There are mixed views about the peer-to-peer finance sector – where those with spare cash can make direct loans to those who want to borrow − with some investors believing that it is a bubble waiting to burst, while others see it as a viable alternative to the banks and an attractive source of returns.
Those who think that P2P is here to stay can take advantage by buying one or more of the investment trusts operating in this area. These offer access to diversified, ready-made portfolios of peer-to-peer loans chosen by specialist managers who are used to operating in this field.
The best performer this year was the Honeycomb Investment Trust (LON:HONY), with a 12-month return of 23%. It invests in UK small businesses and consumer lending, and recently increased its dividend target from 8% to 10%. Honeycomb has strong institutional backing from the likes of Invesco Perpetual and Old Mutual that has helped to push the shares on to a 15% premium to NAV, the highest in the sector.
Pollen Street Capital, Honeycomb’s fund manager, has recently taken over the running of P2P Global Investments (LON:P2P), the largest fund in the sector, as part of the merger with its former manager MW Eaglewood.
P2P had struggled and had missed its dividend target with the shares moving on to a double digit discount to NAV. Pollen Street Capital have said that they will transition the portfolio away from unsecured P2P lending in favour of specialist loans secured on invoices, property and other collateral over the next 18 to 24 months. They will also wind down the US component in favour of the UK. The shares are up 6% in the last 12-months and are trading on an 18% discount to NAV.
Numis Securities believe that the target dividend of 15 pence per quarter, which gives the shares a prospective yield of 7.5%, should be enough to close the valuation gap between the 18% discount and the 15% premium for Honeycomb. This is all the more likely given the enhanced share buyback policy.
The biggest casualty of the year was Ranger Direct Lending (LON:RDL), which has generated a loss of 32% in the last 12 months. It has been beset by problems, most notably the bankruptcy of the direct lending platform Argon in which it had an indirect investment. The shares are currently trading on a 33% discount to NAV.
One other factor that could negatively affect sentiment in the sector is the adoption of the new accounting standard IFRS9 that is due to take effect in January. This will require lenders, including direct lending funds, to take account of the losses they expect to make on all new loans. The upshot is that a proportion of the NAV of new loans will have to be written down at the outset with the companies clawing back the provision as they successfully collect the repayments.
Mark Barnett, head of UK Equities at Invesco Perpetual, invests in several of these trusts through his various funds and has acquired large stakes in the Funding Circle Income Fund (LON: FCIF), the Honeycomb Investment Trust and P2P Global Investments. He believes that they offer an attractive opportunity because the big banks are not interested in lending to certain parts of the economy.
If you share his view you might want to follow suit.