Marijana No Comments

P2P Lending Investment Returns Outstrip Many Market Competitors

Peer to Peer (P2P) lending may be one of the newest kids on the investment block but according to new research from AltFi, it is paying out handsome returns.

P2P lending arrived in the UK back in 2010 with the launch of Funding Circle. The idea was simple. In the wake of the financial crisis, banks were – and still are – paying abysmally low rates of interest to savers. P2P platforms allowed savers to collectively lend money to businesses and individuals, usually over relatively short periods of time. By cutting out the middleman (or to be more precise, banks and other traditional lenders), P2P lenders were able to offer competitive rates to borrowers and superior returns to investors.

The market has evolved over the years. AltFi – which provides specialist news for the alternative investment industry along with a range of analytics services – says the market is growing rapidly. For instance, in 2015, P2P lending platforms brokered around £1.1bn in loans. In the first half of 2018 alone, the figure was £3bn. Separate figures from the Peer to Peer Finance Association reveal that its members have, to date, originated loans to a value of £9bn.

As P2P lending platforms have proliferated, there has been a considerable amount of specialisation. Many are open to a broad spectrum of investors, ranging from private individuals on relatively modest incomes,  seeking a way to make their money work a bit harder to institutions, such as pension funds. Some platforms focus on wealthier investors or specialise in certain sectors, such as the property market.

Beating the Market

According to AltFi  Data’s  Lending Returns Index,  P2P platforms delivered a return of 18.92% to investors between June 2015 and June 2018. Based on an analysis of data from Funding CircleMarket InvoiceRate Setter and Zopa, that figure has been calculated after factoring in losses and fees. The average return not only compares more than favourably to the average returns from bank savings accounts that typically offer 1.5% per annum or less (even after the Bank of England’s hike in rates) but also with the more rarified forms of investment favoured by professional investors.

AltFi cites the example of the M&G Optimal Income fund, which returned a premium of 12.6% to investors over the same period. Overall, the report says that P2P returns outperform many large investment funds and bond investment opportunities.

The target interest rates advertised by some of the leading  P2P platforms confirm that the returns from P2P offer attractive returns. For interest Funding Circle currently targets a return of 7-8% per year for its investors. Zopa targets 4.5% per annum for low-risk loans and 5.2% for those who are happy to live with a slightly riskier proposition.

A Lot of Variation

However, the returns enjoyed by investors do depend on the performance of the loans and as Uma Rajah, CEO of prime property focused platform lender CapitalRise observes,  returns vary from 2% to 12% per year, depending on the platform.

“The rate of return depends on a lot of factors – the level of risk, the creditworthiness of the borrower and the purpose of the loan. That’s why annual returns can vary so much from platform to platform.”  

A Safe Investment

But given that high returns are available, should the ordinary saver (aka ‘retail investor’  in the parlance of the financial services industry) be rushing to take money out of his or her easy-access savings account and put it instead into a P2P platform?

Investing via a P2P platform is a relatively simple process. The platforms in question are essentially online marketplaces that bring together prospective borrowers with investors who have cash they are prepared to lend in concert with others. For its part, the platform vets those who are applying for finance – assessing their creditworthiness –  and then presents a range of loan propositions to prospective lenders. Every platform works a little differently but in most cases, the loan opportunities will be rated in terms of the associated risks and an interest rate is set accordingly. Generally,  investors, have the ability to choose a particular loan opportunity but some platforms ask for funds to be pre-committed and the platform itself makes investment choices and funnels that cash to borrowers. In an ideal world, investors lending through a platform can choose a rate of return that aligns with their own appetite for risk.

More Regulation

Despite the success of P2P, there are still some question marks over its suitability for ordinary investors, as highlighted in July by the industry regulator, the Financial Conduct Authority (FCA). While the regulator has been broadly supportive of  ‘alternative finance’  it has expressed concerns that some platforms are not providing sufficiently accurate or transparent information about investment opportunities on offer. So under proposed new rules, all P2P platforms will have to be much more open when it comes to disclosing information on interest rates (real and expected),  default rates and the risks associated with each loan.

The FCA is also calling on platforms to tighten up their approach to marketing, saying that some lenders were being exposed to opportunities that fell outside their stated risk comfort zone. More controversially – at least within the industry – the regulator is also proposing that the marketing of some P2P products be restricted to ‘sophisticated investors’  – or to put it another way, individuals who tend to be wealthy and can demonstrate that they are financially literate.

It would be wrong to suggest that P2P investing is unacceptably risky – as the AltFi research indicates, the returns after losses remain high. But the reforms should provide an added safety net and have been broadly welcomed by the industry as a positive step. As David Bradley Ward, CEO of the P2P platform, Abirate put it:

“For the P2P lending industry to grow further, it needs to be effectively regulated. In short, this means there’s a fair playing field for lenders, borrowers and platforms. FCA regulation has cemented peer-to-peer lending as a mainstream financial service but to reach its full potential the industry must ensure best practice at a time when the FCA is seeking the adoption of good practice.”

Uma Rajah points out that there three different categories of lending – consumer, business and property – and each have their own risks associated.

“Loans to SMEs and consumers are usually unsecured,” she says. “What this means, in a nutshell, is that should the borrower be unable to repay the loan, investor capital is lost. Property loans, on the other hand, are secured against the properties themselves with a legal charge. The easiest way to understand this is to imagine that should the borrower be unable to repay, the lender (or lenders) could seize the property and force its sale in order to recoup their capital.”

P2P Lending is now part of the mainstream. The Altfi report suggests that it is delivering consistently high returns. But the opportunities and risks vary according to the platform and the nature of the loan.

Source: CashLady

Marijana No Comments

1 in 5 homeowners using mortgage alternative

Research by Market Financial Solutions shows 19% of homeowners have used a form of alternative finance, ranging from crowdfunding to mezzanine finance and unregulated loans.

The bridging lender commissioned an independent, nationally representative survey among more than 2,000 UK adults to uncover just how Brits have been financing their property purchases. Of those who have bought a property since 2007, 42% identified as cash buyers while a further 52% said they had used a mortgage or re-mortgage.

The number opting against a conventional mortgage is at its highest amongst millennials, with 29% of respondents aged between 18 and 34 stating to have used different forms of finance. Meanwhile, 13% of homebuyers said they had used a bridging loan – this number increased to 21% for those who were investing in a second home.

The UK’s alternative finance industry is currently worth over £4.6bn. However, 46% of survey respondents stated they did not have enough knowledge or confidence in finance options other than mortgages to consider using them. Nearly a quarter of buyers said they would have liked to have considered other financial products but feared they would lose out on their property purchase if they delayed their credit decision. Nearly half did not have a strong enough understanding of bridging loans or the situations in which they can be used.

When asked about the factors influencing their decision, 37% of homebuyers said they relied on a broker to recommend the different financial products available to them.

Source: PlaceTech

Marijana No Comments

Fifth of homebuyers seek mortgage alternatives

Alternative finance, including crowdfunding, mezzanine finance or unregulated loans, was used by 19 per cent of home buyers in the past decade, research has found.

Research commissioned by bridging lender Market Financial Solutions, found 52 per cent of borrowers used a mortgage or remortgage to finance a property purchase in the past decade and 42 per cent had purchased using cash.

Alternatives were the least popular options, with bridging considered by a mere 13 per cent of homebuyers. However, alternative finance was used by a respectable 19 per cent of borrowers.

The lender had surveyed 2000 residential homebuyers who had a bought a property in the last ten years, with a quarter of the sample owning two or more residential properties in the UK. About 37 per cent of homebuyers had sought advice from a broker when considering their funding options.

It found 46 per cent of homebuyers felt they did not have the knowledge or confidence in alternatives beyond mortgages to choose them.

The lender claimed homebuyers were restricting their ability to find funding because they lacked the confidence to consider alternative finance options.

Paresh Raja, chief executive at Market Financial Solutions, said: “To remain reliant on the mortgage market could restrict an individual’s ability to get the funds they need.

“Indeed, in the UK’s competitive property market, it is essential that buyers are aware of the financial products they can choose from, in turn putting themselves in the best position to progress with a purchase quickly and efficiently.”

Mr Raja added: “Over the past decade, a range of new alternative finance products has arisen to give buyers different options that might be better suited to their needs – however, today’s research demonstrates that there remains a lack of understanding about what these options are and how to use them.”

But Ruth Whitehead, financial adviser and director at Ruth Whitehead Associates, said she was pleased that bridging loans remained a minority pursuit, considering them an expensive option that should be used as a last resort.

She said: “Traditionally their function has been to ‘bridge’ the gap between sale and ongoing purchase, if the sale process is too slow. However, in the current market in London, which is significantly affected by the uncertainty around Brexit, this situation rarely obtains.

“Property values are going down, and it’s better for a purchaser to complete on their sale, bank the proceeds and then couch-surf while looking for a property to buy without a chain behind them – bridging loans are only ever intended to be short term, and are extremely expensive.

“They have some applicability to a shrewd property investor who can afford to take the risk of not being able to raise the finance to pay off the bridging loan, but for our clients buying and selling their main residence, the word ‘bargepole’ springs to mind.”

Source: FT Adviser

Marijana No Comments

Investors tap alternative funds in buy-to-let struggle

Property investors are opting to raise alternative finance after struggling to secure buy-to-let mortgages, the latest property Investor Survey conducted by short-term finance lender, mtf, has found.

Some 57% of 84 property investors struggled to secure a buy-to-let mortgage in the past 12 months, with 62% citing affordability criteria as the primary barrier to mainstream funding. This was followed by age restrictions at 20% and insufficient deposit capital at 18%.

Yet 43% surveyed filled the funding gap with other sources of liquidity, as 40% of those opted for secured loans and 30% raised bridging finance.

Tomer Aboody, director of mtf said: “The results from our Q1 Property Investor Survey reflect the impact of stricter affordability and stress testing from lenders on professional property investors’ ability to obtain mainstream funding.

“However, specialist lenders are stepping in to meet the needs of borrowers and fill the liquidity gap.”

Some 57% thought a more flexible approach to lending was key for mainstream buy-to-let lenders improving. And 29% said a reduction of processing times would be the best improvement, while 14% felt offering better rates would help greatly.

Source: Mortgage Introducer

Marijana No Comments

The Crowdfunding Trend – Threat or Opportunity?

Crowdfunding was previously only an approach for start-ups to get up on their feet, but the method is now showing potential for established companies to shift their strategy and encourage positive and profitable change. Lauren Razavi analyses the potential of crowdfunding as both a disruptive threat and an opportunity for established companies.

Crowdfunding has been gaining more and more ground in recent years, especially among European consumers. It might seem like a trend embraced only by start-ups desperate for cash, but in reality crowdfunding is quickly becoming a useful tool to recruit and maintain an enthusiastic client base for companies across multiple industries.

We live in a world in which failure to adapt to technological advances can spell destruction for a company. But is crowdfunding a dangerous threat that start-ups will use to disrupt industry, or an opportunity for established players to make profitable changes to their process?

Alternative Finance 101

A report by CrowdfundingHub.eu identified four major types of crowdfunding:

  • Donation Based crowdfunding relies on the charity of the customer base, with little to no anticipated reward. The biggest risk is that the company won’t raise the funds they need to deliver on their promises – in which case, they are responsible for either returning the donations or funnelling them into an acceptable project.
  • Reward Based crowdfunding provides security to the investor by giving them a sample of the finished product. This will satisfy most consumers, who aren’t looking for a share of the profits but simply to support an idea they find compelling. However, this type of crowdfunding requires the company to actually have a sample product they can ship, which means that the initial funds will have to come from another source.
  • Equity Based crowdfunding is similar to traditional investment methods in that the backer will receive a stake in the company, and possibly even some control over the final product. The primary issue with this type of crowdfunding is that in Europe the company will be subject to the regulations and policies of the European Banking Authority.
  • Peer-to-Peer Lending is also similar to traditional financing – the backer will provide funds on the understanding that those funds will be paid back with interest at some point in the future. In some countries such as Italy and Belgium, peer-to-peer lending is prohibited, and there are various other restrictions in place across Europe.Each type of crowdfunding has its own pros and cons, but a major advantage of all of them is that they are more accessible to less established companies who may not be able to guarantee a consistent return on investment.

Industry Disruption

There are some concerns that the rise of crowdfunding will cause major disruption across industries. According to the world bank, 2016 saw more money raised from crowdfunding than from venture capital.

That’s bad news for investment managers – instead of paying costly legal and management fees, big investors are now choosing to cut out the middleman and interact directly with the companies they feel best align with their interests. As more and more platforms choose to cater to specific industries, investors are better able to make decisions for themselves, instead of relying on financial experts who charge fees for their knowledge.

The unregulated nature of the crowdfunding sector is also a cause for concern. In Europe, regulators have struggled to harmonise the challenges that  crowdfunding brings with existing financial practice. In Finland, for example, there is no requirement for crowdfunders to have an MiFID licence, which means that companies who have obtained a licence are more strictly regulated than their unlicensed competitors. Other nations have been quicker to adapt – in France and the UK existing legislation has been brought smoothly up to date to be compatible with crowdfunding.

However, it can’t be denied crowdfunding is bringing in some much needed changes, especially in European markets. Traditional investors tended towards funding large, trusted companies during the financial crisis, which meant that many small to medium businesses were lagging behind in capital investment. Crowdfunding means that general consumers can now invest in local, small to medium businesses from their smartphones – and that means that those same struggling companies are able to gather the funds they need to compete in the big leagues.

Power to the People

Easy access to the internet and the simplicity of digital payment options is the driving force behind the crowdfunding boom. Europeans are demanding a more transparent financial market, and right now it seems as though crowdfunding is answering that demand. The European Crowdfunding Network hosts articles on its website guiding companies through everything from designing compelling incentives to identifying the motivations of their funders. Crowdfunding means that companies are connected to their consumer base more closely than ever. Whether that’s a curse or a blessing depends on the company’s willingness to engage with their backers.

The rise of crowdfunding presents a golden opportunity for established companies to reconnect with their audience and test the waters before fully committing to a project. Your funders will eventually become your customer base. They know exactly what they’re looking for in a project, and they are more than happy to talk about it. When you engage with your audience on this level you’re essentially bringing them on board as co-creators – and their advice can be more helpful than you’d think. Your funders might not be the most seasoned market analysts, but they can be valuable mentors and smart beta testers.

One of the major advantages is that it combines financing and marketing in one easy package. Your funders will be your biggest cheerleaders – they know every feature of your product, every drawback, every brilliant innovation. Some of them will be marketing professionals themselves. Some of them will be experts in their field who are desperate to share this helpful new tech with their colleagues. All of them will be guaranteed customers by the time your product hits the shelves.

Whether it is a threat or an opportunity for your company depends on your willingness to embrace change. Those who have so far failed to adapt to the crowdfunding trend are already suffering repercussions, but those who have taken the time to adjust their methods and bring them in line with the trend are finding that crowdfunding isn’t so scary after all – in fact, if you play your cards right, it can be an important tool for your business going forwards.

Source: Eureka

Marijana No Comments

Post-Brexit environment will have a positive impact on the UK’s alternative finance industry

With just under a year to go until the UK leaves the European Union, nearly 90% of alternative finance executives see their industry either growing or staying the same after Brexit, according to research from Prodigy Finance, a global lending platform that provides postgraduate loans to international students.

The data shows that a majority 58% of respondents believe that the alternative finance industry in the UK will grow post-Brexit, with a further 30% expecting the industry to remain the same.

This positive sentiment is also reflected in a total of 70% respondents, who feel that the UK alternative finance sector is either moderately or very insulated from potential interest rates hikes in the US or the UK, leaving only a marginal group who express concern about the expected rises. In fact, only 10% of respondents see interest rates as the biggest challenge for companies in the sector.

However, what has been shown to be the greatest concern for the alternative finance sector in the UK is regulation (40%) shortly followed by issues surrounding the maturity of the sector (24%). These findings underscore the ongoing debate of innovation vs. regulation; how companies within alternative finance and fintech will be coming under closer regulatory scrutiny as the sector matures and whether this will create, or stifle, opportunity.

The study also revealed that a notable number of companies (28%) are engaging in a form of impact investing, with a further 19% of companies considering this approach. The most important criteria of impact investing amongst the respondents is primarily financial inclusion (38%), followed by environmental causes (31%) and then social impact (25%).

“It is great to see that there is an increasing interest in the world of impact investing, with almost half of the companies surveyed either considering or already engaging in ethical investing of some description. This is something that is at the core of what we do at Prodigy Finance; through our community platform, alumni, impact investors, and other private qualified entities, are able to invest in prospective students and tomorrow’s leaders, whilst earning a financial and social return” commented Oliver Aikens, Head of Capital Markets at Prodigy Finance.

“As for Brexit, whilst it may create limits for the UK economy, it is important that companies in our industry look beyond borders and take on a more global perspective. According to the data this change appears to be well underway and resonates with us at Prodigy Finance, which is based on the belief that access to finance should be borderless”.

Other key findings

  • Respondents think that the next wave of capital into alternative lending is going to come from institutional investment (39%), retail investors (17%) and family offices/UHNWI (11%).
  • 17% of respondents think that political instability is the greatest challenge for companies in the UK’s alternative finance sector, with 14% stating competition and a further 10% stating consolidation.
  • Only 5% of respondents see governance and healthcare as the most important element of impact investing.

Source: London Loves Business

Marijana No Comments

Pension funds, small businesses boost growth in UK alternative finance

LONDON (Reuters) – Britain’s alternative finance market grew by 43 percent in 2016, research showed on Friday, with interest from start-ups, small businesses and institutional investors helping to boost demand for services such as crowdfunding and peer-to-peer lending.

Last year, 4.6 billion pounds ($6.2 billion) was raised through alternative channels, up from 3.2 billion pounds in 2015, according to a survey of 8,300 investors and 77 crowdfunding or peer-to-peer platforms.

“Alternative finance has entered the mainstream and is likely here to stay,” said Byran Zhang, executive director of the Cambridge Centre for Alternative Finance (CCAF) at the university’s Judge Business School, which conducted the survey.

Approximately 72 percent of the year’s market volume, or 3.3 billion pounds, was driven by demand from start-ups and small businesses. That was up from 50 percent the year before.

Major banks reined in their lending in the wake of the financial crisis, and many small businesses complain of poor treatment and difficulty accessing funds.

Several alternative finance providers have sprung up to try to fill the gap, such as peer-to-peer lender Funding Circle, which announced this week it had lent more than 3 billion pounds to almost 40,000 businesses since its launch in 2010.

Another, MarketInvoice, offers peer-to-peer loans secured against businesses’ invoices and has lent 1.7 billion pounds since 2011.

ATTRACTING ATTENTION

After peer-to-peer business lending, the biggest categories were peer-to-peer consumer lending, peer-to-peer property lending, invoice trading, equity-based crowdfunding, real-estate crowdfunding and reward-based crowdfunding.

Institutional investors including pension funds, asset managers and banks were also increasingly backing the platforms, the survey showed. Funding from these sources accounted for 34 percent of peer-to-peer property lending, 28 percent of peer-to-peer business lending and 32 percent of peer-to-peer consumer lending.

 Peer-to-peer lending can offer relatively high returns. Funding Circle, for example, currently boasts an all-time average annual return of 6.6 percent.

But the sector’s fast growth has also caught the attention of the Financial Conduct Authority, which is looking at introducing new regulation for the sector, highlighting concerns about past loan losses and due diligence.

This week, peer-to-peer lender RateSetter, the UK’s third-largest, reported a pretax loss of 23.7 million pounds after it took a hit from a bad loan.

Source: UK Reuters