Peer-to-Peer Lending Industry Overview & Understanding the Marketplace
Assetz Peer-to-Peer Investment Guide 3 Contents UNDERSTANDING PEER-TO-PEER LENDING p. 4-5 MARKET OVERVIEW p. 6-7 UNDERSTANDING THE RISK AND REWARD p. 8-9 CALCULATING YOUR RATE OF RETURN p. 10 PROVISION FUND VS SECURITY p. 11 DIFFERENT TYPES OF SECURITY p.12-13 UNDERSTANDING DEVELOPMENT LOANS p. 14-15 FREQUENTLY ASKED QUESTIONS p.16 ABOUT US p. 17 CONTACT US p. 18
Assetz Peer-to-Peer Investment Guide 4 Understanding Peer-to-Peer Lending WHAT IS PEER-TO-PEER LENDING? Peer-to-peer lending is the practice of lending money to unrelated individuals or businesses, peers, without going through traditional fi nancial intermediaries such as a bank or other fi nancial institutions. Peer-to-peer lending companies facilitate the provision of loans to property developers and businesses through a network of investors. The nature of peerto-peer lending is that it offers a transparent lending model unlike some traditional fi nance providers. HOW IT WORKS Assetz Capital sources loans, meets prospective borrowers and produces all the documentation necessary to support each opportunity. Once the rate of interest and the security pledged over the loan has been determined, the opportunity is presented to investors. Assetz Capital acts as loan agent in the assessing, marketing and managing of the loan. All lenders funds are held in a segregated client money account, in accordance with FCA rules. THE SECONDARY MARKET The Aftermarket is a secondary market that allows lenders in existing loans to offer part or all of an existing loan investment to be sold on to a new lender. Lenders are therefore given the option to exit their investments at any time, subject to demand. This service offers the potential to create liquidity if a lender requires some or all of their capital back before the normal date for the repayment of the loan. New lenders can also buy these loan units immediately without waiting for an auction process to fi nish, meaning interest will begin to accrue from day one of investing. *Rates of loan interest / investment return on our website are shown as gross rates. We do not charge fees to our lenders currently but you should make allowances for tax and expected default rates and losses when calculating your likely net return. This will allow you to make a more meaningful comparison of likely actual returns to other forms of investment.
Assetz Peer-to-Peer Investment Guide 5 The Process 1 Assetz Capital assesses the creditworthiness of businesses borrowing money and ensures that an appropriate level of asset security is in place. 2 Following a set process, Assetz Capital provides a thorough credit report and risk profile on each borrower, enabling lenders to judge risk and build a balanced loan portfolio and income stream. 3 Cash is held in a segregated client money account, in accordance with FCA rules. The security pledged in support of a loan, is held in trust by Assetz Capital Trust Limited. Grant Thornton has been appointed as Corporate Director of the Trust. Company. 4 Once a loan is filled, money is released to the borrower. At the same time the borrower s pledged security is taken over the loan. With Assetz Capital we don t charge any lender fees, all costs are paid by the borrower.
Assetz Peer-to-Peer Investment Guide 6 Peer-to-peer lending Market Overview Relatively unheard of fi ve years ago, the peer-to-peer lending market had accounted for the funding of 500 million of loans by 2012. Established in the UK in 2005 by Zopa, the peer-to-peer lending industry is still very much in its infancy, but is now experiencing exponential growth. To put this into perspective, the largest peer-to-peer player in the USA, Lending Club, has funded a total of $4,034,212,750 loans to date 1 and it has been predicted that by 2024 the P2P platform revenue pool is likely to be at least 12-25bn (for just UK and US consumer fi nance and UK SME). 2 PEER-TO-PEER RETURNS VS. OTHER ASSET CLASSES FOR INSTITUTIONAL AND HIGH NET WORTH INVESTORS 3 12% 10% 8% Graph is taken from data collected by Liberum - a specialist, UKregulated investment manager. 6% 4% Data Source: Prosper, Lending Club, Bloomberg, Liberum 2% 0% 3y gilt yield IG 3y bond yield Commercial Real Estate* Equities Levered Active P2P Portfolio *Assumes investment in every loan from inception to December 2013 COMPARISON OF NET YIELD Shown in the table above, a comparison of the net yield investors are expected to receive from peer-to-peer loans vs other asset classes makes clear why the industry is experiencing such rapid growth. Previously, investors may have been forced to choose between sub-infl ation returns on cash ISAs, or the volatility of stocks and shares. Peer-to-peer lending not only offers extremely competitive returns, but also allows investors to manage their own risk and diversify their investment portfolio across a variety of loans which offer different levels of risk and return. INDUSTRY DEVELOPMENTS In the next five years, the market share of lending may shift as forms of alternative fi nance such as peerto-peer lending start to become a material part of annual business lending, spurred on particularly by the deployment of institutional money into peer-to-peer platforms. In addition to this, the Government has set up the Business Finance Partnership Scheme (BFP) and are investing 1.2 billion in order to increase lending to small and medium sized businesses from sources other than banks. FCA REGULATION Previously unregulated, peerto-peer lending has now been recognized by the UK government as a growing force. As a result of this, on April 1st 2014 the Financial Conduct Authority (FCA) took over regulatory responsibility of peer-topeer lending platforms. 1 https://www.lendingclub.com, data as of 31/03/14, Lending Club 2 Liberum, 2014 3 P2P Lending: Opportunity and how to invest, Liberum, 2014
Assetz Peer-to-Peer Investment Guide 7 In the 2014 budget announcement, George Osborne commented that peer-to-peer lending will be included in an ISA wrapper. PEER-TO-PEER TO BE INCLUDED IN AN ISA WRAPPER The inclusion of peer-to-peer in tax-free ISAs will help to boost net returns to investors and as a result will widen the pool of those wishing to invest through peer-to-peer. According to Assetz Capital s research, a peer-to-peer ISA could increase returns by up to 88% for higher rate taxpayers investing in P2P platforms. DATA ON ISA INCLUSION FROM ASSETZ CAPITAL Assetz Capital s data shows the potential increase in net returns that would occur from ISA inclusion. The illustrative return used is based on the total weighted average of return that was available on the Assetz Capital platform from March 2013 - March 2014 (12.2% pa gross). Past performance is not indicative of future performance and the actual tax payable would depend on the investor s highest marginal rate of tax. ILLUSTRATIVE RETURN FROM ASSETZ CAPITAL ON 15,000 FOR 12 MONTHS AT 12.2% PA Return minus tax at 45% 931.50 Return minus tax at 40% Return minus tax at 20% ISA return (no tax deducted) 1,023.00 1,389.00 1,755.00 20% POTENTIAL INCREASE IN NET RETURN FOR 20% TAX PAYERS POTENTIAL INCREASE IN NET RETURN FOR 40% TAX PAYERS 72% 88% POTENTIAL INCREASE IN NET RETURN FOR 45% TAX PAYERS
Assetz Peer-to-Peer Investment Guide 8 Important information Understanding the risk and reward POTENTIAL RISKS Before starting to invest through peer-to-peer, it is wise to gain an understanding both the process and the potential risks of lending your money. Any form of lending always carries risk - particularly when lending on loans which are unsecured. Whilst savings accounts protect up to 85,000 of your money through the Government-backed Financial Services Compensation Scheme, there is no such compensation scheme when investing through peer-to-peer lending platforms. The risk you face in lending money is that if the borrower cannot repay the loan, you may lose some or all of your capital. MINIMISING RISKS There are however, systems which can be put in place to reduce the risk investors have to take. On the Assetz Capital platform, investors are able to weigh up the potential risk and security provided on the loan, against the return on investment received. WHAT ARE DEFAULTS? When a borrower takes out a loan, there are conditions within the loan agreement that the borrower has to adhere to. The simplest of these is that they make the loan repayments on time without fail. Breaking these conditions is known as defaults, which trigger further conditions in the loan agreement, allowing the lender to take action. The lender has the right to ask for immediate repayment of the loan, ASSETZ CAPITAL S EXPECTED LOSS AND DEFAULT RATES IN THE CURRENT MARKET ACROSS A DIVERSIFIED PORTFOLIO OF LOANS* recognise the default but take no further action at this point, or to renegotiate the terms of the loan. WHAT ARE LOSSES? Losses occur after defaults, but not necessarily every time. The borrower will have stopped their repayments, creating a default and the lender will have asked for full repayment of the loan. If the borrower cannot repay the full amount outstanding, then the lender could take legal action to recover the money from the borrower. If the borrower does not have enough assets to repay the outstanding amount then the lender could lose their entire investment. As well as having a robust default management system, Assetz Capital secures all loans with tangible assets. This means investors are less likely to lose their capital in the case of a default, as the sale of the borrower s assets can be used to recoup some or all of the amount lost through missing loan repayments. EXPECTED FUTURE DEFAULT RATE EXPECTED FUTURE LOSS RATE < 1.5% 0.5% * Statistics as of 01/05/2014
Assetz Peer-to-Peer Investment Guide 9 DIVERSIFICATION LIQUIDITY With minimum investments of 20 per loan for most peer-topeer lending sites, investors have the ability to diversify very easily. Whilst acceptance of higher risk presents opportunities for potentially higher returns, lower rates will generally offer more security. By diversifying monies across a variety of loans which offer different levels of risk and return, investors are less likely to lose all of their capital, even if the borrower of one loan does not make some loan repayments, as they do not have all their eggs in one basket. Many successful peer-to-peer platforms have an active secondary market for lenders to sell on their loan parts to other investors; always check the platform to see if this is the case if this is important to you. Assetz Capital has traded almost 28% of all loan parts through their secondary market.1 1 Investors are given the option to exit their investments via the secondary market. Subject to continued credit quality of the loan, and sufficient demand from new lenders, this offers the potential to create liquidity upon demand if an investor requires some of their capital back before the normal date for the repayment of a loan. New lenders can buy these loan units, allowing interest to begin to accrue immediately. Statistics based on the total % of loan parts traded on the Assetz Capital platform as of 29/04/2014
Assetz Peer-to-Peer Investment Guide 10 Calculating your rate of return CALCULATING YOUR TAX LIABILITY Headline rates offered by peer-topeer lenders do not always take into account lender fees, bad debts and taxation. An important point to note, is that interest earned from any loan is treated as investment income by the tax man. In addition to this, current UK tax law does not allow the loss of capital from bad debts to be offset against the investor s income before the calculation of tax. Income earned from investments is therefore taxed before the impact of bad debts is calculated. It is important for peer-to-peer lenders to have a clear default management process and safeguards in place to minimise bad debts. This can help to avoid any unneccessary tax pitfalls for investors. The return you receive on your investment with Assetz Capital is paid gross; no tax is deducted at source by peer-to-peer lending platforms. When lending through Assetz Capital, investors are responsible for the payment of any tax due to HM Revenue & Customs. Tax will be payable at your marginal rate. We are not able to offer specifi c tax advice so we recommend that you consult a tax adviser if you are uncertain about the treatment of your investment returns. CALCULATING YOUR LIKELY ACTUAL RETURN Rates of loan interest available on our website are shown as gross rates. Assetz Capital do not charge fees to our lenders currently but you should make allowances for tax and expected default rates and losses when calculating your likely net return. This will allow you to make a more meaningful comparison of likely actual returns to other forms of investment.
Assetz Peer-to-Peer Investment Guide 11 Provision Fund vs Security PROVISION FUNDS (Potential Losses) Bad Loans exceeding 2% 2% Loan Amount Provision funds often only cover 2% of the lender s entire outstanding loan book A number of peer-to-peer lenders in the UK have launched provision funds - cash pots made available to replace any losses that lenders may incur. These cash pots are typically a percentage of the loans outstanding and should be greater than either the historic loss rate or the predicted loss rate. According to P2PMoney.co.uk, losses on peer-to-peer lenders are around 1.5% per annum. 1 These however can vary from lender to lender and from year to year. The provision funds currently offered by some peer-to-peer lenders are 2% of the loan book, which given the 1.5% loss rate would be suffi cient to cover potential losses. Losses however do not have to rise by very much more for this to become insuffi cient. SECURITY The way in which Assetz Capital protects its investors is through security and the pledging of assets. Security is taken on a loan by-loan basis and is not a slush fund to be used across the entire outstanding loan book. Security can be taken in many forms, but the traditional types are property, debentures & personal guarantees. 1 www.p2pmoney.co.uk, 2013 Bad Loans No Loss Loan Amount Asset security covers more than the loan amount in the case of nonrepayments
Assetz Peer-to-Peer Investment Guide 12 Understanding Different Types of Security Assetz Capital take tangible asset security on every loan that appears on the platform. The details of the security taken for each loan will appear in the information displayed in the loan detail page. Even with security in place for loans it is not possible to completely eliminate the risk of loss of capital, however by having security pledged to support the loan and making a risk assessment before lending on opportunities, you can reduce the risk of losing money. A number of different forms of security can be taken in support of a loan, and the actual security taken will vary from loan to loan. Whilst many of the loans available on the Assetz Capital platform are secured by property, we also lend on opportunities secured by debentures from borrowers demonstrating strong serviceability. Taking a legal charge over a property or debenture over the assets of a company, offers lenders tangible asset security on their investment. In order to create an investment strategy and to assess risk, investors should consider the types of security they are comfortable lending on alongside the serviceability of the business in question. If a borrower does default, a lender should expect to recover some or all of that loss through recoveries of the security pledged by the borrower when they took out the loan. LEGAL CHARGES Legal charges are mortgages placed on an asset, usually a property, by a lender. If the borrower is unable to repay a loan in full, the lender can enforce their rights and sell the asset to recover money owed to them. FIRST LEGAL CHARGE If a borrower fails to make the agreed repayments of a loan, a fi rst legal charge gives the lender the right to decide what to do with the asset, meaning lenders are able to recoup the proceeds of any sale up to the amount of the debt which the charge secures. SECOND LEGAL CHARGE A second legal charge allows a borrower to use any equity in their asset as security against another loan. Second legal charges have secondary priority behind the fi rst charge lender, meaning the second charge holder is unable to do anything with their charge without the permission of the fi rst charge holder.
Assetz Peer-to-Peer Investment Guide 13 DEBENTURES A debenture is a charge over the assets of a company, including the stock, trade receipts and any machinery or property not already subject to a legal charge. A debenture also gives the lender the right to take control of a business, known as Administration, should it need to try and recover those assets. Loans secured by debentures rather than legal charges generally have quicker drawdown timescales as less legals are involved in the process, which helps to reduce the time between close of auction and drawdown. They are also attractive to lenders wishing to invest via a SIPP or a SSAS pension fund, as there is no risk of a property being taken into possession which could cause a tax charge within the pension. PERSONAL GUARANTEES A personal guarantee is an undertaking by a borrower or a third party to repay the loan from personal assets. Whilst these are legal documents enforceable in law, if the person giving the guarantee does not have assets which can repay the loan in full, there will be a loss. Assetz Capital always take tangible asset security on top of personal guarantees to ensure lenders are protected.
Assetz Peer-to-Peer Investment Guide 14 Understanding How Development Loans Work THE STRUCTURE OF A DEVELOPMENT LOAN As with SME lending, the key behind any lending is the quality of the borrower. Most property deals are structured within a single purpose vehicle company (SPV). The reason for this is to contain all aspects of the deal within one single legal entity. That way, the SPV can buy the property, can contract with builders and other service providers and can maintain its own bank account. Lenders to the SPV can enjoy their security unfettered by interest from any funders of separate property deals or other corporate activity. Most property fi nancings are structured in such a way that cash is injected into the SPV to fi nance the property purchase, professionals fees, project costs and interest. THE DIFFERENCES BETWEEN SME AND PROPERTY LENDING This is different to most SME funding because new cash facilities are normally used by the SME to fund additional working capital and so the underlying business should be able to continue to produce cash and service its debt, often monthly. In an SPV, the SPV itself is the borrower so we are talking about the principal behind the borrower, who will normally be its shareholder and director (but not always). Generally, the principal will be asked to provide a personal guarantee; either a secured guarantee (secured on other third party assets) or an unsecured guarantee. The guarantee may either be limited to a certain fi gure, to cost overruns, to cost overruns and interest or be unlimited. The facility is invariably secured by legal and fl oating charges over the property and other assets owned by the SPV itself normally the property is the subject of the fi nancing. Profit Developer Profit The reason for this is that property projects, particularly development projects, are cash consumptive until the date of exit (normally the sale of the underlying property). In certain circumstances, the property remains tenanted while, for example, planning is obtained and in such circumstances, rental income fl ows and interest can, if the rent is sufficient, be used to service the debt. Often, however, once the project commences any tenants are cleared out and the property becomes non-income producing. Total Development Value (GDV) Priority Coupon/Investor & Assetz Capital Developer Equity Typically 17.5% Mezzanine Loan Typically 17.5% Senior Debt Typically 65% Total Costs
Assetz Peer-to-Peer Investment Guide 15 Senior Debt, Mezzanine and Equity are words you will hear used. In simple terms they represent risk levels. EQUITY Equity is normally the cash contribution from the developer and carries the highest risk of loss. The equity provider will expect the biggest return on their investment, typically 30%+. The equity is normally injected fi rst by the principal and is usually unsecured. Often, the principal will use his equity fi rst to exchange contracts to buy the property. MEZZANINE Mezzanine sits between senior debt and equity. The risk of loss with mezzanine is high but if controlled, the returns can be generous, (typically 10%+). Often the combination of equity and mezzanine fi nance will be needed to complete the purchase of the property. SENIOR DEBT Senior debt is fully secured by the property that is being funded and the risk of loss is low. Sometimes an element of the senior will also be needed alongside equity and mezzanine to fi nance completion. The remainder of the senior is then advanced monthly to fi nance the building works. BUILDING WORKS The building works of a development are usually certifi ed by builder invoices which are in turn verifi ed by a Monitoring Surveyor appointed by the lender, who (if properly instructed) will also complete monthly site visits to confi rm that works are on budget, on programme and that there remains on an ongoing basis, suffi cient cash in the funding facilities to fi nish off the works. SECURITY AND REPAYMENTS The security will be taken for the benefi t of all secured parties (usually the senior and the mezzannine) and their security ranking will be regulated by a deed of priorities or inter creditor deed. At completion, the project is sold, normally for one single cash payment. 1 The fi rst tranche of cash goes to repay the senior (including any rolled up senior interest and fees). 2 The second tranche goes the repay the mezz (including any rolled up mezz interest and fees). 3 The remainder goes to the borrower to repay his equity and to give him his profi t on the deal.
Assetz Peer-to-Peer Investment Guide 16 Frequently Asked Questions HOW DOES BIDDING WORK? Loans can have differing repayment profi les. Some offer full repayment whereby your interest and capital is paid monthly. Others may be interest only, whereby your interest is payable monthly and capital repaid upon loan term. Some shorter term loans also offer a single bullet repayment of accrued interest and capital. HOW LONG IS MY CASH TIED UP FOR? This differs according to the term of loan, but generally speaking on sites such as Assetz Capital loans can be anything from 3 months to 5 years. Investors can however sell their loan units on the aftermarket if they wish to free up some of their capital before the normal repayment date of the loan; this is subject only to demand from other lenders. IS THERE ANY PROTECTION FOR LENDERS SHOULD LENDING PLATFORMS CEASE TO TRADE? Structures vary across peer-to-peer lending platforms. Assetz Capital has a seperate Trust Company of which Grant Thornton is Corporate Director. All security in relation to loans is held by the Trust Company and would not be affected by any insolvency of Assetz Capital. appoint new agents to manage any existing loans and the monies invested in them. WHY DO BORROWERS NOT GO TO THE BANKS IF LOANS ARE SECURED? Since the credit crunch and start of the recession, the appetite of banks for risk has reduced signifi cantly and this means they have tightened their lending criteria. As banks are very large organisations, they have to set and enforce strict criteria across the board. This leads to infl exibility and there are many borrower proposals which are rejected by banks for failing to meet lending criteria in a very limited way. As a small organisation with a lot of lending experience on the team, Assetz Capital is able to be fl exible and use judgement as to whether proposals are worthy of support, despite the fact they may not fully meet a clearing bank s lending criteria. CAN I INVEST USING A SIPP, SSAS OR ISA IN ORDER TO MAXIMISE TAX EFFICIENCY? The great news is yes you can, subject to certain terms and conditions. SIPP (Self Invested Personal Pension) and SSAS (Small Self- Administered Scheme) are able to invest straight away. touch with pension specialists who can help you to assess viability and appropriate schemes based on your personal or corporate status. ISA investment has been approved by the Government and is likely to be a viable proposition in 2015. To fi nd out more about this, please call us on 0207 870 1023. In the unlikely instance of Assetz Capital going into administration, the trustees have the power to Assetz Capital cannot provide advice on pensions or pension schemes but we can put you in
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Assetz Peer-to-Peer Investment Guide 18 Assetz Capital Assetz Capital has become one of the fastest growing peer-to-peer lending platforms with more than 20 million lent to UK SMEs and property developers within the fi rst twelve months of business. STUART LAW CEO & Founder Of The Assetz Group Of Companies Stuart Law has over 25 years experience of running SME businesses. The board behind the business is made up of highly trained and respected individuals from the lending profession. The board of Directors has over 100 years of experience within credit assessment, risk management, investment strategy and regulatory compliance. For further information and to register with Assetz Capital, please visit the website. www.assetzcapital.co.uk Assetz Capital Head Offi ce, Assetz House, Newby Road, Assetz House, Newby Road, Stockport, Cheshire, SK7 5DA T: 0207 870 1023 F: 0161 482 7588 E: enquiries@assetzcapital.co.uk Assetz Capital London Offi ce, 23 Berkeley Square, Mayfair, London, W1J 6HE Assetz House, Newby Road, Stockport, ANDREW HOLGATE ACMA Managing Director - Business Loans 15 years of experience in SME lending and fi nance including RBS, NatWest, Euler Hermes and GE Capital. DAVID PENSTON Managing Director - Property Loans 35 years of lending experience (including Singer & Friedlander and Charterhouse) and is an Ex-president of the Association of Property Bankers. CHRIS MELLISH Director & Chief Technology Officer Chris is one of the few Peer to Peer software specialists in the UK having developed a number of high profi le sites for peer to peer lending platforms. MARK WARDROP Chief Operations and Finance Officer Mark is a Chartered Accountant and Insolvency Practitioner with 19 years experience advising owners of & lenders to SME businesses whilst at BDO LLP. ANDREW SHEPPARD Chief Risk, Compliance & Ethics Officer Andrew has worked in fi nancial services for 30 years including time with NatWest and as Head of UK Compliance for the world s leading insurance broker & risk adviser, Marsh. ROBERT DELLINER Chief Credit Officer Robert has had 25 years of banking experience including executive positions at major banks such as Citibank, and MD at BNP Paribas Fortis.
Assetz Peer-to-Peer Investment Guide 19 Contact Our Lender Team For more information To enquire about lending through Assetz Capital or about setting up a lender account, please contact one of our lender team on the details below. DAVID HAMER Sales Director E: david.hamer@assetzcapital.co.uk MARTIN HEELAM Business Development Manager T: 0161 482 7531 E: martin.heelam@assetzcapital.co.uk DOMINIC RIDDLES New Registrations Advisor T: 0161 482 7528 E: dominic.riddles@assetzcapital.co.uk STEPHEN FINK New Registrations Advisor T: 0161 482 7538 E: stephen.fink@assetzcapital.co.uk Assetz House, Newby Road, Stockport, Cheshire, SK7 5DA Assetz Capital London Office, 19 Catherine Place, London, SW1E 6DX T: 0207 870 1023 F: 0161 482 7588 E: enquiries@assetzcapital.co.uk
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Assetz Peer-to-Peer Investment Guide 21 Disclaimer Details of this guide were correct at time of publication. This document is for information purposes only and nothing in it should be taken as a statement or representation of fact or as definitive investment advice for your particular situation. We always recommend that you speak to an independent fi nancial adviser about fi nding a lending strategy that is right for you. Information in this document does not form part of any offer or contract. Whilst endeavoring to ensure complete accuracy in this document, Assetz Capital cannot accept liability for any errors. Assetz SME Capital Limited is a company registered in England and Wales with company number 08007287. Assetz SME Capital Ltd is authorised and regulated by the Financial Conduct Authority. Assetz Capital is a trading name of Assetz SME Capital Ltd. Assetz SME Capital is registered with the Offi ce of the Information Commissioner (Reg No: Z3338899) for data protection purposes. Copyright Assetz SME Capital Limited 2014. All rights reserved.
Assetz Capital 2014 Assetz House, Newby Road, Stockport, Cheshire, SK7 5DA Telephone: 0207 870 1023 International Telephone: +44 207 870 1023