HIGH-PROFILE failures of peer-to-peer lending platforms have brought the question of profitability into greater focus for institutional investors, Peer2Peer Finance News has learnt.
Lendy and FundingSecure fell into administration this year, with critics highlighting poor underwriting practices at both platforms. Speculation of mounting defaults surrounded the platforms in the months leading up to their demise.
Many platforms in the P2P sector have typically defended the fact they are loss-making as a normal stage in business growth, rather than a path to insolvency, as they are focusing on increasing revenues and customer acquisition over profitability.
But institutional investors have told Peer2Peer Finance News that they do indeed assess profitability – or future profitability – when considering which P2P platforms to back, particularly in light of recent platform collapses.
“For comfort across all investors, not just the opportunistic ones seeking high yield, it’s about showing sustainability,” said Marilena Ioannidou, director of investments at British Business Investments – the commercial arm of the state development lender British Business Bank.
“If platforms are not profitable, we need to consider how much equity backing they have.
“The question is, will they be there in six months?”
Another institutional investor, who chose to remain anonymous, noted that the new Financial Conduct Authority (FCA) regulations for the sector, which come into effect this month, mandate more disclosure about wind-down plans.
The investor said that when platforms are loss-making you need to take more care to question their living wills and whether they have a back-up servicer in place.
John Cronin, analyst at stockbroker Goodbody, also noted that profitability is becoming increasingly important.
“In the past, profitability was less relevant,” he said.
“But platform failures in the sector have raised a few eyebrows. It makes sense to do due diligence before deciding who to invest through.
“As the industry matures, those investing will be concerned about whether models will be sustainable.
“It’s too early to say that profitability is a decisive factor but it will increase in importance in the decision-making process as time goes on.”
Stephane Blanchoz, head of SME alternative financing at BNP Paribas Asset Management, said that investors should consider both sustainability and profitability.
“Of course, all businesses are aiming to make money, but it won’t happen overnight,” he said.
“You need capital before you can achieve profitability.
“But investors should consider both – for the question, what happens if the platform goes bankrupt? Would somebody take care of the loan servicing/recovery process?”
The new FCA rules that come into effect on 9 December include stricter requirements on platforms to have a comprehensive ‘living will’, to protect investors as much as possible in the event of a platform failure.
Platforms can trigger standby arrangements ahead an anticipated insolvency, enabling them to wind their loanbook down and return money to investors.