David Bradley-Ward, chief executive of Ablrate, explains what investors should look for when choosing to fund secured loans…
SECURITY can be a great way of mitigating risk when it comes to peer-to-peer lending, but it is only effective if the platform uses it correctly.
For David Bradley-Ward, chief executive of asset-backed peer-to-peer lender Ablrate, stringent checks are the best way to assess security – and the more stringent, the better.
“We do everything in-house now as far as registering the charges on assets, unless there are specific legal requirements,” he explains.
“One of the things we insist on if we’re doing a second charge is a deed of priority. Without it, you’re literally at the mercy of the first charge.
“Platforms and investors should look carefully at what that deed of priority says. Does it require a minimum sale price of the assets so that the holder of the first charge cannot hold a fire sale to recoup their money? Does it restrict the administrative charges and the rollout of default interest? “If it doesn’t, your second charge is not very good.”
Bradley-Ward says that P2P investors should make sure to read any relevant documents that platforms provide regarding security before they make any investment decisions. On Ablrate’s website, there is a documents section where customers can access detailed information about any charges against assets and potential risks.
“Within our borrowing proposal, we provide details about general marketplace risks but also specific risks of the deal and what the mitigants are within the deal,” Bradley-Ward explains.
“If you’re going to have a self-select product like we do, you have to be as transparent as you possibly can, in order for people to be able to make an informed decision. If you don’t, you’re just relying on the platform to have done the job they say they’ve done.”
Bradley-Ward also highlights an important point – debt investing is different to equity investing. When assessing potential borrowers, it is essential to consider not only the company’s growth prospects but what will happen if things go wrong.
“How saleable is the asset in question? Is there a potential buyer, such as a competitor? Can we get a valuation directly from a valuer that allows us to complain on professional indemnity insurance if that valuation is wrong? It’s looking at that security stack all the way along.”
In uncertain times, security can help to reassure investors that there may be a way to recoup their money if things go wrong, but it is by no means a guarantee, he adds.
“Not every asset is going to secure you 100 per cent,” Bradley-Ward states. “There are all sorts of factors that can weigh in, such as a decline in property prices or weaker demand for certain types of assets.
“That’s why it’s so important for platforms to have a secondary market. “At the end of last year, amid the spate of bad press about certain P2P platforms and Brexit uncertainty, we traded £12m on our secondary market in six months.
“Those who were super risk averse got out and those who were prepared to take more risk came in, giving us the opportunity to re-balance our portfolio.”
As Bradley-Ward explains, security provides a “backstop” for platforms and their investors if things go wrong.
“I think we are small and agile enough to understand the customers we have and the security we’ve got,” he adds. “In a secured marketplace, there is at least a floor. Depending on the assets you’re secured on, and how you’re secured, there is at least a backstop.”
This article featured in the June issue of Peer2Peer Finance News, now available to read online.