Perhaps not unsurprisingly, we have the demise of another P2P platform, and it is the one that many predicted would happen in the summer: Funding Secure called in the administrators on October 23. This follows on from the failures of Collateral and Lendy and further puts into question the viability of P2P as an investment class. In both of these cases, no money has of yet been returned to investors and it remains to be seen what kind of losses there will be, but it is likely to be substantial.
There is no real advice for investors (like me) who have invested in Funding Secure, aside from to take a copy of your investments (the site is still up, for now) and make sure your contact details are correct for the administrators. It seems likely that 2021 might be the year when the process finishes going on what we have seen thus far.
However, while there is nothing to do in respect to this platform, perhaps there may be lessons we can learn when dealing with other ones and things to implement, even starting today.
My final Funding Secure Experience: Worst P2P Investment Ever!
Having been involved in both Lendy and Collateral, the results are going to be damning. I would guess that many people could be in the same position, as a couple years back diversifying investment among platforms could have been sent to be a way of lowering risks. However, hindsight is always 20/20 and in retrospect this was a foolish thing to do: it was simply concentrating money in the same type of asset, primarily development finance.
My experiences are also skewed slightly by the fact that I withdrew a lot of Lendy money (there may be a chance I can come out of that break even or in profit still) and that I would expect Collateral to have a slightly higher recovery rate as I invested in more physical assets.
Funding Secure is a bit of a disaster for me. For a start, their interest rates were really never that meaningful as many loans were kicked down the road forever and accrued interest piled up in your account. This was interest that will never be paid.
I am also a little fortunate that I did not invest too much (relative to net worth), but this amount still hurts.
The records show at the last count that I invested £3,000, earned £561.44 of interest, and withdrew £1,261.11 over time. That interest figure allowed me to reconcile my balance, but this figure also included the accrued figure. Impairing that to zero shows that I need £1,738.89 return to break even.
This is not going to happen, because looking at my investments, many of them are bad and are going to realise little, perhaps nothing after fees. Many of these investments were problems of my own making and taken out well when I was naive. Taking part in subsequent tranches of loans, for instance, doubled or tripled my exposure.
Are there signs that a platform may be going down the tubes?
I’ve been unhappy with Funding Secure for a while and their rating was 1.5/5 stars. The only thing preventing a complete exit was illiquidity in the secondary market, but this was also the case at Lendy. When people know the game is up, there is a big queue to get out.
There were also many other reasons to be unhappy with Funding Secure: bad communications, poor valuations, bad website design, evidence of no ability in managing loans. Offsetting this was the fact there were several of them. We cannot be naive and think that some of the smaller platforms are like the bigger ones: with no equity to sell, they need money to pay their staff and keep on running. As entities, they are almost worthless unless they can achieve some scale, which means there is low tolerance for continued losses.
This may be made a little more complex in that some platforms are owned by parent companies who may be able to take the loss: ultimate platform ownership is worth checking out.
Perhaps the one worry was that as late as September 12, Funding Secure announced a 30 Day Access account, quite similar to Lendy and its ‘Wealth’ product. With no money apportioned officially to any loans, this type of thing smacks as a last-ditch attempt to get some liquidity into the business.
Lessons to learn for the future
P2P isn’t what it was. The whole sector has various hazards designed to fleece investors: fraudulent borrowers, valuers who simply over-value to get the business, insufficient discipline for borrowers to stick to timelines. Arguably platforms themselves are meant to be responsible here, but there are real questions on competency here as many seem powerless to do anything.
The macroeconomic backdrop has changed somewhat over the last 5 years. In 2014 you could get an uplift in the value of a property simply by doing nothing but waiting as the market was trending upwards. Today, it seems that it is not beyond the realms that a flat built today could be worth less next year. It was easy to confuse market factors as some kind of skill. When failures occur, borrowers don’t care too much, as they have little skin in the game and neither do the platforms it seems, as they too have little skin in the game.
That is not to say there may be platforms who can tread the narrow line of making money for all, but it seems a tough ask. Certainly where property is concerned, developers are going to P2P platforms for a reason: nobody else will finance their projects. And it seems to me that the risks are not worth the rewards.
So here is what I am doing:
- A review of all P2P holdings.
- Where property is concerned, I am not interested in development loans. I still like simple bridging loans, where the current value of the security can be more or less ascertained.
- Where loans are to people, I regard platform risk as increased and I will review exposures accordingly.
This kind of brings many investors full circle, back to the question: ‘where should I put my money to get a decent return’? I don’t have an answer to that, not a risk-free one, anyway.
Who’s going to be next?
I don’t regard this as the last failure in the market. Consolidation (where bigger platforms take over smaller ones) appears to be unlikely, as when a platform gets to the point of insolvency it appears that many of its assets are already impaired, perhaps badly and customer goodwill is likely to be small.
I would say Moneything doesn’t look great, which has many failing loans based on developments at high interest rates, a shortage of new loans to generate cash and long queues on the secondary market even for asset-backed loans. As an investor there I hope they get through it, but it would not surprise me.