Financial planners’ clients are emerging as some of the biggest hitters in the nascent peer-to-peer (P2P) lending space, which is delivering returns of up to 10 per cent per annum.
Daniel Foggo, the CEO of RateSetter, the only P2P lender available to Australian retail investors, says the average investor on his platform lends $11,000 and the average SMSF $57,000, but lenders put in by advisers typically invest around $100,000.
“Advisers are really understanding our product and putting their clients in with more meaningful amounts of money,” he says.
Online P2P lending platforms allow investors to lend money directly to borrowers. The most popular areas are personal loans and SME loans.
The platforms open up areas of lending previously that were previously the domain of banks, who reaped big profits by offering loans with huge interest rates.
P2P lending is attracting investor interest given the difficulty in earning income in a low-rate environment that has seen deposit, term-deposit and bond rates fall sharply.
The P2P market has exploded in the both the US and UK, where it has gained Government and regulatory support.
RateSetter began in the UK and is now the biggest P2P lender in Europe. It launched in Australia in 2012 and has facilitated $35 million of loans.
RateSetter offers lenders the chance to offer loans over one month, one year, three years and five years.
Foggo says financial advisers are typically choosing to lend for three or five years, which generates an average return after fees of 8 per cent, significantly higher than other cash and most fixed income yields.
Borrower’s default
Lenders are exposed to the borrower’s default. Foggo says RateSetter’s borrowers are of high enough quality to get bank loans, but they are looking for cheaper rates. On average they are 39 years old, have an average income of $90,700 and around 70 per cent are men.
But RateSetter charges borrowers a fee that contributes to a ‘Provision Fund’, which compensates lenders for late payment or default. The fund currently has $1.66 million held against $31 million of loans.
Lenders take a risk that the Provision Fund might run out during times of high unemployment and high default. “You’re really taking a risk on our provisioning for bad loans through the cycle,” Foggo says.
So far all defaults have been funded.
Foggo says advisers are viewing the loans as part of a diversified portfolio, and says they provide a middle ground between deposits and ‘volatile’ equities. He says advisers also like the ability to control interest rates, which have typically been handed down by banks and central banks.
“Advisers like the fact they are getting something that banks have funded for decades – consumer loans,” he says.
RateSetter is now working with a number of independent dealer groups to be added to their approved product list (APL), and it expects to be rated soon. “That will broaden our appeal and boost the number of advisers that can recommend the product to investors.”
The site is also working on building an adviser portal where advisers can manage all their clients.
A new way with an old product
Another fund, Global Credit Investments, is also targeting planners, but in their case those advising high-net-worth clients.
GCI was launched by former Bain & Co consultant, Gavin Solsky, and Goldman Sachs veteran, Steven Sher, to provide a managed fund-style solution to accessing P2P loans in the US.
Solsky says he started CGI after selling his company and needing to deploy his capital. He realised there was a significant challenge generating a reasonable return from fixed income.
He and Sher began looking around the world and discovered P2P lending.
“It’s an old product originated in a different way,” he says. “This is an old asset class that’s now become available to investors.”
Solsky says consumer loans, which have “been around forever”, offered the best risk-return equation. But they have been dominated by banks.
“P2P lending is still quite new in Australia, so we concluded the US is the best market to invest in,” he says, adding there are also big benefits for Australian investors to have $US exposure.
The partners hired a team out of investment banks and developed algorithms to scan the US P2P market to find where the best risk/return loans are.
“We think we can deliver high single-digit returns and be resilient to any downturn in economic conditions,” he says.
Early days
Solksy says a diversified P2P portfolio isn’t correlated with other asset classes and the sentiment that drives them. Performance “is unrelated to what’s happening in the investment market; it’s much more leveraged to unemployment.”
The fund, which launched in January, has just $10 million of funds under management and is only available to sophisticated investors. “It’s still early days,” Solsky says.
CGI has already engaged planners and has also talked with dealer groups about getting on their APL.
“We’re talking to planners. It tends to be planners dealing with high net worth and sophisticated investors. Not the small end of town.”
But Solsky says there is room for more planners to become receptive to new products, particularly in fixed income.
Solsky says in the past, planners have been more focussed on shares and property than fixed income investments.
“Planners need to get up to speed as technology continues to disintermediate financial services and banking,” he says. “They need to get their heads around what that means for new products and how that helps their clients.”
ASIC has warned that P2P lending platforms don’t lend their own money, so investors take all the risk. They may not get some or all of their money back if the borrower defaults. They also warn that money could be lost on loans deemed low risk.
ASIC also warns that credit assessment is a highly skilled and complex process, and investors are relying on the platform to assess and rate a borrower, “not an external credit rating agency”. It says P2P loans are not deposits and the Government’s deposit guarantee doesn’t apply. Some funds do maintain funds that compensate investors if a borrower defaults, but ASIC says that if there are a large number of defaults, the fund is unlikely to be able to compensate all investors.
