Peer-to-peer lending is rightly portrayed as a significant disruptor of the financial services club. The peer-to-peer lenders have grown rapidly since the middle of the last decade as more traditional sources of funds — the banks — were forced by circumstances and regulation to tighten their lending requirements.
The end result was that the little guy — typically small business owners — got squeezed out of the lending game.
Now, according to the New York Hedge Fund Round Table — a non-profit organisation focused on promoting ethics and best practices within the alternative investment industry — “Not only has P2P lending become extremely popular among borrowers, but P2P loans and the platforms that make them have become equally popular among institutional and alternative investors.”
And therein lie the seeds of potential for the hedge fund companies.
According to a study by the Hedge Fund Round Table, “Now that the P2P lending industry has originated tens of billions in loans, and given how rapidly the P2P lending platforms continue to grow, members of The New York Hedge Fund Roundtable believe that P2P lending platforms will increasingly rely on larger hedge funds to fund their expansion. The negotiating leverage is swinging back in favour of the institutional investors.”
When the hedge fund managers were asked their views on the peer to peer lending sector, they key responses included:
- Only 17 per cent of respondents said their firms have invested in P2P loans or P2P lending platforms;
- 81 per cent said they have yet to invest in the sector at all; and two per cent of respondents indicated that they are interested in the sector, but are staying on the sideline a bit longer to see how the alternative investments already made in P2P deals fare.
When asked if P2P lending will remain limited to a small portion of the alternative investment community:
- 63 per cent of respondents said that the rapid growth of the sector will make it necessary for alternative investors to embrace P2P platforms if they want to diversify their investments within the financial and banking sectors;
- 20 per cent think that, while the P2P sector is currently more appealing than traditional banks, once interest rates really move back up institutional money will shift back to more tried and true investments in the major banks;
- 17 per cent think that P2P lending will never be more than a small niche strategy for the investment community.
Asked which portion of the P2P market is most attractive with the greatest growth potential for the near future:
- 43 per cent of respondents think that investments in the platforms making P2P loans are the way to go because that avoids exposure to any loans that wind up defaulting;
- 31 per cent think that securitised bundles of P2P loans offer the biggest bang for the buck;
- a quarter think that the best bet is taking direct positions in some of the larger P2P loans made to small businesses.
“Investing in peer-to-peer loans not only means the promise of high risk-adjusted returns, such private debt investments also provide less correlated risk relative to more traditional fixed income portfolios,” said Timothy Selby, President of the New York Hedge Fund Roundtable. “But while it is clear that P2P lending isn’t going away, and that institutional investors cannot afford to ignore P2P lending platforms, the alternative investment community will need to keep a close watch on the quality of loans made within this sector.”