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Advisers urged to be cautious on 'esoteric' P2P investments

Advisers urged to be cautious on 'esoteric' P2P investments

Peer-to-peer (P2P) lending company Goji is launching the UK’s first diversified P2P lending bonds.

The Goji Diversified P2P Lending Bond is a fixed-term product that spreads risk by investing across a range of P2P lending platforms. It is eligible for inclusion in an Innovative Finance ISA. The one-year fixed-term bond has already launched, while the three-year bond is set to launch in April or May, with the five-year bond following soon after.

‘These bonds will aim for steady cashflows, low volatility and low correlation with equities,’ said Jake Wombwell-Povey, Goji chief executive.

‘This is like a fund of funds model. We know which P2P loan groups and managers we like and provide them with capital. It’s old school. It’s about asset allocation, diversification, risk management and counterparty management.’

Safety net

According to Wombwell-Povey, Goji tries to pick P2P platforms that manage risk well. ‘This means avoiding some of the big P2P platforms, which give simplified products to retail investors,’ he said.

Wombwell-Povey described how Goji manages risk by lending across different sectors. The types of platform it might invest in include property, vehicles, fixed assets, invoice finance, and lending to small and medium-sized companies.

He said the current fund contains around 600 companies, ‘so there’s loan diversification’. Goji targets a 5% annual yield, and said the current yield after fees (after three months for the one-year bond) is 6.8%.

‘We’re seeing a bifurcation from advisers,’ added Wombwell-Povey. ‘Those that don’t look at alternative investments won’t consider the bond. But those that use venture capital trusts [VCTs] and enterprise investment schemes [EISs] like it.’

Step into the unknown

Phil Young, managing director of support services provider Threesixty, has concerns. ‘Advisers should steer clear of these products,’ he said. ‘It has an impact on PI [professional indemnity] insurance, as these insurers are sceptical of P2P lending.

‘It may be suitable for investors who use VCTs and EISs. Experienced investors or institutional investors such as discretionary fund managers might get involved. But it’s too esoteric for advisers.’

Young said Zopa, the UK’s biggest P2P lender, had a ‘reasonably conservative’ approach, but offered relatively low returns.

‘With the ones offering higher returns, you can draw your own conclusions about the risk they are taking on,’ said Young.

He pointed out the limited historical data on P2P lending and highlighted potential dangers in matching supply and demand.

‘In China, lenders are taking on lots of risk to meet demand for P2P lending, as the market has become saturated,’ he said. ‘The only way to attract lenders is to offer loans at a high rate. But the borrowers who do this are generally those unable to secure ordinary bank loans.’

However, Young was positive on the concept of P2P, which avoids the involvement of financial services and highly paid professionals. ‘You’re now seeing people it was designed to avoid coming in and packaging it,’ he said. ‘It’s a bit like 2008, with securitisation and added complexity, which brings down returns. There’s only a finite market, so we could end up in the same position as during the credit crunch.’

Mixed opinions

Numerous advisers have also voiced concerns. ‘I don’t think the market is mature enough,’ said David Bashforth, partner at Derbyshire-based Belmayne Independent. ‘It’s untested in a downturn,’ said Mark Begg, director at London-based Mark Begg Asset Management. ‘We would need at least a three-year track record,’ said Andrew Brady, director of East Sussex-based Prosperity IFA.

But Stuart Jefferies, director of Worcestershire-based Singular Financial Planning, was more positive. ‘I haven’t used it yet, but we are considering P2P lending as a means of getting a return on certain types of lending. I’d consider the Goji bond in principle.’

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