P2P trusts reap rewards from changing focus
TWO of the biggest peer-to-peer investment trusts are finding better returns since shifting from traditional P2P lending or altering their strategy.
VPC Specialty Lending Investments posted its best returns for eight months during March with a net asset value (NAV) return of 0.57 per cent, while P2P Global Investments (P2PGI) returned 0.55 per cent, its best performance since October 2015.
While both firms started by investing predominantly in unsecured P2P loans, a shift from these assets has helped to improve their performance following lacklustre returns last year.
VPC Specialty Lending announced in November 2016 that it was winding down its P2P lending portfolio, after losses triggered substantial writedowns.
Instead, it has moved more of its capital into balance sheet investments, arguing they typically offer higher returns with less leverage, while the lending platform takes on more risk as it usually takes first loss on loans.
In November 2016, the fund invested in 22 platforms, 16 of which were balance sheet investments. There are now 20 in the portfolio as of the end of March.
Balance sheet investments made up 2.01 per cent of gross returns in the first quarter of 2017, while marketplace loans were down 0.47 per cent.
Matthew Hose, analyst for Jefferies, says the VPC strategy appears to be working.
“The exposure to balance sheet loans increased from 51 per cent to 63 per cent of NAV over the first quarter, highlighting the transition of the portfolio continues to make good progress,” he explains.
“With additional commitments into balance sheet loans seemingly awaiting deployment, the limiting factor here remains the rate at which the marketplace loans run off.
“Further portfolio sales would inevitably help speed up the process, although there is likely to be a trade-off in terms of any discount sought by potential buyers.”
Meanwhile, P2PGI has remained in the P2P lending space but has attempted to bolster its performance by shifting from US consumer loans and focusing more on asset-backed loans.
Its exposure to UK real estate grew from 5.1 per cent in September 2016 to 8.9 per cent in March 2017.
For example, the fund has backed residential development platform Zorin Finance, which issued loans on more than 350 properties in 2016.
It is also trying to build its exposure to balance-sheet loans, targeting an exposure of 20 per cent.
Its first-quarter update last month showed US consumer assets dropped to 45.1 per cent, down from 46 per cent a month earlier and 48.4 per cent at the start of the year.
The fund’s March NAV return of 0.55 per cent was its strongest since October 2015, but Hose warns this is flattered by share buybacks.
He says there is also uncertainty due to the company reviewing its manager arrangements.
“Despite a clear need for a material improvement in NAV performance, there is already evidence of the manager grasping the nettle here,” he says.
“Furthermore, the multi-faceted nature of the underperformance understandably means any recovery in NAV performance will take time. At this point, we feel the key question is whether the board and shareholders have sufficient patience.
“However, P2PGI’s recent strong share price performance, seemingly on the back of an indication that the manager has formulated a ‘discount reduction’ plan, may ease the pressure somewhat.”
The investment company said in the report that, as part of its performance boost plan, it is also looking to invest more into new origination channels in the private debt space, away from a narrow P2P remit.
“The term P2P lending, referring to the practice of lending money to individuals through online platforms that match lenders with borrowers, is arguably no longer sufficient to describe this expanding market of private debt origination, as this is far larger than the P2P industry,” it said.
Both trusts are trading at discounts to NAV of around 14 per cent, suggesting there is still some work to do, but these shifts beyond pure P2P reflect what many analysts feel is a rising trend in the P2P sector as platforms look to grow their business and investors seek diversification.
Stephen Findlay, of P2P investor BondMason, told Peer2Peer Finance News that half of the loans it enters into are now outside the P2P lending market.
Whether it is P2P lenders becoming banks or P2P funds looking beyond mainstream loans, this is clearly still an industry keen to innovate and find ways to grow.