Fund managers turn to P2P

Equity income and multi-asset fund managers are adding peer-to-peer debt to their portfolios after the launches of two investment trusts opened up access to the fast-growing sector through listed shares.

Managers including Neil Woodford, the multi-asset veterans Gary Potter and Rob Burdett, of F&C, and Axa Investment Managers' George Luckraft have been attracted to peer-to-peer by annual target yields of six to eight per cent, combined with a perceived low correlation with other asset classes.

They see potential for long-term growth in the sector, in which consumers and institutions lend directly to individuals or businesses through online platforms.

Mr Woodford and Mr Luckraft bought shares in P2P Global, the first peer-to-peer investment trust, when it launched last year and both later subscribed to VPC Specialty Lending, launched in March.

"P2P platforms are using technology to cut the ground away from traditional sources of lending, and over time they will become a big source of lending to small and medium-sized enterprises and consumers," said Mr Luckraft.

"[The holdings] should do a very good job on the income generation side, [which] gives us more freedom to seek growth elsewhere."

While the trusts mainly hold debt issued through P2P platforms, they can also buy equity stakes in platforms themselves. Mr Luckraft said these could eventually prove "quite significant", given the $5.4bn initial public offering of the US marketplace lender Lending Club last year.

Mr Potter and Mr Burdett also subscribed to the launch last week of Ranger Direct Lending, another alternative loan fund. Meanwhile, Mr Woodford's Equity Income fund directly holds a stake in Ratesetter, one of the biggest UK peer-to-peer platforms.

Managers have so far kept their peer-to-peer holdings modest, given the youth of the asset class. P2P Global and VPC Specialty Lending together made up 1.46 per cent of Woodford Equity Income at the end of March.

Zopa, the oldest P2P platform, has existed for a decade, but overall lending in the UK has gathered pace over the past three years, increasing from about £200m in 2012 to £1.2bn in 2014 and £459m in the first quarter of 2015.

"We are dipping our toes in this, as are a number of equity income managers I know. We haven't got up to our knees yet, but this is an interesting asset class offering premium total return potential," said Mr Potter.

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Meanwhile, low yields from bonds and concerns over a potential liquidity crunch in fixed income have made peer-to-peer look attractive by comparison, said Mr Potter.

The F&C duo classify peer-to-peer as fixed income in their asset allocation, although they are accessing it through a listed vehicle. Premier Asset Management, which holds P2P across a range of funds, sees it as a "higher risk alternative to credit", said Ian Rees, head of multi-asset research.

Much of the peer-to-peer sector has yet to endure a major downturn or rising interest rates, but Mr Potter suggested that when rates do rise, it is conventional corporate debt - with its lower total returns - that would be first in line for a sell-off.

Other fund managers that hold the peer-to-peer trusts include Invesco Perpetual, Aviva Investors, Jupiter Asset Management and City Financial, according to Bloomberg data.

David Jane, manager of the Miton Multi Asset fund, said so far he had not invested in peer-to-peer as it was not a large or liquid enough asset class to meet his investment criteria.

"The sector remains at very early stages, and most innovations in financial services go through an early growth phase and then are challenged by more difficult conditions before maturing," he said.

However, he added, "the sector is clearly potentially very disruptive of the traditional banking business . . . For us it provides another reason to avoid the banking sector, as returns will inevitably continue to be under pressure."

Unlike banks, peer-to-peer lenders do not take the debt on to their own balance sheets or run branches, and can thus offer competitive rates.

Fund managers expect that more peer-to-peer trusts will hit the market, while existing vehicles are likely to expand. P2P Global raised £250m in an oversubscribed C-share issue in January.

"If the renewables sector can raise a combined market cap of over £2bn for wind and solar parks, then the direct lending space really ought to be able to raise a multiple of that over a number of years," said Mr Potter.

P2P Global is run by New York-based Eaglewood Capital, majority-owned by the hedge fund manager Marshall Wace. It targets an annualised dividend yield of six to eight per cent by investing in peer-to-peer loans from the US, UK and Europe, and can also take equity stakes in P2P platforms.

VPC Specialty Lending, run by Chicago-based Victory Park Capital, targets an eight per cent yield.

The two combined have a market capitalisation of £689m; both are trading above net asset value, with P2P Global carrying a 12.78 per cent premium.

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