Risks

This is logical, but ignores one very significant factor -- psychology!

IMHO, most investors are risk-averse, and will opt for lower-risk investments even it if means their expected return will be lower.  Some people sleep better at night if they feel their risk is minimal, and this is worth something to them, even if it means their return is sub-optimal.

This advice would be correct if SS were set up as is typical for P2P/P2B.  At the moment, however, it is not.  SS investors do not lend directly to borrowers.  They give their money to SS, and SS lend to the borrowers.  (AIUI, this is how Wellesley work as well.)  SS have given an undertaking -- though it isn't in their Ts&Cs -- that they will stand behind their loans with their own resources.  This was easy to feel comfortable with back in SS's early days when they were making relatively small boat loans but it is less so now and, as a result of pressure from investors, SS are considering a change in these arrangements.

In the current situation, however, it would seem that a failure of one loan could affect all SS investors, not just those who have nominally invested in that particular loan.  As a result, some SS investors -- and this includes me -- feel that there's little advantage in having a diversified loan portfolio at SS.  It's also not particularly easy to achieve since SS have only about 25 loans in total at the moment, and the only way to diversify is if another investor wishes to reduce their holding.

Wellesley now have an arrangement where we do in fact have a small share of all of their loans, the borrower has a direct debt to us.  (SS haven't yet achieved the same, Lendinvest isn't vey clear)

Interesting and very relevant points from samford71 . As I see it (and the reason that I would NEVER lend unsecured through a platform for more than three months) is the risk of an adverse change in the personal or business circumstances of the borrower. Even in larger companies you can have a catastrophic change in circumstances - one recent example is Phones4U where their bonds went from trading at something like 103 to pretty much zero in a few days. In this case it was because a major contract didn't get renewed but that can happen in P2B or P2P as well. The longer your maturity, the greater the risk of getting "stuck" in a loan and exposed to economic conditions that could hamper repayment. 


Where there is security, the business itself becomes of limited relevance as long as you can get to the asset if the business is failing. And as observed above, something is wrong with the way that P2P and P2B price secured loans vs unsecured loans. That misprice is purely a function of demand, in my opinion. One example of bond issuance would be Volkswagen, where their unsecured bonds would trade at around LIBOR+30 but their secured bonds would be around LIBOR+10. Bank bonds are the same, with secured bonds trading a lot tighter than unsecured (in nearly all cases). 

Hmmm.... I wonder if FC will let me borrow a couple of million unsecured and invest it in long-dated secured P2B loans?

You are quite correct, but...

Some of the asset backed platforms offer a small number of high value asset backed loans. It is impossible to diversify across several loans so the asset provides the protection.

FC is taking money from unsophisticated lenders dazzled by relatively high rates and mesmerized by the excitement of the auction. The large throughput of loans makes it easy to diversify into many different loans and accept that losses are inevitable, this is calculated as part of the return calculation before every manual bid. The bond example you quote relates to a small difference over a very low rate. I actually use a limited time exposure method with FC where I reduce my exposure to a loan progressively over 3 to 6 months (C loans go entirely before the 4th payment, A+ loans are allowed a little longer).