P2P funds' weak sentiment unjustified based on UK platform performance, says investment bank Jefferies

Jefferies' Matthew Hose argues amid a difficult year for the handful of funds offering investors p2p exposure the performance of the underlying loans is better than the market is pricing them. 

The performance of p2p loans at Funding Circle, Ratesetter and Zopa are at odds with the current weak market sentiment towards the major funds investing in the platforms, according to Matthew Hose, analyst at Jefferies.

With markets – especially global equities – in an extended period of heightened volatility and a cloud hanging over the p2p and marketplace lending industry, the array of listed funds that offer investors exposure to the space have been hit hard.

The largest two closed-ended portfolios in the space,  the £855m P2P Global Investments trust and the £383m VPC Speciality Lending Investments trust, have seen their share prices hit alongside a move to substantial discounts relative to their net asset values (NAVs) of late.

Hose says these two portfolios as well as the the £155m Funding Circle SME Income Fund have seen returns from the major UK platforms, whose loans they buy, perform relatively well.

Jefferies analysed a number of the loan books of platforms from which P2P GI and VPC Speciality Lending purchase loans from and found only a "limited deterioration" in loan performance.

This included the publicly available loan books of Funding Circle, RateSetter, and Zopa. Furthermore, although they were unable to directly access Prosper's loan book, the team at Jefferies looked at the performance of its loans, as they represent a meaningful exposure for both the funds.

The findings of the research goes against a prevailing sentiment that there is a trend of of deteriorating credit quality for marketplace loans, Hose says. 

“While we remain highly cognisant that the loan performance demonstrated here is backward looking, we don’t find evidence of widespread performance issues that would serve to justify the current weak sentiment towards the funds,” he said.

“There is of course no guarantee the performance of the loans does not deteriorate going forward, particularly given the susceptibility to macroeconomic factors, although amid a less stable interest rate environment, movements in the fair valuation of the loan pools could also be a significant driver of the funds’ returns.”

However, Hose says there was some evidence pointing towards more but nonetheless limited deterioration in  the performance  of Prosper loans, alongside specific "pockets of poor performance elsewhere"  including in RateSetter’s non-contingency fund loans originated prior to September 2015.

According to research by AltFi Data, since the beginning of 2016 P2P Global Investments is only fund of the three to have outperformed the broader UK marketplace lending space as measured by the Liberum AltFi Returns index.

Performance of funds' NAV in 2016

Source:  AltFi Analytics