Equity Versus Debt: We Look At Risk And Rewards For P2P And Beyond

Investing in peer-to-peer (P2P) loans has its attractions, especially for the income-hungry. It also has its risks – which are prominently displayed on this site, including the Home Page and the risk warnings run at the foot of almost every article.

But investing in the P2P platforms that provide the loans is something that can attract investors looking for capital growth. Of course, there’s the commensurate risk of loss. Take a look at one of the many general pieces we have written and published about the risks of equity investment (and here the investment remit is not just alternative-finance companies, but SMEs of all sorts) as opposed to taking a share of a P2P loan for its income.

The investment vehicles that offer exposure to the alternative-finance sector have not, to our mind, performed brilliantly so far. Our friends at P2PFN look at an investment trust that focuses on the P2P sector; a capital loss of some heft is offset by a dividend yield of over 5 per cent. But if you’re looking for yield, why not simply invest in loans that you like the look of, after you’ve vetted them for security: a charge on assets, the quality of the assets, the market for selling those assets if the company servicing the loan runs into difficulties, etc, etc? It’s an option – with its own risks, of course – to be examined.

P2P GLOBAL Investments (P2PGI) posted another month of net asset value (NAV) growth in December in spite of challenging market conditions.

The alternative finance-focused fund reported a monthly NAV return per share of 0.78 per cent in what proved to be a difficult month for stock markets across the globe. On an annualised basis, the investment trust’s NAV has returned 9.31 per cent.

Source: Hargreaves Lansdown

Performance was boosted by several one-offs. These include the proceeds from selling two performing loans at a premium to carrying value and an increase in the value of the quoted equity portfolio, as well as the sale of a portfolio of US consumer loans.

The investment manager also completed its annual IFRS 9 provisioning review, which resulted in a small increase in portfolio provisions. This was down to greater global economic uncertainty.

A Process Guide To Innovative Finance ISA Investment

All loans on site are eligible to be held in a Money&Co. Innovative Finance Individual Savings Account (IFISA), up to the annual ISA limit of £20,000. Such loans offer lenders tax-free income. Our offering is an Innovative Finance ISA (IFISA) that can hold the peer-to-peer (P2P) business loans that Money&Co. facilitates. For the purposes of this article, the terms ISA and IFISA are interchangeable.

So here’s our guide to the process:

  • Step 1: Register as a lender. Go to the login page, and go through the process that the law requires us to effect. This means we have to do basic checks on you to comply with money-laundering and other security requirements.
  • Step 2: Put money into your account. This is best done by electronic transfer. We can also process paper cheques drawn in favour of Denmark Square Limited, the parent company of Money&Co.
  • Step 3: Buy loans in the loan market. Once you’ve put cash in your account it will sit there – and it won’t earn interest until you’ve bought a piece of a loan. It’s this final step that requires lenders and IFISA investors to be pro-active. Just choose some loans – all loans on the Money&Co. site can be held in an IFISA – and your money will start earning tax-free interest.

The ISA allowance for 2018/19 is unchanged from last tax year at £20,000, allowing a married couple to put £40,000 into a tax-free environment. Over three years, an investment of this scale in two Money&Co. Innovative Finance ISAs would generate £8,400 of income completely free of tax. We’re assuming a 7 per cent return, net of charges and free of tax here.

Once you have made your initial commitment, you might then consider diversifying – buying a spread of loans. To do this, you can go into the “loans for sale” market. All loans bought in this market also qualify for IFISA tax benefits.

Risk: Security, Access, Yield

Do consider not just the return, but the security and the ease of access to your investment. We write regularly about these three key factors. Here’s one of several earlier articles on security, access and yield.


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Disclaimer: Money&Co.™ is the trading name of Denmark Square Limited, Company Number 08561817, registered in England & Wales, authorised and regulated by the Financial Conduct Authority (FCA). The company is identified on the Financial Services Register under Reference Number 727325. The registered office is 58 Glentham Road, Barnes, London, SW13 9JJ where the register of Directors may be inspected. Denmark Square Limited (ISA manager reference number Z1932) manages the Money&Co. Innovative Finance ISA.