Derek Pratt, our Commercial Director introduces this latest blog, which has been independently provided by 4th Way.

Everyone at Sourced Capital is rightly proud of how we have consistently delivered the targeted rates of return at c.12%* per annum to our investors. That this has been achieved whilst also being able to demonstrate a 100% record of capital and interest repayment is testament to the efforts of all involved**.

I am fully aware, however, that the majority of all information we distribute is very much focussed on what Sourced Capital is doing, has done – or will be doing.

To assist our valued connections obtain a wider perspective across the entire Peer to Peer sector, I am delighted to advise that we will now be able to distribute regular updates from 4th Way.

4th Way is recognised as the industry-leading P2P and online direct lending ratings and research agency, so who better than to provide their observations of different elements investors in our sector should be considering., the P2P and online direct lending ratings and research agency. This report by Neil Faulkner, Head of Research. 

There are always percentages, ratios, annualised figures and charts that investors need to look at, whatever asset classes you invest in. No doubt over the coming quarters we’re going to share a lot of that with you. 

However, ultimately, investing always comes back to the cash we actually see. That’s why the wider investment industry repeatedly comes back to the phrase “cash is king”.


£1 Billion in Interest

When it comes to cash in P2P lending and similar online direct lending, investors have earned £0.9 billion in interest, after lending costs and after losses from bad debts, since the UK’s P2P lending industry began in 2005. That’s including the vast majority of net interest earned through platforms that have either closed or switched to a non-P2P business model.1 

It’s close to £1 billion in cash earned on £20.8 billion in lending in those platforms. 

Looking at platforms that exclusively do property lending, which now make up most of P2P lending, it’s been a total of £5.1 billion lent and £0.4 billion interest earned after fees and losses. That’s nearly half the total cash profit from just a quarter of the lending. 


How Much Cash Can Investors Expect This Year?

So the cash is there for investors, as the full 18 years of history has shown. But, while the long run confirms this, all that cumulative loan volume hides the actual value for investors. After all, £1 billion earned on £21 billion seems disappointing, at a superficial level. 

But not all the money was lent at once and a lot of it was earned through re-investing, so it’s easier to grasp the scale of cash rewards you’re getting if we look at shorter periods. 

There’s no time like the present: in the first four months of this year, investors using live platforms have already earned £16.5 million, after fees and losses, on loans under management worth £721 million. 2 With a modest increase in outstanding loans coming this year, investors are on track to earn over £50 million in 2023. 

It’s going to work out at about £68 earned for every £1,000 invested this year.

The range of results by live platforms will be from around £40 to £120 per £1,000 invested. 


4thWay projections. Net investor interest means after lending fees and credit losses 

It’s also noteworthy that the net interest earned in the first four months of the year already greatly exceeds expected losses for the remainder of the year. 


Stable Cash Results Every Year From the Beginning 

All prior annual periods have shown cash coming back to investors with remarkable stability. Every year since P2P lending began, investors have made at least £39 for each £1,000 invested3, but usually far more than that. In other words, there have been no years where investors have seen their cash returns fall.1 

Almost the same can be said in real terms, when accounting for the falling value of money due to rising prices. Only 2022 saw investors’ cash being able to buy slightly less after inflation. Aside from 2022, the worst result after rising prices has been the equivalent of gaining £14 per £1,000 invested.1, 3, 4 

(Not that macroeconomic forecasts have any value whatsoever except for entertainment, but projected 2023 returns are also above all the recent inflation forecasts I’ve seen for the year.) 

I’ll have more to share with you on all of that in later reports, as we will then be able to show you the best years, worst years and annualised returns.


Not So Remarkable After All 

I said that P2P lending returns have “remarkable stability”, but, in a big way, it’s not so incredible. 

Banking data collated by Liberum5 has shown that, for different kinds of lending in both the UK and the US, banks invariably have net positive lending returns, every calendar year, including through the Great Recession/property-crash combo of 2008/9.6 

That is also the experience of 4thWay’s leading risk specialist, who has assisted virtually every high-street bank and building society to assess and improve their credit-risk policies over the past 30 years, across different types and niches of loans.

Here, I’m referring to just ordinary types of prime bank lending and not to speculative lending, subprime, or the crazy complicated weapons of mass financial destruction that cause instability and go on to become catalysts for severe recessions, leading to massive losses. 

If you exclude the highly speculative P2P cryptocurrency lending (which you hopefully do – with great enthusiasm), the P2P lending industry has so far also stuck to bread-and-butter lending. Straightforward business loans, consumer loans and property loans that are credit-checked and priced, banking style. 

So, stable returns for this asset class have not been remarkable, in that it’s what you would expect. Banking – and then P2P lending – has shown this for a long time, in good and bad macroeconomic environments. 


Let’s Not Ignore Survivorship Bias 

Above, and in the footnotes, I’ve mentioned which types of P2P lending platforms are included in the data today. It’s important not to forget about those that are excluded, if we want to accurately see how the overall asset class performs. 

When you ignore excluded investments completely, it’s called survivorship bias. You see it a lot in equity research and it’s often caused by easy-data bias, meaning you base your research just on what data is easily available to you. That leads to weighting your results towards the success stories. 

To combat this, my colleagues and I beg, steal and borrow the difficult data on closed and opaque platforms as best as we can.  

The data we have available shows that P2P lending investors have seemingly found it easy to avoid these platforms that have largely dropped off the radar. 

While, as a group, their returns have undoubtedly still been positive for investors7, it is still the segment that contains all of the worst performers and all of the biggest losses. 

Yet good investing decisions mean that just £1.5 billion has been lent in those, which is less than 7% of the total lent in this overall asset class. 


Do read the footnotes. They are quite interesting this time. 

1 Figures are on all platforms for which 4thWay® has sufficiently detailed data. Includes not just live platforms, but also closed ones. We estimate this covers between 90% and 94% of the entire historical market. 

While the excluded ones contain some true disasters that are still being wound down, which are likely to lead to total losses for lenders well in excess of £100 million, we estimate the positive returns of the excluded non-disasters outweigh those, so they cancel each other out.7 

2 Looking at data from live platforms only, i.e. excluding platforms in wind down. Over 90% of the total outstanding lending volume is now property lending. 

3 The worst year for returns was 2006, although it was still a plus year in both nominal and real (after inflation) terms. Just one platform existed at the time, which was Zopa: the first P2P lending platform in the world. 

4 From the Office for National Statistics’ Consumer Prices Index including owner occupiers’ housing costs (CPIH). 

5 The Liberum research was based on Federal Reserve and Bank of England data. Liberum is now closed and the founder is CEO of AxiaFunder. 

6 Lessons are buried in the details, however. Standard commercial property lending remained easily profitable for banks as a whole in the aftermath of 2008/9, but, according to RICS, at least one bank had to write off 20% of its loans in those following years. P2P lending is the same, in that not all investment providers are equal. 

7 As they are less transparent, there’s obviously less information that even 4thWay has on them, but we still collate all available data and we sometimes obtain special insights into these opaque platforms. We have sufficient information to make educated estimates on their collective scale and results. 


Final Comments

I hope that you found the update from 4th Way to be both thought-provoking and inciteful.

I should state that a condition of Sourced Capital having access to these updates is that we are unable to influence the content in any way.

It was, therefore, interesting to see the positive returns that have been delivered by the entire industry during a period including some volatile economic times and a relatively long period of low interest rates. It was intriguing to see how those returns across the P2P sector have compared collectively across the wider investment markets.

There will be more market commentary from 4th Way in the future and we look forward to sharing those with you.

If you would like to know more regarding Sourced Capital, and how our funding opportunities might fit into your investment strategy, please do not hesitate to contact us.

* Don’t invest unless you’re prepared to lose money. This is a high-risk investment. You may not be able to access your money easily and are unlikely to be protected if something goes wrong. Take 2 minutes to learn more.

**Figures accurate as of 19/06/2023. Past performance is not necessarily indicative of future performance.

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