stevio
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Post by stevio on Mar 28, 2018 6:35:42 GMT
Traditionally we think of LTV in reducing risk, but we are seeing that this doesn't always give enough headroom in a forced sale
People don't generally give much credit to Provision funds, but are there any that are worthwhile and which are not?
Lendy, AC, UB, RS are the ones I can think of off the top of my head, please add others. Which ones have worked in practice, how and why?
Also, the structure of the loan might help - Amortising, buyback, skin in the game. Again, which ones have worked in practice, how and why?
What other ways are there, how and why?
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SteveT
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Post by SteveT on Mar 28, 2018 8:03:23 GMT
Opt for loans against readily marketable assets that appear fairly valued versus reasonable comparables, and where the borrower appears to be of good standing (DD turns up no red flags).
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bugs4me
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Post by bugs4me on Mar 28, 2018 9:09:58 GMT
My old hobby horse is to carry out extensive DD on the platform itself especially the individuals that are promoting it.
LTV's are looking more like a casino and require investigating where possible. Normally easy to find out what similar properties sold for in an ideal world. Then take off xx% for a forced sale at auction less fees. Then depends whether the platform will retain or forego their own fees. Not an exact science but at least the value will be more accurate for lending purposes.
The odd-ball properties are more difficult and a great deal depends upon the track record of the borrower. DDC is a great help here especially tracking what other developments the borrower is involved in.
PF's are a great idea and must by their nature be discretionary. The platforms though need to be more transparent as to when the PF would likely be applied. Many platforms engage in can-kicking so technically there is no default even though any reasonable thinking would indicate otherwise. So due to platform opaqueness I have my doubts as to whether they are in a practical sense worthwhile or just a marketing ploy.
Skin in the game is important and demonstrates a certain degree of commitment provided it is on a first loss basis. Plus that skin must remain throughout the loan duration and not just at commencement.
Loan presentation is an area which seems to have been skimped on lately especially as most offerings were funded almost instantly. There is only one platform exception I can think of where the presentation is comprehensive. So carrying out time consuming DD on these loans unearths many negatives - the brain then wanders as to what else there is. This could easily be dealt with by the platform presenting the loan but by apparent deliberate omission that simply brings the platform into potential disrepute.
A somewhat negative response by myself but I also believe there exists an opportunity for a platform to bite the bullet and both act and treat investors as investors not just cash cows. The solution therefore is not with investors but with the platforms themselves.
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elliotn
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Post by elliotn on Mar 28, 2018 15:09:07 GMT
Traditionally we think of LTV in reducing risk, but we are seeing that this doesn't always give enough headroom in a forced sale People don't generally give much credit to Provision funds, but are there any that are worthwhile and which are not? Lendy, AC, UB, RS are the ones I can think of off the top of my head, please add others. Which ones have worked in practice, how and why? Also, the structure of the loan might help - Amortising, buyback, skin in the game. Again, which ones have worked in practice, how and why? What other ways are there, how and why? PF + Skin + Auto-diversification + No losses = Wellesley. Broad Oak 5% (MT), 20% co-lending on Kuff, TC ubo co-invest, LW have repayment insurance, LI pre-fund, OC have significant group backing, Orchard verify professional borrowers - quite a mix of 'safeguards' available.
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seb8072
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Post by seb8072 on Apr 1, 2018 11:19:23 GMT
Traditionally we think of LTV in reducing risk, ..... Is LTV an indicator of risk? It may indicate the potential amount of recovery in case of default but is that the same thing?
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michaelc
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Post by michaelc on Apr 1, 2018 20:15:33 GMT
PF + Skin + Auto-diversification + No losses = Wellesley. + No FCA involvement.
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bigfoot12
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Post by bigfoot12 on Apr 28, 2018 10:50:42 GMT
PF + Skin + Auto-diversification + No losses = Wellesley. Turns out there isn't actually a provision fund, and now there are losses! See this thread.
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Post by samford71 on Apr 28, 2018 13:08:23 GMT
My old hobby horse is to carry out extensive DD on the platform itself especially the individuals that are promoting it ....
In my day job, it's mandatory that my firm will have to go through an ODD (operational DD) process before an institutional investor will deploy capital. That includes extensive (and arguably invasive) personal background checks of partners like myself. As a private syndicate, we've taken a similar view with platforms where we are considering a significant exposure and always ask a third party to execute a rigorous investigation of the platform, directors and staff. Yes it can cost a few £k but it's essential counterparty DD and worth it if you're considering investments in the six/seven figure territory. It's helped flag up a number of issues with certain platforms that changed our investment strategy on that platform and was a factor in helping us avoid Collateral completely. I see PFs mainly as a drag on returns. My preference is simply reserve a proportion of my returns against defaults. At least my "self-insurance" model keeps the money with me. Over a diversified portfolio, I see this as likely to perform better. Moreover, it's simply good risk discpline to reserve interest against forward default expectations. It means you are forced to put a default rate and recovery expectation against every position. if you can't do that you shouldn't be investing. Moreover, PFs also only really work on collective investment models. Where PFs are use on individual loans then this raises the subjective question of whether the PF should be used on a loan or not (given it may deplete the fund and result in no provision for later defaults). It's effectively pricing a "n-to-default" first loss tranche and I'm skeptical that anybody on a P2P platform understand how to price that correctly. It's essentially a correlation trade and retail investors may well overestimate ther PFs value. I see this as particularly problematic where platforms are doing large loans (say property development) where the defaults could be cause large draws on the fund. It's far less of an issue with platforms doing small SME or consumer loans. I'm more inclined to prefer loan specific first loss tranches and co-investment. This shouldn't come from the platform (since this can impair their balance sheet and violates the fact that the platform is simply an intermediary) but from a seperate vehicle where the directors have their own personal net worth at stake on a FILO basis.
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