David Swanson, head of lending at ArchOver, delves into the benefits of P2P for City investors
WHEN YOU’RE looking for investment opportunities, ask yourself this: ‘who do I want on my team?’ This is as important in life as it is in business. The people around us make all the difference to our experience of life. You want the right doctor, lawyer, friends – people you connect with. Similarly, you want to look the companies you’re dealing with in the eye and see a team that you trust.
Institutional investors are people too. They want to know that they’re putting their company’s capital in the right place – after all, their careers are on the line if it goes wrong. Too often the big players in finance treat the investment business as formulaic – tick the boxes, fit the bill, get the cash (or not). That’s not the right way. It excludes too many smaller businesses, and it makes it impossible to get a truly dedicated service.
Let’s take a step back for a minute. Why do institutional investors come to the peer-to-peer sector in the first place? At the most basic level, it’s to get their cash working as fast as possible to achieve the highest possible returns matched with the best possible level of security. Often, though, those two variables work against each other – the higher the security, the lower the returns.
The trick for institutions, then, is finding the point where the graphs converge – and where the best opportunities lie.
Institutions looking at newer investment opportunities like P2P need a higher level of reassurance and comfort that their money is safe. The tipping point with any investment is to reach an understanding where the facilitator prospers as the investor prospers, and suffers if the investor suffers.
In venture capital, that means the company on the selling side puts its own skin in the game. Things work differently with P2P platforms, which act as agents rather than principals. Institutions deal with this by only entering into deals where someone else is putting in money at higher risk. That acceptance of higher perceived risk will earn higher interest but, if something goes wrong, the company with the ‘first loss’ piece of the pie literally takes any loss first.
How to choose which P2P platform to use? Institutions have to be extremely prudent about dedicating time to assessing investments. They need to understand credit analysis processes as well as individual loans. They need trust in the thoroughness of the credit process – then they can invest in a number of loans with the same confidence in all of them.
Which brings us back to where we started – who do you want on your team? At ArchOver, we’re dedicated to seeing the whites of our borrowers’ eyes. Our credit analysis is detailed and thorough, and we’re continuously improving our processes. We get to know these companies intimately as individuals and understand the uniqueness of their business.
We’re confident that those that make it through the scrutiny of our credit team have an extremely strong chance of succeeding. And even then, we aim to detect any point of weakness and protect our lenders against it, whether through credit insurance, dispute resolution or controlled accounts.
Institutional investors are people. Borrowers are people. Personal trust is the best basis on which to build a financial relationship. Is that how your facilitator works?