 4.1 per cent, depending on the account chosen Minimum ISA investment: £1 5. AxiaFunder The UK’s first litigation funding platform, AxiaFunder backs legal cases with a high chance of success. Target rates: 20-30 per cent Minimum ISA investment: £500 6. Blackfinch Investments An investment solutions group which usually works with advisers, but offers

IFISA

a handful of execution-only IFISAs to its high-net worth customers on request. Target rates: N/A Minimum ISA investment: £15,000 7. CapitalRise A property-backed lender which funds professional property developers in prime central London neighbourhoods. Target rates: 10 per cent Minimum ISA investment: £1,000 8. Carlton Bonds Backed by Growth Capital Ventures, Carlton Bonds offers fixed-term investments through property sector loans. Target rates: 7.75 per cent Minimum ISA investment: £1,000 9. Crowd for Angels Offers access to crowd bonds which specialise in secured lending to UK businesses. Target rates: up to eight per cent Minimum ISA investment: £25 10. Crowd2Fund Business lending platform that lends directly to small- and medium-sized enterprises (SMEs) across the UK. Target rates: 9.84 per cent Minimum ISA investment: £100 11. CrowdProperty A property lending platform which offers first charge security on each loan. Target rates: up to eight per cent Minimum ISA investment: £500 12. Crowdstacker A business lending platform which allows investors to back individual projects, secured by borrower assets. Target rates: up to 7.5 per cent Minimum ISA investment: £100 13. Cyan Finance One of the newer IFISA providers on the market, Cyan Finance offers a specialised green bond which allows investors to access a range of ecofriendly projects.

Target rates: 3.5 per cent Minimum ISA investment: £100 14. Downing LLP The crowd bond division of the Downing investment group, Downing bonds invest in asset-backed businesses across the UK. Target rates: up to seven per cent Minimum ISA investment: £100 15. EasyMoney Part of the ‘easy’ family of companies, EasyMoney invests in P2P loans backed by British property. Target rates: up to seven per cent, depending on the account chosen Minimum ISA investment: £100 16. Elfin Market The brand behind the Elfin Purse, Elfin Market allows investors to lend directly to consumer borrower via a P2P ‘credit card’. Target rates: up to 5.8 per cent Minimum ISA investment: £100 17. Ethex An ethical investment platform which offers an IFISA wrapper on selected bonds. Target rates: up to five per cent Minimum ISA investment: £100 18. Folk2Folk A business lender which specialises in rural business loans, secured against land or property. Target rates: 6.5 per cent Minimum ISA investment: £20,000 19. Fund Ourselves Short-term lender which offers affordable loans to consumers with a maximum value of £500. Target rates: up to 15 per cent Minimum ISA investment: £1,000 20. HNW Lending A P2P platform for high-net worth individuals only, HNW Lending arranges asset-backed loans for individuals, small businesses, and the directors of small businesses. Target rates: N/A Minimum ISA investment: £10,000

21. Invest & Fund Property-backed P2P lending platform which specialises in residential property and bridging finance. Target rates: 6.5 per cent Minimum ISA investment: £2,500 22. JustUs A property-backed lender which aims to become the provider of the biggest range of consumer mortgages and loans. Target rates: up to 9.61 per cent, depending on the account chosen Minimum ISA investment: £10 23. Kuflink A former bridging lender which now specialises in property development loans, co-investing alongside institutional and retail lenders. Target rates: up to 7.2 per cent Minimum ISA investment: £100 24. LandlordInvest A property-backed lender which invests in professional landlords who can offer security in the form of property. Target rates: up to 12 per cent Minimum ISA investment: £100 25. Leap Lending This consumer lending platform launched in December 2019 and rolled out its IFISA six months later. Target rates: up to five per cent Minimum ISA investment: £50 26. Lending Works An established consumer lending platform which provides first-loss cover via a contingency fund. Target rates: up to 4.5 per cent Minimum ISA investment: £100 27. Loanpad A property lender which offers two accounts with two different risk profiles. Lending partners invest alongside retail investors. Target rates: up to four per cent Minimum ISA investment: £10

IFISA

28. Money&Co Asset-backed P2P lending platform which allows users to choose from individual loans across a range of sectors. Target rates: up to eight per cent Minimum ISA investment: £1,000 29. Property Partner A fintech investment platform which offers an IFISA wrapper on selected property development loans. Target rates: N/A Minimum ISA investment: £1,000 30. Proplend Property-secured lending platform which specialises in UK-based commercial properties. Target rates: up to 12 per cent Minimum ISA investment: £1,000 31. Rebuildingsociety Acts as principal to a number of appointed representatives which also appear on this IFISA list. Rebuildingsociety also offers its own IFISA, which funds British SMEs. Target rates: six per cent Minimum ISA investment: £10 32. Relendex A P2P commercial real estate

platform which ensures that all loans are secured against UKbased property. Target rates: up to 11 per cent Minimum ISA investment: £500 33. Rockpool Investments A private wealth management company which allows investors to either build their own IFISAeligible loan portfolio, or invest in a Rockpool-managed fund. Target rates: 12 per cent Minimum ISA investment: £10,000 34. Share Credit An international lending platform which loans money in dollars and pounds to consumers and business owners. Target rates: up to 16 per cent Minimum ISA investment: £10 35. Shojin Property Partners Property-backed lending platform which funds loans through a mixture of investors, bank debt, the borrower and co-investment from the platform itself. Target rates: 12 to 15 per cent Minimum ISA investment: £5,000

36. Sourced Capital Property lending platform which exclusively provides finance via its Sourced Franchise Network, which offers training and ongoing support to franchisees. Target rates: up to 12 per cent Minimum ISA investment: £250 37. Triodos Bank The ethical bank also offers a bond investing service to customers, with IFISA-eligible bonds priced on a case-by-case basis. Target rates: up to seven per cent Minimum ISA investment: £50 38. Triple Point Triple Point acts as a direct lender to thousands of UK businesses through its IFISA-eligible Income Service portfolio. Target rates: 5.64 per cent Minimum ISA investment: £1,000 39. Unbolted Rooted in the pawnbroking model, Unbolted lends against valuable assets such as designer watches and jewellery. Target rates: up to 12 per cent Minimum ISA investment: £1

PROMOTED CONTENT

Investing with purpose

Folk2Folk looks at the increasing role environmental, social and corporate governance considerations play in investment decisions and how P2P supports this trend

INANCIAL RETURNS HAVE traditionally been the dominant decider when it comes to investment selection. However, it’s increasingly commonplace for investors to include other criteria when choosing which businesses to invest in – taking into account ethical factors such as whether the company is sustainably run, what impact it has on society, and whether it’s involved in activities they feel comfortable funding. More broadly across society there has been a general trend towards consideration for environmental and ethical factors, as recently evidenced by the controversy over Shell’s sponsorship of Science Museum Group exhibitions about climate change. Previously, ‘impact’ or ‘social’ investing was viewed as worthy but delivering weak returns. But times are changing as more investors seek out investments that align with their personal beliefs. It’s arguable that a rise in awareness of – and hence a closer emotional connection with – social and environmental issues, coupled with investor and consumer realisation that money talks, has resulted in a shift in priorities regarding where to spend or invest. Consumers can boycott brands whose practices or behaviours they don’t condone; and investors can choose to invest in companies whose impact (or lack of) aligns with the change they want to see in the world. Today there are more opportunities to make money while contributing to the social good. The creation of the environmental, social and corporate governance (ESG) framework has enabled potential investors to evaluate the ethical impacts of

publicly traded companies they may wish to invest in. Financial markets now provide ESG relevant ratings indexes such as the Dow Jones Sustainability Index and the FTSE4Good Index making it easier to dig deeper into the non-financial aspects of a business. Investing in opportunities with a positive impact no longer requires sacrificing profits for principles. This ethos neatly aligns with peer-to-peer lending, which can be financially rewarding while also naturally supporting a more direct link between investor and the business/cause. With a fixed interest rate of 6.5 per cent per annum and land or property as security, Folk2Folk offers compelling investment opportunities where investors can select projects that suit them, including: Renewable energy: Our investors have used their money to support their environmental concerns by investing in renewable energy projects. Affordable housing: Investors can contribute to solving the housing crisis by investing in development projects which include affordable housing. Helping to sustain viable local economies and communities: Investments via our platform often have a wider human impact – felt far beyond the business they are helping – which we call Folkonomics™. Flow-on local benefits may include

bolstering local supply chains, job creation, attracting new people and visitors to the area, and other businesses benefitting as a result. Helping to redress the economic imbalance across our country: The economic ‘levelling up’ of rural and urban Britain is topical, but something we approach without political agenda. We support the viable but underserved niche of businesses outside the large cities, enabling our investors to make a real impact in regional Britain. It’s not about altruism – investors still require a return – but a balance is struck and ESG related factors may more often form part of that total equation. Folk2Folk allows investors to meet that balance of fair returns while making a difference with their investment. Change begets change and this trend is likely to accelerate. Imagine if all investors invested with purpose as well as for profit. A shift along these lines could make a dramatic difference. It really begs the question: If you can help others while helping yourself, why wouldn’t you? Folk2Folk investors have lent £420m to date with no investor having lost any capital. Earn tax free via our Innovative Finance ISA. Capital at risk. No FSCS. Past performance is not a reliable indicator of future trend.

WAYS TO INVEST

Four ways to access the P2P sector as a retail investor

ETAIL INVESTORS WERE the original inspiration for peer-to-peer lending and they still play a crucial part in the industry today, providing diversified funding sources for platforms and a source of income for individuals in a low-interest-rate environment. Furthermore, the sector has evolved and there are now a number of ways that individuals can access the inflation-beating returns offered by P2P lending platforms. 1. Stock market investments Funding Circle is the only UKbased P2P lending platform currently listed on the London Stock Exchange. However, there are other ways to indirectly invest in the P2P sector. Metro Bank is listed on the London Stock Exchange and its recent acquisition of RateSetter means that an investment would give some indirect exposure to the P2P firm’s loanbook.

2. Crowdfunding campaigns Crowdfunding sites such as Seedrs and Crowdcube have been great sources of fundraising for P2P platforms. Platforms such as Assetz Capital, Abundance, CrowdProperty, Crowdstacker and Elfin Market have all launched crowdfunding campaigns in recent years. In return for their investment, supporters are offered a small amount of equity or convertible equity in the business, which means that as the platforms scale up, these ground-level investors will see the value of their stake increase accordingly. 3. Investment trusts After a spate of wind-downs, there are still a few alternative financefocused investment trusts listed in the UK. VPC Specialty Lending, Honeycomb Investment Trust,and GLI Finance are all still open to new investors. While the portfolio allocations are

different for each trust, all of these firms offer exposure to a range of alternative finance opportunities. 4. P2P lending platforms But of course, the best way to invest in P2P lending as a retail investor is via the platforms themselves. Although some platforms temporarily closed their doors to retail money during the pandemic, there are still plenty of options for would-be P2P lenders. The likes of Assetz Capital, JustUs, CrowdProperty, Kuflink and Folk2Folk are still accepting new retail investors. Despite the challenging economic climate, most of these platforms are still targeting inflationbeating returns for their investors – both institutional and retail. On many platforms, retail investors can also benefit from taxfree earnings thanks to products such as the Innovative Finance ISA. For more on these tax benefits, go to page 15.

DIVERSIFICATION

How to build a diversified P2P portfolio

EER-TO-PEER LENDING should have a place in any diversified portfolio. As a well-established and well-regulated investment market, P2P can help investors to access inflation-beating returns with less volatility than traditional stock market investments. But even within the P2P market, there is plenty of room for diversification. There is a common misconception that P2P lending means investing all your money in one loan. While many platforms do offer the option of investing in self-selected individual loans, this is far from the norm. Most platforms now encourage investors to diversify their money within an auto-investing portfolio, which spreads each individual investment across dozens, if not hundreds, of risk-assessed loans. Each P2P platform has its own specialisation and its own risk management process. For instance, a novice P2P lender might choose a relatively low risk P2P platform where each loan is secured by property or similarly valued assets. This means that if the borrower defaults on their loan repayments, the underlying asset can be sold to repay lenders’ capital. A more experienced P2P lender might prefer to choose a selection of individual loans which have a higher risk profile and higher target returns. This approach requires a lot more due diligence, and a much better understanding of the risk attached to each loan. Alternatively, investors can fashion a portfolio which is made up of both higher risk and lower risk P2P loans, thus diversifying within the alternative lending asset class. There are scores of active P2P lending platforms in the UK right now, all with different areas of expertise, and different investment opportunities. The three main segments of UK P2P lending are

consumer lending, property lending and business lending. Consumer lending is often referred to as ‘pure P2P’. Individual borrowers will apply for a loan from a P2P lender, and they are then subject to a rigorous credit checking process before their application is rejected or accepted. They are assigned a particular risk status, and their loans are priced accordingly. Investor funds are used to pay the loan, with investors receiving monthly or quarterly payments of interest for the duration of the loan. Property lending is quickly becoming the largest segment in the world of P2P. Investors can fund a range of different property loans across the UK, from social housing initiatives to prime central London properties. Some platforms specialise in finding property development opportunities, while others focus on the buy-to-let property market or commercial premises. The expertise of the platform is particularly important here, as lenders are counting on the platform to seek out lower loan-tovalue ratios and viable projects that

minimise the risk of a default. Business lending can come with or without security in the form of a property or other asset. This has become increasingly popular over the past year, as more and more lenders choose to back British businesses during the Covid-19 pandemic. There are several platforms where investors can choose to lend directly to a specific company, but most of the larger P2P platforms encourage lenders to pool their money and spread it across a large number of different businesses, for maximum diversification. As with any portfolio, the starting point should be your individual risk appetite. When you have found a platform that meets your requirements, do your due diligence, diversify as much as possible, and regularly review your allocations and risk profile in case anything changes. And of course, don’t invest more than you can afford to lose – while diversification can minimise the risk of losses, no investment comes with a guarantee.

PREDICTIONS

Peering into the crystal ball

O ONE COULD HAVE ever predicted how 2020 would pan out. But that’s not going to stop us from making a new raft of predictions for the rest of 2021! Here’s what we think the year will have in store for the peer-to-peer lending sector… Platforms will reach profitability It almost happened this year, but the coronavirus pandemic got in the way. But when next year’s financial results start to trickle in, we expect to see at least a few P2P lenders swing into the black. New platforms will enter the market We are already aware of a few new platforms which are set to launch in 2021. But even without this insider knowledge, it just makes sense that the P2P market will welcome new entrants next year. A looming debt crisis in the UK presents a major opportunity for alternative lenders, while the low interest rate environment will encourage more investors to seek out non-bank returns. Add in a swathe

of recent platform closures, and there is clear space in the market for a few newcomers. The IFISA market will boom 2020 was a quiet year for the Innovative Finance ISA (IFISA), as several platforms paused lending, delayed their IFISA launches, or shifted their focus to governmentbacked lending schemes. But as the economy starts to slowly recover from the pandemic, so too will the IFISA market. Stock market volatility and the threat of negative interest rates have left few options for yieldseeking investors. But with a fiveyear track record behind it, and inflation-beating returns across the board, IFISA investing should be an obvious choice for investors and advisers alike. There will be another P2P IPO The UK P2P market has not seen an IPO since Funding Circle floated on the London Stock Exchange back in 2018. Since then, several IPO rumours have been swiftly debunked, but 2021 could be the year that we see

another multi-million pound listing in the UK. We can think of several platforms which would be good candidates for an IPO this year. There will be more consolidation Market consolidation – long predicted – finally started to happen in 2020, with several high-profile mergers and acquisitions in the P2P space. We see this trend continuing, as platforms increasingly prioritise secure funding lines and scalability. A better, stronger industry Regulation tightened throughout 2020, with a permanent ban on minibonds and new marketing restrictions for P2P platforms. Meanwhile, the Senior Managers and Certification Regime (SMCR) aims to make directors at Financial Conduct Authority-authorised firms, including P2P platforms, more accountable – which can only be a good thing for the sector and its customers. The P2P industry has been quick to comply with all the new rules and we expect this to lead to a more resilient sector in 2021 and beyond.

TAX BENEFITS

Tax-free investment opportunities in P2P

ANY INVESTORS ARE attracted to the peer-topeer lending sector because of the returns. While target returns range between three per cent and 20 per cent depending on the platform, investors who maintain a diversified portfolio can typically expect annual returns of five to eight per cent. When these returns are reinvested, compound interest can quickly tip a mid-sized P2P portfolio over the personal allowance limit. For the 2021/22 tax year, up to £2,000 can be earned through savings and dividends before being taxed. This means that a P2P lending portfolio worth £25,000 earning more than eight per cent per annum would be subject to taxation before the year is out. As P2P lending becomes increasingly popular, investors will be

keen to seek out ways to protect their investment from excess taxation. Luckily, there are a few options available to them. INNOVATIVE FINANCE ISA Launched in 2016, the innovative finance ISA (IFISA) has seen rapid growth over the past five years, passing £1bn in deposits in the 2019/20 tax year. Over the past year, the pandemic has caused several P2P platforms to pause retail lending, and this has had a knock-on effect on the number of IFISAs on the market. However, IFISA investors impacted by the closures have simply transferred their funds into another IFISA account on another platform. IFISA investors can add up to £20,000 per year into their accounts without paying any taxation on their returns. Under HMRC rules, just one new IFISA account can be opened

per taxpayer, per year, but there is no limit on the number of transfers that can be made. Effectively, an investor could open one IFISA and then divide their capital investment across nine more platforms. Recent research by Peer2Peer Finance News found that the average actual annual return for IFISA funds has remained consistently above eight per cent over the past four years. When compound interest is taken into consideration, that is a huge pool of tax-free earnings that can build up over time. SIPPS and SSAS The other way for P2P investors to benefit from tax free returns is by making P2P lending a part of their pension portfolio. A growing number of P2P lenders now offer self-invested personal pensions (SIPP) or small selfadministered schemes (SSAS), which allow taxpayers to contribute up to 100 per cent of their annual earnings before tax up to a limit of £40,000. Income tax relief is offered on any money paid into a SIPP. At the age of 55, SIPP-holders can take out up to 25 per cent of their money tax free, with the remaining funds being taxed as income. By carving out a P2P allocation in their portfolio, pension savers can boost their overall returns and diversify away from potentially volatile equities investments. Furthermore, by taking a longer-term investment standpoint, SIPP and SSAS investors can afford to back a range of P2P lending opportunities, from 10-year fixed rate bonds, to easy access consumer lending accounts. A P2P allocation can also help investors access dynamic parts of the economy, such as property developments, green bonds, and individual loans. Of course, no investment is free from risk. But by wrapping their P2P portfolio in a tax wrapper, investors can maximise their returns and shield a high-yielding investment from the taxman.

PROPERTY

The phoenix rises

The property market may be facing challenges, but peer-to-peer property lenders are seizing on opportunities – and investors can benefit

N ANCIENT GREEK folklore, the phoenix signifies new life when it rises from the ashes of what came before. Peer-to-peer property lending platforms evoke this mythical phoenix. While the UK’s property market has flamed out during a year of lockdowns and other restrictions, P2P property lenders have swooped

in to show the old guard what can be done with a little innovation and an eye for opportunity. While property sales have flagged and prices have remained stagnant, P2P property lending has remained buoyant. Buyers have been determined to make the most of the stamp duty holiday before it ends, however when it does, there will

likely be another slowdown in the housing market, even if it is only in the short-term. In the meantime, there are a vast number of existing opportunities for P2P property platforms to show what they are made of. Unlike traditional banking institutions, alternative lenders can adapt to the ongoing effects of the Covid-19 crisis. This is

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particularly evident when it comes to distressed properties. Anyone can find an undervalued property at auction and use P2P money to buy them. But although there are always opportunities for investing in distressed assets – even in good economic times – these opportunities increase during a downturn. “There’s the opportunity in P2P for investing in distressed assets, properties that are undervalued,” says Terry Pritchard, director of Charter HCP, a commercial loan brokerage which plans on launching into the P2P space. “The market will be horrible so be prepared for it, but it will come back, and investors can make money and do well out of it. “Platforms need to adapt, you can lend through any crisis, you just need to adapt your lending policies. The difference this time from the last crisis is there’s liquidity in the market,

we’re not short of money to lend, it’s just finding the opportunity to lend.” Mike Bristow, chief executive of CrowdProperty, says that his platform will assess any of these distressed asset investments like any other project and support them if they match the platform’s criteria.

Similarly, there are opportunities for platforms on the high street, where a number of shops have closed permanently due to Covid-19 and its subsequent lockdowns. For example, Mothercare entered into administration after failing to find a buyer that would allow it to continue

“ P2P property lending will continue to

demonstrate excellent risk-adjusted returns for quite some time “We’re not as a business out there hunting for distressed assets,” he says. “Our borrowers may be out there looking for distressed and nondistressed assets. “If it’s a good economic project, a site at a good price that makes the economics work, whether distressed or not, we will back it.”

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trading, and blamed challenging high street conditions including high rents and the shift to online shopping. Several P2P platforms have already spotted an opportunity to fund the conversion of high street shops into residential homes, especially given the recent easing of planning rules. From September, new legislation on

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permitted developments removed the requirement for planning permission when demolishing unused commercial properties to build residential homes in their place. “There are platforms that specialise in funding conversions to residential,” says Filip Karadaghi, co-founder and chief executive of LandlordInvest. “I think they will get more enquiries as a result of this.” However, Stuart Law, chief executive of Assetz Capital, is mindful of inner city density and says that financing commercial to residential conversions in the suburbs of city centres would be more attractive. “The high street equals density and with people and the virus it won’t be the most buoyant deal converting a town centre into residential homes,” he says. “I can see in the high streets’ suburbs possibly, but demand is somewhat restricted in city centres where you have lots of competition.” Neil Faulkner, managing director of P2P analysis firm 4th Way, warns that even though there are opportunities here for P2P property platforms, many firms have failed to revive collapsed brands, so caution is needed. “In-person shopping is far from dead,” he says. “P2P property platforms that carefully scrutinise the area, footfall and prospects, and set sensible loanto-values (LTVs), can safely offer such loans to investors.” He goes onto say that P2P platforms can service the high-quality property borrowers that are being seriously underserved due to the pandemic and Brexit concerns. Atuksha Poonwassie, managing director of Simple Crowdfunding, says that the Covid-19 crisis has prompted some platforms to partner with banks to provide mezzanine finance to property borrowers. This fills a gap in the market where borrowers are being left short of the funds they require after traditional lenders have tightened their criteria. “There are lots of good things that

“ You can lend through any crisis, you just need to adapt your lending policies

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have come out of Covid, so it’s just a case of tapping into that opportunity,” she says. “There is still finance available, but lenders have changed their criteria so

borrowers are looking elsewhere to P2P and crowdfunding for additional layers of finance.” But the prospect of a property slump after the stamp duty holiday ends has put property platforms on high alert, ready to pounce when the next deal appears. Several P2P property lenders have expressed to Peer2Peer Finance News that they can adapt to any predicted slowdown as there is such a strong need for property funding away from the banks.

PROPERTY

“ There is still finance available, but lenders have changed their criteria

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The ongoing housing shortage means that more homebuilding needs to be financed and thus there is a place for SME developers, a group that have historically found it difficult to raise funds from mainstream lenders. It also goes without saying that people still want to own their own home and the need to buy and move at different life stages will remain. In addition, given the record low base rate, now is the perfect time for these platforms to be lending.

“Overall, P2P property lending will continue to demonstrate excellent risk-adjusted returns for quite some time,” says Neil Faulkner. “The sector will continue to grow and take over market share. Potentially, at some point, the reward investors receive will come down to better reflect the typically lower risks in this sector, but investors will have many years before their returns slip from being extraordinary to merely satisfactory.” There is also an opportunity for

P2P property platforms to tap into one of the biggest investment trends du jour – environmental, social and governance (ESG). A number of platforms have already been supporting environmentally friendly and sustainable housebuilding and cite this as an area of growth. For years, Assetz Capital has supported good quality offsite manufacturing of homes and CrowdProperty has backed sustainable modern methods of construction, and now Relendex is joining the party. Last year the platform partnered with developers who were cognisant of the issues around climate change and going forward it will work with independent trustees with proven environmental credentials to find a way to incentivise its developers to adopt best practices. “In the short-term, suitable developments will be highlighted on our platform,” says Paul Sonabend, executive chair of Relendex. “We hope that our lenders will accept a lower rate of return on these loans in the knowledge that our borrowers meet the highest ESG standards which adds to their costs, and therefore merit preferential finance rates.” Despite the wider macroeco¬nomic challenges impacting all businesses and industries, it seems certain that P2P property platforms will take every possible chance to innovate and grow. This sector is set on stoking the flames of the beleaguered property market, spotting new possibilities, and producing inflation-beating yields for investors.

The P2P Investing Summit Peer2Peer Finance News and AngelNews are delighted to present the P2P Investing Summit, a quarterly event series for the investor and adviser community. Our virtual events showcase high-profile speakers and expert panellists, to provide an insight into the untapped opportunities provided by peer-to-peer investing. These events are exclusively for investors and advisers. Please put the next Summit dates in your diary now, to avoid missing out! Tuesday 13 July 2021 Thursday 28 October 2021 If you are a peer-to-peer lending platform interested in sponsoring the next Summit, please email Tehmeena Khan at tehmeena@p2pfinancenews.co.uk. Previous sponsors include: