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Who invests in peer-to-peer? (Bridging & Commercial)

The number of peer-to-peer finance investors has continued to grow as the industry becomes more recognisable and trusted.  The latest figures from the Peer-to-Peer Finance Association found that the number of lenders (investors) on its member platforms grew to 181,068 in Q1 2017, compared with 169,747 the previous quarter. But who are the different types of peer-to-peer investors and which type do platforms prefer to work with?

The individual investor

Stephen Findlay of BondMason pointed out that peer-to-peer investors started out as private individuals.  According to Mat Gazeley of Folk2Folk, the majority of its investors are retirees or business owners looking to help or support their local economy and community.

“Typically, the majority of investors in P2P tend to be retail consumers over the age of 50.”

With bank interest rates for savings remaining at low levels, a number of individuals are now looking towards peer-to-peer platforms as a way to earn much more interest.

Jordan Stodart, co-founder of Orca, said P2P catered to a whole range of individual investors, from novices frustrated by low savings rates to more sophisticated high-net-worth clients who are looking for an uncorrelated alternative to diversify their portfolio.

“P2P has democratised investing by offering an accessible, affordable and transparent method of generating wealth, unrestricted and open to all, not just the elite, and not just for the tech-savvy millennial generation.

“There’s a common misconception that technologically advanced solutions like P2P are only adopted by the millennial generation.

“Evidence actually shows that over 55% of investors in P2P are 55 years old and over, with only 12% of investors under 35 [according to Nesta].”

Stuart Law, CEO of Assetz Capital, added: “While HNWI still make up a strong percentage of P2P investors, the market has also attracted younger investors because of its low entry [cost], where people can invest as little as £1.

“We see people start small, test the model and platform, and then start to gradually increase their investments.”

Jordan felt that although it was quick and simple to invest online, this was not the primary reason retail individual investors were attracted to the asset class.

“The stable, risk-adjusted returns first attracted enthusiastic retail investors before spreading more mainstream.

“We have novice investors making small, passive investments, happy to spread their capital automatically between dozens of borrowers.

“This is compared with the more active and sophisticated investors who take advantage of bespoke P2P platforms, selecting their own loans and implementing their own investment strategies in order to generate higher risk-adjusted returns in the region of 10% per annum.”

Meanwhile, Stuart felt frustrated bank investors had created a new set of investors.

“We are now seeing a wide set of investors registering from virtually all demographics now, so it’s great to see that P2P is working for individuals no matter what their financial background is.”

The institutional investor

“There are a handful of institutional investors as well as local councils and government institutions investing large sums into the sector,” said Mat.

Since it was established in November 2014, the government-backed British Business Bank has invested £135m in peer-to-peer platforms. Herefordshire Council previously lent to local businesses via Funding Circle. Meanwhile, MarketInvoice recently signed a major agreement with BNI Europa to lend £45m each year via the platform.

“As the asset class has started to mature, we have seen institutional investors beginning to participate,” said Stephen.

“By the end of 2016, the majority of P2P capital was from institutions.

“However, as the overall P2P lending market is still small in investment terms, it takes a long time for institutional investors to deploy their capital – an issue noted by many of the listed P2P funds.

“This has held back the rate of institutional investment in 2017.”

Which investors do platforms prefer?

RateSetter revealed that retail investors made up 94% of the outstanding lending on its platform, while the remaining 6% were institutional investors.

“We have consciously built our platform with the retail investor in mind: our goal as a company is to open up direct access to loans in a way that has not been possible until now, and that means disintermediating,” a RateSetter spokesperson told B&C.

“The access that we are providing is delivering value directly to individual investors, who have earned more than £75m in interest using our platform.”

Stephen added: “Only the very biggest platforms are able to attract institutional investment.

“Therefore, platforms with a loan book of less than £25-50m will typically only have retail investors.”

Stuart felt it was easy for platforms – especially smaller and newer ones – to concentrate on a specific type of investor, but felt P2P by its definition should be all-inclusive.

“When we set up Assetz, we wanted to be accessible to all, so that no matter what your investment, you had the same opportunities as everyone else.

“While some P2P platforms remain somewhat restrictive, I can’t see this as either a fair or sustainable model.”

Mat added: “I would say platforms prefer investors that like to invest regularly and for the long term, as this helps keep matching at a predictable rate and liquidity levels low as well as helping customers maximise returns over time.

This article appeared in Bridging & Commercial on 10.08.2017.

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