European P2P lenders expect loans to be securitised
Expansion of the P2P lending market in Europe is expected to be fuelled by securitisation within the next 18 months, enabling institutional investment to be extended from specialist funds to pension funds and wealth managers. Hedge funds have been injecting liquidity into platforms for some time and the US market introduced securitisation more than two years ago; most recently, Citigroup marketed $377m of bonds backed by loans originated on San Francisco-basedplatform, Prosper, and last year investment trust, P2P Global Investments, was launched in the UK, enabling investors to take advantage of the returns offered by platforms such as Zopa, Ratesetter and Funding Circle. 

Peer-to-peer lending has become a popular way to get a decent return amid paltry bank savings rates.

Last year an investment trust, P2P Global Investments, launched to take advantage of the growing sector by backing loans on popular platforms.

Now investors have a new chance to invest with the company through the launch of conversion shares, known as a conversion share, or C class.

P2P: The peer-to-peer industry is worth almost a billion pounds in the UK

Peer-to-peer, or lend-to-save, has emerged in recent years as an alternative to getting loans from banks by letting businesses and people lend and borrow from each other.

According to the Peer-to-Peer Finance Association, the industry in the UK alone is worth £900million and could reach more than £1billion this year.

The idea is that by cutting out the intermediary you reduce costs for borrowers, while people lending money often benefit from better returns.

P2P Global Investments raised £200million last May and is now looking to expand with the issue of new shares.

The investment trust uses money raised to invest in loans on peer-to-peer platforms in the UK, US and Europe.

It already has relationships with Zopa, Ratesetter and Funding Circle in the UK, as well as partnerships in the US and Europe.

Now it is looking to raise another £200million through a C share class that will be used to fund new investments.

The investment trust is aiming for a dividend yield of between 6 and 8 per cent.

The minimum investment is £1,000 and shares can be purchased through brokers until 5pm on 26 January.

What is a C share class?

Investment trusts can raise money either by borrowing, known as gearing, or by selling shares.

Selling existing shares risks reducing the value of the investment trust for current shareholders, so instead, conversion shares are used to raise separate money from existing and new investors.

This money can eventually be merged.

Annabel Brodie-Smith, of the Association of Investment Companies, explains: ‘The advantage of C shares is that existing ordinary shareholders: don’t have to take up the C share offer if they don’t want to, they don’t have their returns affected while they wait for the proceeds of the C share to be invested and they don’t bear any of the issue costs.

'For new investors a C share allows them to invest in a company where there is strong demand generally at a better price than the current market price.’

The new shares in the P2P Global Investments fundraising will be merged six to nine months after admission, according to the prospectus.

Could you just invest in the ordinary shares?

There is nothing to stop you purchasing the ordinary shares.

But these will already have been invested so could be trading at a premium if the market value has increased.

For example, ordinary shares in P2P Global Investments are currently trading at a premium of 12.3 per cent.

It would cost just over £11 per share to buy into the original investment trust through a broker such as Interactive Investor.

Alternatively, the C share class is offering shares at £10 each for a minimum investment of £1,000.

Should you invest in peer-to-peer?

Most peer-to-peer platforms will let you lend a small amount of money to a business or individual.

The industry is regulated by the Financial Conduct Authority so platforms have to abide by rules including minimum capital requirements, but loans aren't covered by the Financial Services Compensation Scheme, so there is little protection if a borrower defaults.

You are theoretically further lowering the risk of default by using an investment trust as you are spreading your risk across a number of loans across different platforms and accessing the expertise of the fund manager to do your due diligence.

The investment trust aims to reduce the risk of borrower defaults through strict rules on the amount it will invest on each platform and the type of loans it will back.

They will only invest in high quality borrowers and on loans with a gross yield of between 5 and 15 per cent.

You will most probably end up spending more than if you just put money directly onto a peer-to-peer platform as the trust's minimum investment is £1,000 and there is a charge of 1/12 of 1 per cent of the net asset value per month.

Investors are already reaping the benefits of this product though. It paid a dividend of 6 per cent in November and has also attracted institutional investment from big asset managers such as Invesco.

Simon Champ, chief executive of the trust’s external manager Eaglewood Europe, explains: ‘The new shares help reduce our costs and increases the scale of the investment opportunities.

‘The P2P market worldwide is mind-blowingly large