Never miss an opportunity to frighten the public appears to be the form when it comes to editorial coverage of alternative finance. A recent case to point was a study from law firm White & Case which warned that “Should the market hiccup or hit a serious correction, many investors in these funds (reference to leveraged finance funds) may find their holdings with lower recoveries than other leveraged finance sectors”. A report of these findings in Peer2Peer Finance News suggests that rising default rates could destabilise the entire direct lending sector.
Why I take issue is because one of the main advantages of P2P is supposed to be that the platforms themselves are unleveraged. Like the majority of our peers, ArchOver processes loan applications from corporate borrowers and, if they satisfy the lending criteria, offers them to investors on clearly stated terms, including rates of return, loan duration, minimum investment, charges, etc. We are simply facilitators – there is no gearing/leverage or, at least, there shouldn’t be by my definition.
Let’s start by establishing what we all understand by the term leverage. Where I come from, it means the use of debt to acquire assets, where a higher proportion of debt to equity (i.e. gearing/leverage) means proportionately higher potential gains, but also higher risk. Pure P2P, as proffered by ArchOver and other similar platforms, doesn’t fall into that category because there is no balance sheet strain involved.
The trouble is that not all so-called P2P lenders are “pure” – evolution has brought mutations. Take, for example, Wellesley, a British property lender whose practice is to participate in some loans alongside external investors. In January 2017, the FT pointed out that the balance sheet of Wellesley Finance PLC for the 18-month period ending December 31 2015 showed that total assets minus cash were 67 times shareholders equity. A more recent unaudited balance sheet to June 30 2018 showed that the same calculation produced an equivalent ratio of just under 12 times – an improvement, for sure, but that’s what I call gearing because it wouldn’t take a lot of defaults to wipe out the business. I say again, we don’t have that problem.
Fair criticism is healthy if at times uncomfortable. My point is that we in the P2P sector should not be scrunched together and tarred with the same brush. Headlines like ‘Direct lenders could face ‘test’ in 2019’ are obviously designed to draw attention to the article, but it serves no purpose to alarm investors unnecessarily with sweeping statements that ignore the facts. The old chestnut about our market never having faced “a true market downturn” is true, but only up to a point. Zopa started life in 2005 and that company doesn’t seem to have done too badly. The High Street banks, by contrast, didn’t do well at all.