Time to exit peer-to-peer lending?

By Slow Dad - December 14, 2016

Tough times ahead for the UK's peer-to-peer lending investors. Zopa and Funding Circle certainly think so. I do too, enough to exit my positions.

Peer-to-Peer lending has offered attractive returns

For the last several years I have invested a portion of my portfolio into peer-to-peer lending.

Offering yields of between 6% and 8%, the rates of return are certainly higher than was available for deposit savings or many forms of bonds.

The notion of peer-to-peer lending is a noble one, folks with a tangible funding need get matched up with willing investors seeking a decent investment return.

Peer-to-peer lending has been a great investment when the economy is in a reasonably happy place, economic activity and confidence is bubbling along, employer is flourishing, and generally most folks are wandering around with a warm fuzzy feeling about life in general.

The author behind the Miles Dividend MD blog once described peer-to-peer lending as investing in debts that are junkier than junk bonds, and with a higher management fee to boot.

To some extent he was correct, in that the borrowers turning to peer-to-peer lending often couldn’t obtain funding via more traditional routes. The higher rates of return also tend to reflect the higher chance of the borrower defaulting.

I’m not one of those pessimistic “the sky is falling” doomsayers who are forever bloviating about “the end is nigh”. I figure there isn’t much point worrying about things that I can’t control, so I’d prefer to focus on the important things in life, like whether the Australian Cricket team is winning.

Tough times ahead?

However I’m starting to see financial storm clouds gathering on the horizon for the UK, and these are giving me pause.

Time to exit peer-to-peer lending?
Time to exit peer-to-peer lending?
So I did what I would challenge anybody making such a sweeping and unsubstantiated statement: show me the data. Prove it!
show me the data. Prove it!
Economic confidence in the UK might have recovered to the pre-Brexit levels, but that just means people are less pessimistic than they were as the line is still below 0. On balance that suggests a general “glass half empty” outlook.

UK Consumer Confidence
UK Consumer Confidence

Next I looked at unemployment figures, a trailing indicator. The data to June 2016 showed the tapering off of the medium term downward trend. Normally I would look to participation rates to assess whether this was because everyone seeking work had found some, or because they’d given up looking. However the latest participation rate data I could find was more than 12 months out of date.

UK employment rate (people aged 16 to 64), seasonally adjusted.
UK employment rate (people aged 16 to 64), seasonally adjusted.

Zopa recently closed their books to further deposits, saying there was now more willing lenders than their were quality borrowers.

Funding Circle also cited “an increasingly competitive market for lower-risk borrowers”, before lowering interest rates for their A+, A and B grade loans while increasing them for the much riskier C through E grades. They claim the overall rate of return and bad debt levels will remain unchanged, but as an investor who isn’t so keen on the junkier end of the spectrum what I see is a reduced return.

What is happening closer to home?

So if the economic indicators can’t dispel my concerns, how about what is happening closer to home?

I work in the professional services industry, usually on the leading edge of large organisational change programmes. In the last 12 months most of my recent clients have cancelled or significantly curtailed their forward portfolio of projects.

It has been over six months since I even heard of a new change programme being incepted. Those still running are generally nearing completion, driven by regulatory compliance or having been inflight for 12+ months already.

Approximately 40% of my LinkedIn network currently have variants of “work wanted” displayed as their current employment status.

The volume of job listings in my niche has dwindled in the second half of 2016. Supply and demand have significantly reduced day rates / salaries on offer for those few roles advertised.

Several recruitment agents I have spoken to as a hiring manager report the current market as the toughest they have faced since the dotcom bust of 2001. They forecast a raft of redundancies in the recruitment sector early next year.

High street estate agents are making similar observations about their game.

This week I was invited to a Christmas party at a partially completed apartment complex. The developer was offering £50,000 Swiss watches to anyone who agreed to purchase one of the many remaining overpriced “off the plan” apartments they are unable to sell to offshore investors.

Redundancy seem to be contagious. The recent spate of social activities including Christmas parties, Christmas plays/concerts, and the like has revealed an unusually large number of people in my social circle either warming the bench or about to join those who are.

Number of redundancies in the UK, seasonally adjusted
Number of redundancies in the UK, seasonally adjusted

Heathrow Airport is a revolving door. Many of my European and Antipodean acquaintances are joining the gold rush in Dubai and Singapore, searching for better prospects, remuneration, or perhaps just weather. It will be interesting to see if my experience is representative of the country as a whole, once the official trailing indicator numbers catch up.
Emigration from the UK by citizenship
Emigration from the UK by citizenship
Finally I’m starting to observe a lot more vacant shopfronts appear around town, with even some of the high street chains like Tesco and Marks & Spencers closing the doors on their less performant locations.

Obviously the examples above are subjective and anecdotal, rather than being provably definitive.

Indeed there are larger macro trends at work for some of them:

  • Retail stores have long been squeezed by internet shopping, and many had over expanded.
  • Estate agents and recruiters are a cyclical business that has experienced boom times over the past couple of years, so may well have reached the tipping point of oversupply.
  • It is certainly possible that my niche has fallen out fashion, perhaps even becoming structurally redundant. 
However the number of redundancies and the seemingly never ending series of “leaving parties” for departures from the UK have definitely increased.

So what?

In summary, I’m seeing early indicators of tougher times ahead for the UK economy, but unfortunately the official data is not yet available to confirm or dispel that impression.

That doesn't inspire confidence in the junkier than junk bonds end of the lending spectrum, particularly when the lending platforms themselves are warning of a scarcity of worthy borrowers.

I see enough warning signs that I am exiting my peer-to-peer lending positions in the UK.

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  1. Hello

    I'm getting laid off myself next week, although I take heart that some of my colleagues who have gone in the months before me have secured decent jobs so locally at least, businesses are still recruiting.

    It's nearly 3 years since I started investing in P2P and I was thinking of starting to withdraw some of my cash instead of reinvesting. Part of the reason is due to my wanting to start simplifying my portfolio but another reason is the diminishing interest rates and the long waiting time to get loans matched. I may keep Funding Circle but need to keep an eye on losses.

  2. Sorry to hear you're soon headed for the bench Weenie, I hope you receive a massive payout and find your next fulfilling challenge once you figure out in which direction that lies. From what I've seen it often hits people harder than they expect, so this may take some time.

    I too have been investing in P2P lending for a few years, with interest rates being so low for so long it proved a great place for my business to park surplus cash. My main concern now is with interest rates rising, the peer-to-peer borrowers are going to be facing ever higher costs to pursue the projects they are already unable to obtain traditional funding for.

    Many of those propositions are a bit dubious to start with, so a higher borrowing cost won't help their chances much. The diversification across multiple borrowers helps to a point, but as an asset class they will all start to feel the squeeze around the same time which is troubling.

    All the best for next week.