GAIM Monaco: P2P lending offers fund managers enormous opportunities

16 Jun, 2014

Peer-to-Peer (P2P) lending is a revolutionary premise and offers fund managers enormous opportunities although firms must be long-termist in their approach.

Lee Robinson, founder of Altana Wealth, said P2P lenders represented a significant threat to the traditional banking model. “P2P lending, as it is all done through computers, is far more efficient for the customer in terms of obtaining a loan than going to a bank. It also presents a huge opportunity for fund managers,” he said, speaking at the GAIM Conference in Monte Carlo.

Fund managers are certainly taking note. Marshall Wace, the £18 billion UK hedge fund, recently acquired 90% of Eaglewood Capital Management, a New York-based asset manager that invests in P2P loans.  Marshall Wace itself entered the P2P market in 2013 when it purchased Exchange Associates from Liberum Capital, an investment bank. Marshall Wace has confirmed it will merge the two businesses to create MW Eaglewood.  Meanwhile, Prosper, the San Francisco-based P2P lender, and one of the biggest players in the space, secured an additional $25 million in funding from Blackrock.

P2P lending has grown in recent years as banks increasingly curb their own lending. Figures show that Lending Club and Prosper, which comprise 98% of the US P2P lending market, issued $2.4 billion in loans in 2013, up from $871 million in 2012. A number of banks are simply uninterested in offering loans under $35,000, which is forcing borrowers to approach P2P lenders. 

These web-based platforms connect borrowers with lenders, and unlike banks are not burdened by the internal infrastructure, heightened regulation and bureaucracy. This enables them to charge slightly lower interest rates to borrowers and share the spreads with the lenders. It also offers fund managers a diversified portfolio with consistent, monthly returns not correlated to the stock market, gold or politics.

Nonetheless, firms must be long-term if they are to capitalise on P2P lending. “My biggest concern at the moment is that P2P seems to be too easy, and there is a risk that everyone will end up chasing margin and it becomes a loss-leading margin. I suspect P2P is slightly mispriced at the moment because all of the data we have on P2P is only from 2009. When we get greater volumes of loans, and higher default numbers, we will get a better picture.  Firms must be long-termist in their approach though. However, P2P lending does offer an enormous opportunity,” said Robinson.

Some question whether P2P businesses lend responsibly. A senior executive at Prosper highlighted the firm turned down approximately 85% of loan applications and said applicants needed a minimum credit score of 640. Furthermore, unlike banks, P2P lenders are not leveraged. “As we have seen from recent history, it does not take much for a bank to go bust. Banks are leveraged up to 20 or 30 times, and this presents significant risks to depositors,” said Robinson.

While P2P lenders have grown in stature, there are challenges. It is expected regulation will come into play insisting P2P lenders ring-fence un-lent funds gathered for savers and for external providers to manage outstanding loans if there is cessation of trading. Furthermore, unlike retail deposits at banks, funds held by P2P lenders are not backed by state guarantee. “This is irrelevant. If a bank blows up, retail deposits are only guaranteed to $100,000 and many credit products have no guarantees at all,” said Robinson.

The emergence of Bitcoin was also described by Robinson as the biggest threat to Central Banks, particularly if retail consumers latch on in growing numbers. It is something his firm has taken note of, having launched a Bitcoin-focused fund. “Bitcoin again has the potential to be enormous, but the biggest threat may be regulatory. There is a risk some Central Banks would restrict or even outlaw Bitcoin and that is the biggest threat to Bitcoin prices at present,” said Robinson.

There are fears that the electronic currency is open to abuse. The pseudo-anonymous nature of Bitcoin transactions  can help facilitate fraud and theft, while some of the exchanges have been proven to be less than robust. Bitcoin too is highly volatile having traded for pennies at inception, only to grow to $1,000 per Bitcoin, and then fall to $500.

Assuming there is no further government clampdowns, Robinson argued more fund managers would transact in Bitcoins, while there is nothing to stop firms accepting fees in Bitcoins. “Investors pay managers in dollars and euros. While managers rarely accept fees in gold, for example, there is nothing to stop some accepting fees in Bitcoins,” he said. 

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