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Canaccord: P2P Global faces long road to recovery

Canaccord: P2P Global faces long road to recovery

 

Investors in P2P Global Investments (P2P) are no longer being compensated for the risks they are taking, according to Canaccord.

Alan Brierley and Brian Newell, analysts at Canaccord, have downgraded the peer-to-peer lending trust from ‘hold’ to ‘sell’ because they expect returns will stay below the 6% to 8% target until the end of 2018.

Over the next year, the management team will continue to rebalance the portfolio and take action to turn things around after what the analysts describe as a 'poor allocation of initial IPO proceeds'.

The fund, which invests in loans to consumers and SMEs, used its half-year results to announce a cut to its dividend to 23p over the six months July. This compares to 25.2p over the corresponding period last year. Star fund managers Mark Barnett and Neil Woodford feature among P2P Global's investors.

A third of this year's dividend payment will be funded from P2P Global's 'special distributable reserve', which refers to its profits that are available for distribution. Over the six months to the end of June, the fund's net asset value (NAV) total return was 16.7%, up from 12.2% the previous year before. However, P2P Global's NAV per share remained static at £10.06 over the six month period.

The trust has been dogged by disappointing performance, which caused its shares to fall to a significant discount to NAV. It currently trades at a discount of 14.5%, in spite of share buybacks totalling 2.6 million shares over the first half of the year.

Timely turnaround unlikely

Following a strategic review, which saw investment manager MW Eaglewood agree to merge with Pollen Street Capital, the fund has reduced its exposure to US loans, where impairments are higher. During the first six months of the year, P2P Global's exposure to US consumer loans fell from 55% to 39%.

‘We expect returns to remain below the 6-8% target as the portfolio is rebalanced, a process which should be completed by the end of 2018,’ he said.

‘The company is now heading in the right direction, but in this case we believe it will be better to arrive than to travel. In the meantime, we believe the returns do not justify the risk.’

Brierley also criticised P2P Global’s decision not to back-date the introduction of a hurdle rate for the manager’s performance fee, despite the poor performance of the fund.

The performance fee for the first half of the year was £1.5 million, as no hurdle was previously in place. Under the new charging structure, Pollen Street will take 15% of any increase in NAV over 5% from January.

'Given the returns since IPO, we would have liked to see this back-dated to January 2017,' Brierley said.

The decision to shift away from US loans in favour of European real estate, European consumer loans, European SME loans and bonds is also unlikely to be a panacea for the fund.

In its interim results, the board warned that ‘attractive risk-adjusted yields in both liquid and illiquid credit remains scarce’. Yields on UK unsecured consumer loans have also fallen, as a result of increased competition.

The manager plans to invest in loans that are held with larger peer-to-peer platforms, following problems with US-based Lending Club, which the trust had a stake in.

Brierley raised concerns about the number of defaults on P2P Global's loans and the potential for impairments to rise. During the first half of the year, impairments totalled £27.7 million. US consumer loans accounted for 56%, while UK consumer loans made up 35%.

‘Given current impairments in a relatively benign environment, our fundamental concern remains around what happens when we reach the next stage of the cycle,’ Brierley added.

Over the past three years, P2P Global's share price has fallen by 8.7%, while its NAV has grown by 16.4%, according to Numis Securities.

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