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Advisors should pay attention to peer-to-peer finance

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Peer-to-peer lending is becoming a serious investment asset class, and financial advisors should be taking note, says Christian Faes (pictured), Managing Partner, Montello Capital Partners/Co-Founder, LendInvest…

The UK government is certainly taking note. Through its Business Finance Partnership, the government has committed GBP100 million to be invested in non-bank lending channels, which includes peer-to-peer lending platforms. That is, the government has started lending on peer-to-peer lending platforms, through this scheme. In addition to this, the Financial Conduct Authority has recognised the important role that peer-to-peer lending is starting to play in the financial markets, and is working with the industry to formalise a regulatory regime.
 
Come April next year, running a peer-to-peer lending platform will be regulated activity, and platforms with need to be authorised and regulated by the FCA. In addition to various prudential requirements, all peer-to-peer platforms will need to comply with certain levels of capital adequacy requirements. This is a huge step towards legitimising the industry, and ensuring that investors will be provided with sufficient protections to confirm peer-to-peer lending as a legitimate and sound investment.
 
You only have to look at Lending Club and Prosper in the US to understand that this is a serious industry that is starting to stamp its authority as a market force. Lending Club is lending approximately GBP200 million a month; and they have a powerhouse board of directors that includes John Mack (Morgan Stanley’s ex-CEO) and President Obama’s favourite economic advisor, Laurence Summers.
 
The UK is lagging slightly behind the US, in terms of the volumes being lent through our peer-to-peer lending platforms. However, from a government and regulatory perspective, the UK is taking the lead; and this is providing the industry with a huge boost. The government is showing that it clearly recognises the potential for peer-to-peer lending to fill a huge funding gap – whilst also allowing investors access to a new (and viable) asset class.
 
While Lending Club and Prosper dominate in the US, there are a number of viable investment platforms that are taking the lead in the UK. These peer-to-peer lending platforms include Funding Circle, Ratesetter and LendInvest. Funding Circle is backed by the same Venture Capital investors that backed Facebook and Google, and they are known for picking some of the biggest investment winners ever known. Funding Circle focuses on lending to SME businesses; Ratesetter provides unsecured loans to individuals; while LendInvest lends to businesses, secured against property. So within the burgeoning peer-to-peer lending sector you are finding certain niches being carved out by the platforms.
 
Another sure sign that peer-to-peer lending is forging its way into the mainstream, is that you are seeing hedge funds and institutional players starting to get involved. In the US, New York-based hedge fund, Eaglewood Capital has raised over $150 million to invest direct onto peer-to-peer lending platforms. Eaglewood’s investors include family offices, pension funds, commercial banks, and their investor-base is also rumoured to include a sovereign wealth fund. Proving their ability to be leaders in the ‘institutionalisation’ of peer-to-peer lending, Eaglewood also recent completed the first securitisation of a book of peer-to-peer loans.
 
In the UK, there is a group called P2P Capital Solutions (previously Exchange Associates), which was incubated out of City-based investment bank Liberum Capital. P2P Capital Solutions is in the process of developing a suite of funds, which will be listed on the London Stock Exchange that will also invest direct onto peer-to-peer lending platforms. This group recent sold a majority stake in itself to London hedge fund behemoth, Marshall Wace. The $12 billion hedge fund saying in their statement to the market on the transaction: “P2P lending has the potential to transform consumer and SME lending practices worldwide”.
 
Peer-to-peer lending is well on its way into the financial mainstream, and financial advisors should get a grasp of the different options available amongst the different peer-to-peer platforms. As an investment it provides the potential for superior risk adjusted returns, while also allowing investors to lend into the market and help stimulate the economy at the same time – providing a real win/win for all involved.

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