Is it possible to build a platform that helps reduce risk for lenders by cherry-picking the best loans from the best P2P platforms?
With growing transparency in the sector, and with platforms that are taking the lead in terms of returns increasingly obvious, doing so makes sense. And it is exactly what Stephen Findlay, chief executive and co-founder of BondMason, is trying to do.
The former Fidelity vice-president and investor has a history in private equity, but set up BondMason in 2013 to offer investors access to a carefully selected portfolio of small loans. It doesn’t originate loans itself, instead focusing on analysing the quality of other platforms’ teams and curating a selection of high-quality loans. Since launching, Findlay and his team have delivered clients in excess of 7 per cent net return.
I caught up with him to find out how he’s built BondMason, why his product is “fit-to-Sipp”, and why he’s not too hot on provision funds.
You’ve built a platform that does a lot of legwork for your investors – more than others in the market. Tell us why.
Our overriding ambition is to enable clients to access returns, safe in the knowledge that they’re getting loans that are the best out there. We filter and curate a set of investment opportunities – that’s the core focus of our investment team. And we also add something new: ensuring that the platforms originating have the requisite skills to find and manage good lending opportunities.
Second, we look very closely at the loans themselves. Are platforms sticking to the standards they started with? Third, we diversify for clients. We structure in such a way that clients have a minimum of 50 positions, meaning they can access returns from lenders in the most optimal way. Our thinking is that, with peer-to-peer lending, your upside is always capped – the best you’re going to get is the interest rate. The worst outcome is losing your money. So part of getting the best return is minimising risk – that’s why diversification is important.
Three-quarters of your loans are property-backed. What’s the thinking behind that?
Again, it’s about minimising risks. You’re ensuring for investors that, where loans do go bad, you’re able to recover as much as possible. That said, there’s a very diverse range of property lending out there and it’s important investors understand that. In terms of risk, you’ve got buy-to-let, bridging finance somewhere in the middle and then development loans. Exposing yourself to something quite secure and getting 3-6 per cent return is one thing. If you’re looking at development, it’s more like equity, and you should expect more like 12-18 per cent.
It’s the same story for P2P more generally – it’s not a homogenous asset class. Sometimes, the return investors are getting is not commensurate with the risk they’re taking. That can arise via mis-pricing of the underlying loans, inexperienced credit teams, an inability to originate loans as efficiently as other platforms, or because of an uneconomic fee structure. Our bias focus has always been to ensure that there’s a nice return, and that your capital is still there. Rather than focus on maximum return possible, we focus on preserving clients’ money.
You don’t have a provision fund, nor are you a fan of them. Why is that?
We have a slightly outspoken view on this. Essentially, with a provision fund, you’re trying to predict the future loss rate. If the fund is set at exactly the right level, the internal rate of return is reduced up front. If you over-provide, your returns will be worse. And if you under-provide, the fund becomes irrelevant because you’ll still be hit by the defaults. For a well-diversified portfolio held for a period of time, provision funds don’t add a lot.
I understand the appeal for an unsophisticated investor who’s looking at short-term loans – and where the provision fund might be used to achieve maturity transformation. But for patient investors, it’s not attractive. Losses are a zero sum game; someone has to pay for them.
You’re starting to work with Sipp administrators. Tell us about that.
This is an alternative asset class that we feel is, over time, becoming a pension grade asset class. P2P will have a growing role in pension investing, whether people are investing themselves or via institutions.
We’re leading the charge when it comes to working with Sipp administrators. Because we sit one removed from the lending world, what we offer works very neatly for them. We’ve worked on a structure that restricts behaviour and keeps it compliant.
Because P2P lending is considered a non-standard asset for Sipp purposes, our structure is attractive as clients can’t have more than 3 per cent of their funds in a single asset, and they’ll have their minimum of 50 positions when deployed, which means it is classified as a diverse commercial vehicle for Sipp purposes. That provides administrators with greater comfort from a compliance perspective.