p2pfan
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Full-Time Investor
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Post by p2pfan on Aug 8, 2019 23:44:00 GMT
I imagine, like most P2P lenders, I endlessly focus on the loans I make and the chances of them going into default etc. However, based on a comment I read on these forums a while back, is not the bigger risk for all lenders and deserving of much more of our time and attention the risk of the platforms we use to invest via closing down?
For instance, if one £5k loan doesn't repay we've lost £5k - and, in some cases, the interest in that.
On the other, if a platform on which we made 20 x £5k loans closes down we've lost £100k + interest + any other monies held on that platform. While they all have contingency plans for such scenarios, in my experiences the chances of one getting the majority of one's money back, certainly without waiting years, are slim.
The issue is that most platforms are extremely opaque about how well they are performing, what's happening operationally behind the scenes and how profitable they are. Therefore it's nigh impossible to evaluate or get any advance notification if they will shut up shop. Therefore, as with the likes of London Capital & Finance and Neil Woodford's fund (which I know are different types of investments), investors will only suddenly find out they've shut up shop and they can't access their money after the guillotine falls.
Thoughts?
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registerme
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Post by registerme on Aug 8, 2019 23:59:01 GMT
One of my first posts, four odd years ago, was about platform risk. The notion of risk generally and platform risk specifically didn't attract a lot of interest at the time. I'll see if I can dig out a link. EDIT: Found it - clickeh |
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Greenwood2
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Post by Greenwood2 on Aug 9, 2019 7:02:36 GMT
One of my first posts, four odd years ago, was about platform risk. The notion of risk generally and platform risk specifically didn't attract a lot of interest at the time. I'll see if I can dig out a link. EDIT: Found it - clickehIf you trawl back through the Collateral threads, concerns about their permissions are raised a few times, but generally brushed aside. Must have led to a bit of perspiration at Col HQ though.
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Post by propman on Aug 9, 2019 11:06:50 GMT
I would say platform risk is a misnomer, what we are talking about is uncertainty NOT risk, ie by its nature unquantifiable and largely binary in nature. the response to uncertainty in investing (and there is always some) is to acknowledge the additional return required to make you prepared to accept that uncertainty. This will vary, essentially if you are talking "nice to have" funds that would not cause a significant change to your life if it is lost, the return required may well be relatively modest, if not then it may well be unachievable and hence the general advice that nothing significant should be invested in P2P unless you are prepared to lose it.
Platform "risk" also comes in a number of distinct forms that should be assessed independently, initial thoughts include:
Fraud risk: likely to lead to loss of most of the funds Regulatory Risk: comes in shades, but likely to compound other risks, remove liquidity and impose administrative costs that will reduce returns, possible that some "penalties" such as requiring the interest to be cancelled might end up being borne directly or indirectly by investors. May well lead to wind down arrangements being tested with potential costs
Liquidity/Platform Solvency risk: Loss of access to funds for extended period and possible costs of wind down.
There is also the possibility of voluntary shut down due to preemptive action of unsuccessful platforms, but hopefully this should only impose reduced liquidity.
Any others I should have included? There is also the possibility that the numbers used are misleading or just misunderstood. So defaults may not be reported if a "pretend and extend" approach is adopted (either in less transaparent platforms directly, or where "new" investment is actually into the refinancing of loans to parties who were not in a position to repay the original loan in full or part).
Assessing the viability of a platform for an extended period is very difficult. Also the same things that are likely to impact investor returns (lowering borrower demand / increasing defaults) will impact viability. Furthermore some platforms are likely to respond to issues with their business model with increasing volume by arranging loans with lower credit to increase their fees to solve the short term issue hoping to deal with the expected increase in defaults later (by tightening for better quality loans), when in reality the ability to raise better credit loans at acceptable returns is very limited.
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