Bank or p2p

I don't really see P2P or P2B lending as a direct alternative to bank depos but it's hard to generalize since it depends on the specific platform and product through which you are lending. P2B lending (secured or unsecured) to SMEs is for me a fixed income credit product and as such get lumped to together with my corporate bond holdings in my asset allocation. P2P lending is a bit more difficult to define, and depending on the product/platform, I bucket it as a cash depo (short duration/liquid) or fixed income credit product (long duration/illiquid).

With the exception of Zopa, none of these platforms have operated during periods of rising interest rates or widening credit spreads. The period 2010 to 2014 has seen tightening credit spreads across all investment products which is normal during the first 5 years of a typical 8-10 year economic expansion post crisis/recession. Investment grade credit spreads are already close to pre-2008 crisis lows and spec grade is not much wider. So this has been an ideal period for P2P lending. How their business models would cope with the competition caused by wider credit spreads in other products is questionable. For example, high yield spec grade bonds yield say 5-6%, making P2B platforms offering 8-12% attractive. However, in 2011, the same corporate bonds yielded 10%+. If yields went back to those levels, would P2B platforms need to offer 15%+ to attract lenders? Would any borrower pay such a yield? Moreover, as we move into the second phase of the expansion, we normally observe increased balance sheet leverage (corporate and consumer) which leads inevitably, as rates and spreads widen, to higher default rates. Nonetheless, I don't see the market risk associated with P2P/P2B lending as hugely problematic right now. It's quite possible to lose money, especially in post-tax real terms but that's the same as any investment.

I remain more cautious about the operational risks associated with each platform. With the exception of TC and AC, I'm not clear that many of the platforms are turning a profit. RS did another fund raise last year so it should be ok for a while but Zopa has been around since 2005/06 and I do wonder how long it can go on without turning profitable. While most platforms have provisions for an ordered unwind if they went belly up, I really wonder how practical that would be, what sort of haircut we might see on loan repayments and how much contagion we might get on other platforms if a major player went down.

I am a big fan of the idea of P2P lending and right now there is some mispricing of risk which creates for some good investment opportunities. However, until we see how the platforms perform through a full blown credit crunch, I'm not really keen on deploying more than 5-10% of my net worth in P2P and only 1-2% per platform. I only really risk what I can afford to lose (though it would be still be hugely painful!)

 Zopa has been around since 2005/06 and I do wonder how long it can go on without turning profitable.