littleoldlady
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Post by littleoldlady on May 9, 2017 20:54:07 GMT
Do I need to diversify across a number of loans, or does their strange risk sharing strategy make that pointless?
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Post by nesako on May 9, 2017 21:16:23 GMT
Do I need to diversify across a number of loans, or does their strange risk sharing strategy make that pointless? Regardless how much money you put, you get an equal pro-rata share of all loans on their portfolio, so there is nothing to diversity (not that you even can... everything is automated)
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Post by dan1 on May 9, 2017 21:24:02 GMT
Do I need to diversify across a number of loans, or does their strange risk sharing strategy make that pointless? Regardless how much money you put, you get an equal pro-rata share of all loans on their portfolio, so there is nothing to diversity (not that you even can... everything is automated) littleoldlady - in case you haven't read it already... www.growthstreet.co.uk/investing/protection"It's important to understand that, regardless of how many borrowers you are matched with, your risk of loss on a default is spread across the whole portfolio of borrowers."As nesako says the matching to borrowers is automated, your first match is likely to be with a single borrower (unless you're a BH that is).
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littleoldlady
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Post by littleoldlady on May 10, 2017 7:56:29 GMT
nesako dan1Thanks for your replies, but they don't seem to be the same. Are my deposits spread across all loans or is it just that in the event of any default the loss will be spread across all investors whether they are in the loan or not. If the latter then it begs the question of just how and when the allocation of the loss is done, as the amounts that investors have will be fluctuating all the time. However whichever is right it would seem that there is no diversification advantage of depositing money in chunks rather than all at once.
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Post by nesako on May 10, 2017 8:06:59 GMT
nesako dan1 Thanks for your replies, but they don't seem to be the same. Are my deposits spread across all loans or is it just that in the event of any default the loss will be spread across all investors whether they are in the loan or not. If the latter then it begs the question of just how and when the allocation of the loss is done, as the amounts that investors have will be fluctuating all the time. However whichever is right it would seem that there is no diversification advantage of depositing money in chunks rather than all at once. In theory, it is the latter, i.e. in the event of any loss, it is spread across all investors. Allocation of loss works by the current mechanism of every single loan being repaid and then re-allocated every 30 days. So, every 30 days, all loans "mature" and are then re-matched. Any losses are soaked up by Provision Fund currently, so all investors just get the quoted rate. In the event of there being insufficient funds in PF, automatic wind-down would be triggered where by any losses would be equally spread across all investors who were invested at the time this happened.
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littleoldlady
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Post by littleoldlady on May 10, 2017 10:12:19 GMT
nesako dan1 Thanks for your replies, but they don't seem to be the same. Are my deposits spread across all loans or is it just that in the event of any default the loss will be spread across all investors whether they are in the loan or not. If the latter then it begs the question of just how and when the allocation of the loss is done, as the amounts that investors have will be fluctuating all the time. However whichever is right it would seem that there is no diversification advantage of depositing money in chunks rather than all at once. In theory, it is the latter, i.e. in the event of any loss, it is spread across all investors. Allocation of loss works by the current mechanism of every single loan being repaid and then re-allocated every 30 days. So, every 30 days, all loans "mature" and are then re-matched. Any losses are soaked up by Provision Fund currently, so all investors just get the quoted rate. In the event of there being insufficient funds in PF, automatic wind-down would be triggered where by any losses would be equally spread across all investors who were invested at the time this happened. OK I get that. But in my experience a loss is not a point in time event, at least not for asset backed or otherwise secured loans. First there is failure to repay on time, usually a grace period from the lender followed by legal action which can take months. GS say: Borrowers are constantly monitored in real time and our experienced risk team works with borrowers before problems turn into defaults which suggests that there is a period in which the loan is in problems but has not "defaulted". AFAICS this system will only work if the loans are not secured and GS write them off as soon as they default rather than trying to recover the funds. I cannot see anything on the site about security provision between the borrower and GS so maybe that is the case.
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Greenwood2
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Post by Greenwood2 on May 10, 2017 10:26:52 GMT
I would guess that they don't reallocate a defaulted loan to outside lenders, but continue chasing it internally to replenish the fund.
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Post by p2plender on May 10, 2017 13:41:46 GMT
Any info on the PF? How much is in it etc.
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Post by nesako on May 10, 2017 13:55:18 GMT
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Post by dan1 on May 10, 2017 13:57:55 GMT
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Greenwood2
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Post by Greenwood2 on May 10, 2017 14:01:37 GMT
From the FAQs:
How are my returns protected?
Written by Freddie Drapkin
Updated over a week ago
Growth Street collects provisions for defaults from each borrower. These are held by Growth Street Provision Limited as cash and used to pay lenders immediately in full, plus accrued interest, if a borrower should default.
These provisions are currently set at over 3% of the outstanding loans, and can be changed subject to the performance of borrowers and economic conditions. This rate is calculated by our risk team as sufficient to cover expected defaults.
In addition, Growth Street investors have provided additional capital to bolster Growth Street Provision’s ability to repay lenders should a borrower default. Currently investors have provided the equivalent to 6% of outstanding loans as additional capital. This will be held as cash in Growth Street Provision Limited and is topped up as the loan book grows. This capital will suffer defaults before lenders.
This Default Shield puts Growth Street first in line to lose should borrowers default. We are therefore incentivised to protect your investments and we believe we have built one of the most advanced risk management systems in the business lending market. Borrowers are constantly monitored in real time and our experienced risk team works with borrowers before problems turn into defaults to find the best way of managing problems.
--
Your capital is at risk when you lend to businesses. Find out more here.
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littleoldlady
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Post by littleoldlady on May 10, 2017 16:17:10 GMT
I would guess that they don't reallocate a defaulted loan to outside lenders, but continue chasing it internally to replenish the fund. Yes I thought that likely, and if so all will be well so long as they don't have to declare a "Resolution event" and explain to recent joiners why they should take a hit on a loan which was dealt with before they even joined up. If my understanding is correct.
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Greenwood2
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Post by Greenwood2 on May 10, 2017 19:31:52 GMT
I would assume that once a loan is repaid to lenders out of the fund that is the end of it, so new lenders would not be involved. Unless extremely bad things happen very fast.
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littleoldlady
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Post by littleoldlady on May 11, 2017 14:34:40 GMT
I would assume that once a loan is repaid to lenders out of the fund that is the end of it, so new lenders would not be involved. Unless extremely bad things happen very fast. This, from their web site but you have to dig for it, seems pretty clear: If at any stage the value of the Loan Loss Provision falls below the level of expected losses, all loans will be transferred to the Loan Loss Provision. Repayments will then be made to all investors on a pro rata basis, ensuring that no lender is exposed to the default risk of a particular borrower. In this scenario, investors may not have all of their interest and capital returned if borrowers do not repay.
Now in the (unlikely?) event that this happens presumably one or more large loans have defaulted, and it is probable that GS will have spent some time, maybe months, trying to recover the money. In the meantime the mix of lenders and their loans will have changed. It could even be that investors in the very loan(s) which have gone bad have been repaid in full and have left the platform. Another problem is that GS have to make a decision to do this transfer and there will probably not be any particular decisive event to trigger it. It is more likely that there will be a longish window during which it would be reasonable to make the transfer at any time. This puts GS in a difficult position as lenders come and go during the period. BTW it is a very similar problem on Assetz QAA.
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Greenwood2
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Post by Greenwood2 on May 12, 2017 6:44:56 GMT
And all the other platforms with provision funds, once the fund is in trouble current lenders will take the pain, however it is inflicted. Comments in the past have suggested that once a provision fund fails the platform will probably go down, with lenders leaving in droves (if they can). I hope not to see it.
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