Direct Lending and Family Offices

Direct Investing

Peer-to-peer lending (P2P) is one of the most talked about FinTech sectors as platforms look to connect lenders directly to customers. In an article recently published in Campden Wealth, BondMason CEO Stephen Findlay discusses what families should be looking for from their FinTech investments and some of the pitfalls to watch for.

Q. Financial technology has attracted a lot of investment focus recently. What does BondMason do differently from other platforms?  

Technology plays an increasingly varied role within the financial services sector, from the basic supply of data and order processing, through to the more complex algorithmic trading and robo-advising. BondMason uses technology to access and manage a large number of P2P loans and smaller lending opportunities for clients across many P2P platforms.

“BondMason clients receive a higher return as compared to saving through banks and building societies who have to support larger legacy cost bases”

For the clients of BondMason there are two key benefits – the first is access to a large and diversified set of P2P lending and small loan opportunities quickly and easily; the second is dramatically lower transaction costs thanks to technology-led process deficiencies, as compared to legacy systems operated by banks and traditional institutions. This means that BondMason clients receive a higher return as compared to saving through banks and building societies who have to support larger legacy cost bases. This enables clients to target a 7.0%+ p.a. return from direct lending opportunities.

Q. There are a lot of potential FinTech- orientated investment opportunities for families. What are some of the pitfalls they need to be aware of?

In our view, FinTech shouldn't replace investment judgment, but should act as an enabler to operate more efficiently and pass on those cost savings to clients, driving higher returns. Some of the pitfalls to look out for are investment propositions where the team has limited investment expertise or experience (particularly where this is masked by a complex technology proposition); or where the proposition relies entirely upon technology to determine which investments should be selected.

The investment team behind BondMason has all had successful investment and credit careers, having invested £2bn+ over a combined 50+ years. We meet and diligence the providers of loan opportunities that our clients invest in – and the human aspects of credit decisions and investing are important for us.

Q. The scandal around US company Lending Club weighs on the minds of investors, can you explain more about “platform diligence”?

Within P2P lending, which is a relatively young market, it doesn't necessarily hold that the biggest platforms are always the best. Many of the big platforms have aggressive growth targets for their loan books, predicated upon venture capital investment, which often results in a deterioration in credit quality within those loan books. For Lending Club, there was a corporate governance failure and – although this was dealt with swiftly – it highlights the pressures that some of these platforms operate under and the lack of alignment between their own business model and the clients on their platforms.

“At BondMason we meet and conduct extensive due diligence on all of the P2P Platforms we invest with"

At BondMason we meet and conduct extensive due diligence on all of the P2P Platforms we invest with. This includes visiting their offices, meeting the senior team, in particular the credit decision-makers, understanding their experience, lending background and credit philosophy. We believe that there will be winners and losers in the P2P space hence this diligence process is critical to enable us to invest successfully across P2P loans and small loans.

Q. We’ve talked about the risks, what are the benefits of investing in a platform like BondMason?

Our clients are able to generate attractive risk-adjusted returns with low volatility and shorter- term liquidity. We believe that this offers a relative safe haven for family offices, who may be concerned with the volatility of stock markets, preservation of wealth and lack of return on their cash deposits.

BondMason’s clients have achieved a 7.93% p.a.* return,net of our 1.0% fee, since April 2015. The underlying investments are not listed on an exchange therefore, unlike the stock market, the returns are not exposed to daily pricing movements and volatility. Despite not being listed securities, our portfolio exhibits a degree of natural liquidity due to the short- term nature of the loans. This means that clients can request a full or partial liquidation of their positions when they want, with funds usually becoming available in 7-28 days.

Q. What are the three best pieces of advice you can offer investors getting into online lending platforms for the first time?
  1. Do your diligence and look for alignment: Make sure you understand the team behind the platform, their motivations and philosophy – including that they will only succeed if you get a good return on your capital.
  2. Don’t get greedy: You can’t turn bad credit into good credit by charging a higher interest rate. Settle for a sensible risk-adjusted return, and you’ll be pleased with your outcome.
  3. Diversify: Getting a good return from P2P lending isn’t like stock picking as your upside is capped. Getting a good return is all about managing your downside – one of the best ways to do this is diversify across many loan positions – ideally at least 50 loan positions, and across at least five P2P platforms. 

*Warning: nothing in this article should be construed as advice.  Your capital is at risk

*BondMason clients have achieved an average gross return of 8.93% for the period from April 2015. After our 1.0% p.a. fee this equates to 7.93% net to our clients, after losses but before tax. Your capital is at risk, and past performance is not a reliable indicator of future results. We estimate BondMason clients could achieve a net return of 7.0% p.a. return, after all fees and estimated losses, but before tax. The amount of income tax payable is dependent on your individual circumstances and may be subject to change in the future

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