P2P lending doubled in the UK in 2015 and a clear set of "bulge bracket" platforms emerged. Growth will slow a little in 2016, platform consolidation will increase and the IF ISA will bring new investors to the market

 

The P2P Lending market in the UK grew from £1.2bn of new lending in 2014 to over £2.3bn in 20151, and the growth in the 20 "bulge bracket" P2P platforms matched the "big 5" platforms at 90%+ p.a.:

 

 

Chart: New lending across P2P Platforms in the UK in 2015

UK P2P Lending growth 2014-2015

 

1Data Sourced directly from P2P platform loan books, and proprietary BondMason research and relationships. Our analysis shows a smaller market than presented in other sources, as we normalise Invoice Discount platforms loan books by an average term of 43 days

 

Emergence of the bulge bracket

 

As the P2P lending market matures in the UK, it is beginning to demonstrate similar market characteristics to the investment banking market:

  • Overall market share dominated by a small number of large players: Zopa, Funding Circle, Ratesetter, LendInvest and Wellesley
  • The emergence of "bulge bracket" platforms, carving out meaningful niches (geography, target lender, etc) and seeing impressive growth as a result
    (we define a "bulge bracket" P2P platform as a P2P platform that is currently arranging total loans of £10M+)

We would like to point out that the larger operators do not yet have entrenched positions. Natural churn as well as one-off shocks are likely to result in changes in the leading operators over time.

Within the bulge bracket, some of the most impressive growth has been from property-orientated P2P Platforms; such as Folk2Folk, PropertyPartner and PropLend to name just a few. The trend perhaps reflects the large opportunity in the property market. Other notable operators seeing strong growth in 2015 include LendingCrowd, MarketInvoice, FundingKnight and ArchOver.

Similar to the investment banking industry we believe that the Bulge Bracket platforms will continue to thrive, taking clients from the larger operators; and will be the most active in platform mergers and acquisitions (see below).

Due to the relatively low operational cost bases in the industry (as compared to operating a high street bank), we consider that all P2P platforms which are efficiently structured can sustain themsleves on a loan book from as little as £7.5M-10M. Therefore, we do not believe that only the very largest platforms will survive.

 

Three Predictions for 2016

 

Prediction One: The market growth rate will slow, but another £1.0-1.5bn will be added in 2016

With strong characteristics on both the lending and borrowing sides of the table, we forecast the market increasing by another £1.0-1.5bn in 2016. However, we think the percentage pace of growth will slow as:

  1. the market matures;
  2. regulatory and capital requirement barriers increase, slowing the rate of new entrants; and
  3. P2P platforms have a larger base of loans that are amortising, and require replacement

There will continue to be exciting new entrants though, and ones we are watching for 2016 include MoneyThing, Unbolted and BridgingCrowd

Prediction Two: Platform consolidation and platform exits will increase

2015 saw some of the first meaningful M&A amongst P2P Platforms, with Ratsetter combining with GraduRates, and FundingCircle acquiring Zencap to gain a presence in continental Europe; as well as some of the first high profile failures - notably Trustbuddy. We forecast these trends will continue in 2016:

  • A limited amount of M&A activity will continue, likely cross-border, as platforms seek to gain economies of scale; and
  • We will see more exits, particularly as the FCA finalises its review of those platforms seeking to move from Interim Permission to Full Permission

For P2P investors it is increasingly important to understand each P2P Platform you are dealing with, and the counter-party risk they represent

Prediction Three: The IF ISA will attract more retail investors to the market, but will be slow to take off

We forecast the introduction of the Innovative Finance ISA to be an important step in the maturation of the P2P industry as a whole, but we don't expect it to create a wall of new investors in April 2016. We think IF ISA adoption will be good, particularly with services such as BondMason making it easier for investors to access the market. However, it will take time for the IF ISA market to take off, and we don't expect it to dwarf Cash ISAs or Stocks & Shares ISAs any time soon.

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