Will new institutional products drive out the retail investor?
A NUMBER of purely institutional products have been unveiled recently in the peer-to-peer lending sector. Is this to the benefit or detriment of the retail investor?
In April, Funding Circle announced that it was winding down its dedicated investment trust and would be launching two new institutional products in the UK: a UK private direct lending fund and a UK bond product.
The platform is hoping to bring in over £200m from institutional investors over the next few years.
“[The new products] will further expand the universe of investors that can access loans on our platform and continue to diversify our sources of funding, in line with the strategy we set out at initial public offering,” chief executive Samir Desai said at the time.
The following month, Assetz Capital revealed that it had launched a Luxembourg-based institutional fund to help scale up its lending. The fund “further expands the universe of investors that can access the Assetz Capital marketplace, alongside our valued retail lenders,” said the platform’s chief executive Stuart Law.
There has been a steady rise in institutional flows into the P2P space over the past few years, as platforms look to diversify their sources of funding and secure bigger volumes to scale up loan originations.
Even retail-focused platforms have started to carve out room for institutional money. Ethical crowd bonds platform Abundance recently accepted some funding from a building society, but co-founder and director Bruce Davis said that he hopes that an influx of institutional investors could ultimately benefit everyday investors.
“We’ve always grown through retail investors and our whole philosophy is built around the retail investor,” Davis told Peer2Peer Finance News. “We’re not against the idea of institutional investors coming in but only because that would enable us to do more projects and therefore offer more choice for our retail investors.
“We can see a real benefit there. We certainly wouldn’t want institutional investors to be taking the lion’s share of any particular project but rather being an enabler – someone who is helping create the market for our listed securities and working alongside the retail.”
The rise of institutional funding has led to some innovative new investment structures. Several platforms, such as Loanpad, use institutional money to provide a safety net of sorts for retail investors.
Loanpad refers to its institutional investors as ‘lending partners’, and they cover the first 20 per cent of every loan.
ThinCats, which is majority owned by City firm ESF Capital, has raised more than £700m from institutions over the past two years, compared with £100m from retail investors. However, both retail and institutional investors invest on the same terms, and chief executive John Mould said that individuals can be reassured by the added due diligence which comes with institutional investment.
“It depends on the specific model deployed,” said John Cronin, an analyst at Goodbody. “Therefore, on balance, in certain circumstances, I believe that an increase in the proportion of institutional funding will be beneficial as it would likely reduce retail investors’ exposure to P2P.
“However, the consequential widespread availability of capital as well as the potentially higher risk appetite among institutional investors arguably increases the risk of high profile failures, which would be damaging for overall sentiment towards P2P lending propositions.”
As institutional money continues to flow in, it will be interesting to see how retail investors respond, and whether they agree that the addition of institutional money will improve their P2P experience.
Read more: Trust in the institution
This article originally appeared in the print edition of Peer2Peer Finance News, which can be viewed here.
