P2P investments trusts: a bit ill or is it terminal?

I'm poised on this one too, seems every day I don't and check the day after it has dropped some more 

Thanks - looks interesting.

Yeap, the cut-off was 1pm today.

Sorry to revive a zombie thread but I was looking at the closed-end trust VPC Specialty Lending Investments (ticker VSL LN) report for June over the weekend link. I've traded this fund around for the last few years without much interest in really holding any sizeable position, been short, been long, jobbed it around etc. Disclosure: currently have a small punting long of about 70k shares.

Performance in the first few years of this fund was pretty dire (2015: 5.80% , 2016: 0.85%, 2017: 3.07%). This was mainly caused by capital losses on their marketplace lending book (their name for the P2P portfolio). Income was rising (2015: 4.31% , 2016: 6.01%, 2017: 8.23%) but this was offset by signficant capital losses (2015: 1.49% , 2016: -5.15%, 2017: -5.17%). As a result they made a conscious decision to move away from P2P lending into direct lending, which they call balance sheet lending. At this point direct lending is now 87% vs. P2P lending at just 3% (the rest is some equity positions and cash).

The 1H2018 figures look far more encouraging. Income for 1H18 was 5.51% (so 11% annnualized). Trailing 12-month income is 10.45%. Capital losses for 1H18 are 1.24% but this can be adjusted to just -0.13% once the impact of taking a 1.11% hit moving to IFRS9 accounting is taken into consideration. So essentially flat and very small positive for 2Q18 (0.57%). Dividends so far this year have been 3.8p (so 7.6p annualized). Overall (and based on a small sample for 2018) the slow increase in the fund's price seems justified.

My biggest conclusion is that the rotation way from P2P and into direct lending seems to be working. It's cost them quite a bit to unwind their P2P portfolio but this seems to have resulted in lower defaults (and thus capital losses) and increasing interest income. It also makes an interesting comparison with P2P platforms. VSL offer's liquidity, is easily wrapped in S&S ISA with no need to tie yourself to a platform with an IF-ISA, and is totally "fire and forget". The one thing many of these closed-end funds didn't offer was performance but if it can maintain a 10-11% income stream, net of defaults, that looks pretty good compared to the "12% platforms" right now.

The returns are quoted after fees. The fees are a 1% management fee (20% reinvested in buying back the stock) and 15% performance fee (after a 5% hurdle rate is exceeded). This is not cheap, when compared to other fixed income type funds. A high-yield bond tracker like HYG costs only 0.5%.

The fee strucure makes an interesting comparison, however, with what high-yielding platforms charge (Lendy, MT, FS, Abl etc). Take a hypothetical platform that charges say 18% interest and 4% in fees to a borrower for a 1-year secured loan, paying 12% of that to investors. Assuming a 15% default rate and 70% average recovery, the net return to investors is 8.10%. Now compare the same situation for a fund with the same fee structure as VSL. They lend money direct to borrowers at 22%. In contrast to the P2P platform, investors would get a return of 15.71%, over 90% more. First, the 1% fee is small compared to the 4% a platform charges. Second, rather than losing 33% of the interest to the platform, irrespective of whether a loan repays or defaults, the fund only takes 15% on the net return after losses from defaults and that is only taken after a minimum of 5% return is reached. At least there is some alignment of interests with investors.

So yes, VSL's fees are pretty expensive. They are high compared to most funds and probably comparable to low-yielding platforms like Zopa or RS. But give me a fund that directly invests in property development loans, high-risk SME loans and bridges. It would leave Lendy, FS, MT, Abl in the dust. A fund would need to charge a 4% management fee, 45% performance fee and drop the hurdle rate to get their return down to the same as the platform. Would you buy a fund with 4% management fee and 45% performance fee? Yet we essentially all do when we invest on these platforms. Perhaps that is what the FCA alludes to when they want investors to "be remunerated fairly for the risks they are taking" and that they "may pay excessive costs for a platform’s services".

That’s a heckuva small punting!