The board of Lending Club, a leading player in P2P lending in the US, announced on May 9 that its chief executive was to resign after a review found problems with internal controls.
The move has prompted a government investigation and has had a knock-on effect on P2P Global Investments, the trust that holds stakes in a variety of P2P platforms and whose yield of more than 6 per cent has attracted income-seeking fund buyers and managers.
P2P Global said in a statement that it did not participate in the “near-prime” programme with which Lending Club found issues, and added it did not have exposure to the US firm’s equity.
But the trust, which does invest in the US firm’s “prime” programme, saw its share price drop by 7 per cent in the following days, widening its discount to net asset value back out to around 12.5 per cent.
Aviva Investors’ Chris Murphy said he continued to back P2P Global in his UK Equity Income fund, and noted that the trust invested in high-grade portfolios.
“P2P Global does have exposure to Lending Club, but it also has a disciplined team that undertakes significant due diligence as part of its selection process,” Mr Murphy said.
“This, and the fact that it [invests in] a diverse range of platforms, gives us a certain degree of protection. We still believe long term that this model of lending is disruptive to the traditional bank lenders.”
Alan Brierley, director of the investment companies team at Canaccord Genuity, said setbacks and volatility were “inevitable” for a rapidly growing area such as P2P.
He said: “The disruptive potential of online lending is obvious, but the industry still needs to do more to address concerns about what happens in a credit downturn.
“In the short term we see a more challenging environment for both the industry and for P2P Global as it seeks to reassure investors.”
Peers such as VPC Specialty Lending Investments and Funding Circle SME Income Fund have also seen discounts widen, despite having no exposure to Lending Club, illustrating the damage done to a sector that had already experienced a shaky start to 2016 as risk appetite fell.
Kelly Prior, an investment manager on the F&C MM Navigator Distribution fund, which holds 1.5 per cent of its portfolio in P2P Global, said she remained confident on the long-term picture for P2P and platform lending as an asset class.
“P2P and platform lending is a relatively new area for investors. Banks have been doing this for a long time but in a more leveraged way,” Ms Prior said.
“How P2P Global replaces the Lending Club’s stream of loans should they choose to move away from this platform will be important in the long term.”
The two largest holders of P2P Global, Neil Woodford and Invesco Perpetual’s Mark Barnett, declined to comment.
Ewan Lovett-Turner, director of investment companies research at Numis, thought the Lending Club mis-selling was an “isolated incident”.
“If P2P fell down [on due diligence] then I would be more concerned, but I believe the Lending Club issue feels like an isolated situation rather than a systemic issue that due diligence could have picked up.
“In some ways, it is positive that the board of Lending Club took action to remove its chief executive, showing that even high-profile founders need to play by the rules. [That said], it is another bit of negative sentiment for the P2P sector.”
Innes Urquhart, investment trust researcher at Winterflood Securities, said: “The listed closed-end funds investing in this area have a number of high-profile backers and have largely executed on the strategies outlined at the time of their launch.”
Peer-to-peer lending
Trusts operating in P2P lending have become more common in the past two years. The vehicles, such as P2P Global Investments, generate returns by investing in non-bank loans to individuals and small businesses. Platforms are the main method in matching those with lending capacity with borrowers, with the trusts investing in the loans and taking equity stakes in the platforms themselves.
