Is Funding Circle Worth Putting Money In

Having given the matter some serious though, I have spent the last 10 days selling all my FC holdings.

Well nearly all. I've still got 4 that I can't sell including 2 lates (the telly man and the scrappy) along with 2 downgrades (the £300k lead balloon and a fancy west end restaurant).

Guess I just sit tight and see if what happens.

Yes it is, loans are moving very slowly at 0%. There is a shortage of lender cash for the new loans. Buying to flip is looking risky. FC has not yet involved the corporate lenders. HMG cash must be nearly spent. I called for a cashback offer elsewhere and now I have been offered cashback for introducing a friend to FC in a member-get-member promotion, not what I was wanting. If I had any friends I am not sure what I would do about it.

I started with FC, then TC and now some AC. Never went near Zopa, and I've tipped more like a toenail into Ratesetter. I can't really get with Ratesetter: the inability to move money in quickly to take advantage of good rates, and consequent dead time to achieve decent rates. Talking of which my bigger toe dip into a monthly with Ratesetter came to end a day or two ago: and now I'll have to move it back out again.

I have about 50% more in TC than FC. But I think there is a danger of over maligning FC. I have for a some time now let my FC portfolio decline a bit, but have started topping it back up again.  You need to approach it with eyes wide open (as with any), specifically assume that the level of due dil is pretty limited.

Plus points:
- with the number of loans available, even after filtering them and being selective, you should be able to build up a reasonably diversified loan book pretty quickly. This is in contrast to TC and AC.
- The secondary market is normally reasonably liquid with low fees (compared with TC)
- I guess it depends how much money you have to throw around, but being able to take sub TC size positions is attractive to me. With enough loans coming through the pipe, you can build a decent size total exposure without having it concentrated in small number of loans. My 'book' consists of a whole range of exposures (I'm a bit of a non-diversification criminal, as FC reminds me everytime I log in and tells me I have 3.8% of my lending to a single company).
- Drawdown/dead time: with a 7 day auction and (I think) a 7 day deadline for acceptance, mitigates some of the rates/fees issue.

Minus points:
- Default rates: well I'm not convinced on this one yet. In comparison terms, TC has not had long enough to play out with enough loans to really be able to make a judgement. I like TC, but am beginning to wonder whether the sponsor model and quantity of information and clubby atmosphere etc. in the end may end up as no more than a (non-deliberate) smokescreen for a bunch of propositions which in the round end up little different from FC in terms of success rates.
- Recoveries: is this really a weak spot or not ? I definitely get the feeling that FC are not as aggressive as they could/should be. I recall some discussion about whether they are beefing up this area.
- Indigestion (or 'too much choice is a bad thing'): time consuming/tiring/boring to sift through: with nearly 100 loans listed recently with a 7 day auction period.....but in the end that is arguably just the flip side of the +ve of having the opp. to build up a diversified portfolio quickly.
- Rates/fees: the 1% fee is a problem (when combined with rates). However the marginal available rates are, as you would expect, highly sensitive to liquidity. This is true of FC and TC. With FC its probably a quesiton of timing: I've largely withdrawn from new lending for long periods, bar maybe the odd one I like the look of. But when lender money tightens, you can restock with higher rate loans. If an FC bit of lender targeted advertising falls out your copy of the Economist (as happened to me the other week) you know its time to dust off your login.
- Security: yes, nearly all unsecured. But some are. Although less than there once was is my assessment. I think they prefer not to have the hassle frankly. Easier to handle 2 £150k unsecured loans than 1 £300k secured loan. But set against this: how secure is the security in other cases ? I would rather have an FC specific asset secured loan than a TC debenture  capturing a debtors book which if the borrower ever goes t**s up is likely to be empty anyway. Any security is dependent on the quality of the original valuation and the strength of the market it has to be sold into should the need arise. Even the generally bricks and mortar approach a la AC, I ultimately have some doubts about. Only time and a few defaulted loans will really tell. At least with FC, if it ain't security you won't get blinded by the apparent presence of security.
- NO DYNAMIC BIDDING.....however, I'll caveat that by saying that when lender money is tight that probably works in favour of helping to snag higher marginal rates: but at the expense of it not being worth the effort. PLEASE have dynamic bidding.

I can't accurately say what 'real' rate I've achieved on FC, which itself is a problem. I haven't kept enough data for that. However I have for the last 14 months or so (after a period when it became obvious I should) attempted to estimate it. Or rather to estimate my expected future return (which is more interesting anyway) based on current weighted lending rate, historic bad loans (including late, very late and very very late but not yet Bad Debts) and recoveries (and pessimistic estimates of future recoveries on current bad loans) etc. baselined from that 14 month ago timeline. Its been on an upward curve, with a few hiccups (the £300k loan with 50% recovery didn't help much). If you are on a 45% tax band, then it probably hasn't been worth the effort, although its considerably better than you would get from a bank, and somewhat better than you would get with e.g. RS 5 year @ the moment. But I think if you are lending as an individual and getting hit @ 45% then making p2b/p2p work is difficult.

That post was somewhat longer than I intended at the outset.
 

Agreed, great post by BB.

I thought it might be useful to share my experiences, with some numbers. Of course, everyone's experiences will be different...

I began with £20k each in FC, RS and TC in April 2013. I quickly found that FC is hard work, TC some work and RS very little work at all. Since then I have also dipped my toe into AC.

RS:
My RS money (5yrs) is earning an average 5.4% because I timed my entry badly, but I am content with that. It's a decent return for minimal effort. Reinvestment is currently getting 5.8%. Increased to £30k in October and will increase further when funds are available.

FC:
I made mistakes early on with FC. It was 2 weeks before I turned Autobid off, by which time I'd got a lot of £160 loan parts which are not easy to sell, including several I did not like the look of. I also paid a lot of premiums on the secondary market to get my £20k invested quickly. If I had my time again I would put my money in more slowly and focus on new loans.

I had 3 bad debts in one week in September, including one of those £160 parts. The pre-tax return on my portfolio per TC was less than 4% (the XIRR will have been lower still) and I was not very happy.  By that time I'd learned how the market worked and decided to change strategy. I liquidated half my portfolio fairly quickly and switched it to RS. For the rest, I decided to become a slow flipper, investing in small parts of mostly C- loans with a view to selling before the 4th payment is due. I sold the rest of my original portfolio slowly in order to fund this. The new strategy proved successful but required a lot of discipline and was very time consuming. By mid December I was bored with it and decided to run the portfolio off and take my money out. I brought forward the sale of some loan parts to before the 2nd or 3rd payment in order to complete the process, which I have just done. So I am now out, except for bad debts.

My overall return on investment (XIRR) is 5.68% before tax, and 4.26% after tax at 20% (assuming no further recoveries on bad debts, and tax paid in the last week of January, 2015). This is by no means disastrous but it is not a great return for all the effort. If I had stuck to my strategy of slow flipping I could probably have earned a pretax XIRR of over 8% going forward, but it was too much work for me and I was also slightly uncomfortable with the morality of it.

TC:
I am finding the reward/effort balance on TC to be pretty good, but I have been lucky and dodged the bullets so far. I started off with the intention of investing only in TLCs (their pooled investments) in order to get an acceptable level of diversification, but soon decided that I would rather pick the loans myself. This led me to aggressively switch from other investments to TC so that I could get the diversification I wanted with a £1,000 minimum investment. I now have £90k spread over about 50 loans and am content with that. Because of current issues with the site and a few recent problem loans (albeit ones I avoided), I am not planning to increase further in the short term but nor do I intend to cash out.

My pre-tax XIRR to date is 8.27%, valuing investments at par plus accrued interest (underlying values for my TLCs) and without provision for selling costs. This is significantly less than the weighted average rate on my portfolio, which is approximately 10.1%. The main reasons for the difference are premiums paid on the secondary market (approx 0.7% impact) and dead time. If I were to exit through a sale I would anticipate a significant reduction in return after selling costs. TC is not an investment to dip in and out of.

AC:
The reward/effort balance is good so far, although auction extensions and drawdown delays have been frustrating. My portfolio (which now stands at a bit over £11,000) is showing a healthy pre-tax XIRR of 9.11% if I value my investments at par plus accrued interest. This compares to a weighted average rate of 12.05%. The difference of nearly 3% is entirely down to dead time. I'm hoping that recent changes will reduce future dead time substantially, and expect to continue adding to AC when funds are available.

PS: a note on the XIRRs. There may be more than one way to calculate the XIRR on a portfolio but the way I do it is dead easy. I take the view that there is no need to worry about any of the cash flows "inside the box", the only thing that matters is my cash flows. Therefore I take the XIRR of (a) all cash flows between me and the entity (deposits and withdrawals), (b) the opening portfolio valuation, if any (none in this case) and (c) the closing portfolio valuation. Under this approach, (b) and (c) are notional cash flows which assume I buy the portfolio at the start of the period and sell it at the end.

Coming back from my original post in early Feb. Recently a lot of better quality loans have come on the market and have made very good prices for lenders. I have bought into around 30 of these as they were nearly all at or in some cases well above 12%. This gives me a reasonable enough return even after tax at 40% and a generous allowances for failures. In total I have now put back into FC around £3k and I will continue investing all the while that I can make a few bob.