Will The Increase In US Rates Affect Peer-to-Peer Lending Sector?

In the recent years, the peer-to-peer lending (P2P) sector has offered returns of up to 7% to investors.
Although investors can have direct exposure to the sector, several decide to put their money through specialist investment trusts.

Rising interest rates in the US could hit the peer-to-peer lending sector. But the manager of P2P Global Investments, Simon Champ, voiced that he is not overly worried about its impact on returns.

“As the average life of the loans we own is very short – that is about one to three years –  we are able to steer the book even if economic policy changes. We can get back 3-4% of loans in a month, coming back in cash and reapplying that to other loans. So we are not worrying about what is happening in the US as we have the ability to move the trust weighting to different areas as a fiduciary.”

The first firm that offered peer-to-peer loans was launched way back in 2005. From then onwards, the peer-to-peer lending sector has gained momentum. This has urged investors to lend money through these platforms, in a hope to get better returns than they would get on bank deposits. Accordingly, borrowers also benefit from this as loans remain at an affordable rate.

How will P2P sector fare when US rate goes up?

Holly Cassell, assistant manager on the Neptune UK Opportunities and UK Mid Cap funds, previously told Morningstar that it is uncertain how will P2P fare once rates increase and credit conditions get worse. In connection with Cassell’s statement, the head of multi-asset at Royal London Asset Management, Trevor Greetham said that he believes the peer-to-peer lending sector has not been assessed through the economic cycle.

Are returns in peer-to-peer trusts worth the risk?

Champ acknowledged that the present economic environment has helped to grow P2P lending facilities.

“We have not always been in such a healthy and safe economic environment. Today, consumer confidence remains high, unemployment is close to an all-time low, and many people have equity in their home in the UK, cash savings or other assets.” He pointed out that this means there is often little difficult servicing a loan. “I think we are in a relatively unique financial position today compared to the last 100 years.”

Champ claimed he is not over concerned about the rise of interest rate; rather he is anxious of a high upsurge in unemployment rates, mainly on a global scale, since a significant rise in unemployment could impact everyone’s ability to repay the debt.

“Half of our fund is consumer-lending, with the average loan size at less than £10,000.”

“If we have another 2009 financial crisis, then I don’t think we will make much money, to be honest. But we would strive not to lose any in these circumstances. This is why we look for the strongest funding platforms to work with and seek out quality loans,” Champ added.

According to Champ, the trust seeks to grow diversification in order to minimise these risks. Furthermore, he said the trust has investments in lending platforms in countries which all have strong banking settings and data — New Zealand, Australia, US, and in the United Kingdom.

The San Francisco-based LendingClub (LC) is one of the platforms that the trust is collaborating with. Globally, LC is considered as the biggest P2P lender. It provides 36 different credit ratings that are connected to different interest rates. This offers investors the chance to pick different risk and reward profiles.

For P2P Global Investments, LendingClub gives them the opportunity to concentrate on an extremely low-risk approach and high credit rating loans. Champ believes this can aid the trust to wear away any recession in the broader economic cycle.

Can banks and peer-to-peer lenders coexist?

Champ also put emphasis on the “amazing transparency” that P2P lending platforms have as compared to the banking institution. But he is convinced that in the long run, banks and peer-to-peer lenders vehicles will get along easily within the same marketplace.

“Bank regulation changed a number of years ago, to protect retail depositors. But greater regulation has made it difficult for banks in other ways. Therefore, I believe in the long term banks will not fight back, instead they will coexist with peer-to-peer lenders. It is just like the retail stockbrokers sitting side-by-side with Goldman Sachs.”

Sachin Patel, global co-head at Funding Circle SME Income Fund (FCIF) agrees with Champ’s opinions, saying P2P lending offers another way for small businesses to access finance.

“The market is huge. There are small businesses going to their bank for a loan, but they don’t know where else to go for if this loan application is rejected.” This provides an opportunity for peer-to-peer lending platforms to provide credit services to these small business clients, said Patel.

Primary fund managers invest in P2P lending

Peer-to-peer lending platform directly matches lenders with borrowers.  In the UK, the P2P lending sector is booming. Since 2015, the market is up by 39%. By the end of 2016, the sector reached about £3.2 billion, as shown in the records of BondMason, a direct lending service provider based in the UK.

Investment trusts that capitalise in peer-to-peer lending are also flourishing. With enticing profits of up to 7% for income-seeking investors, P2P investment trusts have fascinated several high profit fund managers. Morningstar’s record showed that Invesco Perpetual is the largest stakeholder in P2P Global Investments, having 30.2% holdings. Woodford Investment Management holds 9% of the trust while Thesis Asset Management has 7.5%.