The tougher lending policies adopted by the banks in the wake of the credit crisis created a gap in the market that was quickly filled by a new breed of peer-to-peer (P2P) lenders. These enabled people with spare cash to earn a higher rate of interest by lending directly to other individuals or small businesses.
Soon afterwards in 2014 the first peer-to-peer investment trust was launched, which gave investors exposure to an actively managed portfolio of these individual, high yielding loans. A whole new sector followed in its wake, but it has been beset by problems with the funds struggling to meet their target returns.
The latest casualty is Funding Circle (LON:FCIF), which has announced that in a recent consultation, shareholders stated a preference to stop investing in new loans and start a process of returning capital in an orderly and expeditious fashion. This policy will be put to a formal vote at a forthcoming EGM.
Spike in impairments
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Funding Circle was launched in November 2015 and targeted an annual dividend of 6%-7% and an annual total return of 8-9%, but its returns have deteriorated and there was a spike in impairments in the last year.
The analysts at Canaccord Genuity believe that the fund “has failed because, despite what has been a relatively benign environment, the returns have fallen well short of targeted returns”. They have calculated that the annualised NAV total return is 4.3%, while the annualised shareholder total return is just 0.18%. The firm sees little scope for the 14% discount to narrow and are maintaining their sell recommendation.
RDL Realisation (LON:RDL), which was formerly known as Ranger Direct Lending, is also in the process of being wound up and returning capital to investors. The fund suffered from poor performance and was badly hit by the collapse of the US online lender Argon Credit through its stake in the Princeton Alternative Income fund.
The first peer-to-peer investment trust, P2P Global Investments (LON:P2P), initially traded at a substantial premium to NAV because of investor enthusiasm for the high prospective dividends, yet it too has suffered a massive de-rating and is now trading on a 14% discount with the shares offering only a modest 4.5% yield.
Grounds for optimism
Like the others it has been dogged by disappointing returns, but there may be some grounds for optimism as the management of the fund is now controlled by Pollen Street Capital, who are also responsible for the Honeycomb Investment Trust (LON:HONY), which has done exceptionally well.
Honeycomb invests in consumer and small business loans with the shares returning 37% in the last 3 years. It is currently yielding 7% with the shares trading on a 12% premium to NAV.
Pollen Street Capital are well aware that the high discount on P2P Global Investmentsis unsustainable and that if they don’t manage to close it, they will come under pressure to return the capital to shareholders. It could be that they end up merging the two funds, in which case P2P would look like an interesting value opportunity.
According to the analysts at Winterflood, the only other fund in the sector is SQN Secured Income (LON:SSIF), which invests in a range of secured loans. It has a targeted dividend of 7% and a targeted total annual return of 8%. The shares are currently trading on a 5% discount.