BL Magazine

Finance
rather than just using them
as a vehicle to throw money
through, and we’ve created
a liquidity in the fund
– investors can redeem
up to 20 per cent of the
fund every six months
with 90 days’ notice at
a price discount to
NAV of 0.5 per cent.”
Finally, there’s the news
that Funding Circle has
launched an investment trust of
its own, making it the first platform
to do so. The Funding Circle SME Income
fund, which is also based in Guernsey,
listed in London in November, after
raising £150 million from a group of
institutional investors. It’s set to focus
on loans to small businesses in the UK,
US and Europe.
INVESTOR GAINS
So exactly what’s in all this for the
investor? P2P investment trusts bring
several benefits – one is yield, which is
proving so elusive in the current climate.
A pension fund that doesn’t have to
worry about the kind of regulation that’s
stifling bank lending may wish to get
involved as P2P investment trusts are
paying between six per cent and 10 per
cent. Funding Circle’s trust targets a
yield of about seven per cent a year.
The other principle boon for investors
is diversification, which helps boost
security and lower risk.
“Investment funds allow instant
portfolio diversification,” says Dent. “If
you’ve only got £1,000, you can’t spread
that around on our platform – but put it
into a P2P investment trust and you can.”
And what about the borrower?
“Institutions are where a lot of the cash
is, and these funds are doing a good job
by unlocking it and getting it out there to
help businesses,” says Dent. “That’s way
better than leaving the money sitting in
deposit accounts not doing anything.
“If you’re an engineering business in
the West Midlands in need of £200,000,
do you really care where it comes from?
You don’t want to get it from a drug
dealer, so it needs to be reputable, but
beyond that you’re not fussed.”
Such platforms also benefit borrowers
with speed. If you have the opportunity
to buy a property for development, but
you have to complete on it in a week, for
example, there’s little chance a bank could
turn it around in the timeframe required.
“With these guys [P2P lending], you
may pay an arrangement fee,” says Ben
Thomason, Managing Director at Asset
P2P investment trusts
bring several benefits
– one is yield, which is
proving so elusive in
the current climate
Leverage Consultants. “But as you’ve
managed to buy the property and refinance
it quickly, it’s still worthwhile.”
While luring powerful institutional
investors is a quick way for a fund to hit
its targets, P2P trusts are still suitable for
individual investors too. They have been
eligible for inclusion in individual savings
accounts (ISAs) in the UK since July last
year – and from April, the first £1,000 of
direct peer-to-peer earnings will be tax-free,
at least for lower-rate taxpayers.
BUYER BEWARE
It’s no surprise then that retail investors are
tempted to get involved. But they should
beware: these yields are high for a reason.
P2P investment trusts come with the risk
of default of the underlying holdings. As
Thomason points out: “Anyone hoping to
get double-digit returns is operating at the
higher end of the risk spectrum.”
Meanwhile, as P2P is a new form of
lending, established after the financial
crisis, these platforms haven’t been put
through their paces yet. If the economy
tanks further and jobs go, those defaults
could shoot up. Ultimately investors
will be reliant on the platform
acting in a sensible way to
mitigate against this.
Dent points to one
problem here – the
focus for fintech
lenders is often more
on the technology
than on the money
lending. And as we’ve
learned quite painfully
in the past, while tech is a
great enabler in terms of finance, a
whizzy bit of computer power isn’t going
to protect anybody once things go wrong.
As such, the trust’s risk management
has to be bulletproof, or as close to that as
possible, and providers must be quick to act
should any security be eroded, in order to
get money back to investors.
Luckily, such platforms have a good
track record in that regard. “One of the
advantages of investment funds is that they
have deep pockets,” says Dent. “When
[GLI’s] Platform Black had a problem,
GLI stepped in and financed the business
through that period, using some of their
funds to ensure people who’d lent over the
platform didn’t lose money. They had the
cash sitting on the balance sheet ready to
go should a crisis arise.”
Still, while the providers may have
systems in place to mitigate risk, it’s
still a huge leap of faith for potentially
unsophisticated investors simply chasing
yield. “My concern is that if you’re a
smaller investor with £5,000, and you think
you’ve found a fund you can stick into your
ISA, do you fully understand the risks?”
says Thomason. “You have to be very
careful that you choose the right fund – you
have to know its quality, its track record
and its risk assessment.”
It’s for this reason that P2P investment
trusts could be a potential growth area for
the Channel Islands – not only in the setting
up of trusts, listing on the CISE perhaps, or
using the Channel Islands to list in London,
but also in their administration.
“Investing in investment trusts is a
process that needs to be professionally
managed,” says Whelan. “If you’re using
client money, you have to ensure that
you’ve managed it accordingly. That’s
administration, which is absolutely a
growth area for the Channel Islands.
“In fact, GLI’s administrator is in
Guernsey, so by supporting them, we’re
ensuring that money goes back into
the local economy.” n
DAVE WALLER is a freelance
business writer
22 January/february 2016 www.blglobal.co.uk