Corporate bonds in an era of P2P lending

Share to Linkedin Share to Twitter
Share to Linkedin Share to Twitter

Marketplace or P2P lending has grown considerably in recent years…

It’s fair to say this pocket of the alternative finance sector is now a fully fledged asset class, with a loyal fan base and an army of sceptics to boot.

P2P lending has been tried by many investors looking to fill a hole in their portfolios, giving them exposure to a novel type of risk. But as a passionate believer in corporate bonds and being at the forefront of opening up access to this incredible asset class we want to highlight the opportunities afforded by corporate bonds.

In this brief article we will highlight the opportunities and risks associated with both asset classes, giving you the confidence to assess the merits of both.

The rise of corporate bonds

The media doesn’t often get excited about corporate bonds. Journalists are more interested in hyping up new products like P2P lending, equity-based crowdfunding and crypto-currencies because they are easily marketed to ordinary investors.

Of course, most investors don’t want excitement. Rather, they’re looking for consistent and steady returns. So, whilst the financial press treats corporate bonds like they don’t exist, savvy investors remain open minded and focused on the real numbers.

The past decade has seen an impressive bull market in corporate bonds. Issuance has grown by $29 trillion in the 10 years since the financial crisis, a remarkable statistic that points to the importance of these instruments to the global economy and the huge amount of pension fund money entering the asset class . In fact, the FT recently observed that;

The shift to bond financing by companies is welcome, and there is plenty of room for further sustainable growth.”

-Financial Times (FT)

This is good news for companies and even better news for investors because it means increased liquidity, transparency, regulatory scrutiny, diversification and perhaps most important of all, choice.

Institutional investors who are the primary beneficiaries in terms of access to corporate debt now enjoy a large and ever-growing pool of bonds to choose from.

The sheer scale and diversity of the corporate bond market now gives investors the chance to make this the most significant part of their investment strategy and only with WiseAlpha can private investors benefit from building a portfolio in this premium asset class .

P2P lending takes centre stage

Whilst the corporate bond market has grown rapidly, albeit quietly, peer-to-peer lending, or simply “P2P” as it’s known by market insiders, has received a lot of high profile media attention.

P2P lending platforms connect lenders with borrowers, promising higher returns than savings accounts after defaults which created some confusion as to whether you are saving or investing. The growth of the industry came as a response to the financial crisis, with innovative platforms, such as WiseAlpha, stepping in to provide financing to individuals and companies who were shut out of traditional credit market by struggling banks.

First-movers like ZopaRatesetter and Funding Circle continue to dominate the UK market, but there are now numerous other platforms operating across different sub-sectors.

The oft-cited challenge facing the sector is that it’s simply just untested. P2P lending is a new industry that’s undergone a single, expansionary business cycle under an evolving regulatory framework. As economic conditions change and borrowers inevitably feel the pinch, will they default on their commitments and plunge P2P platforms into a vicious cycle of higher default rates and capital outflows? The major players believe they have contingency plans in place, but it’s impossible to predict the effect of a pronounced downturn. Will all of the platforms be able to avoid the mistakes made by the biggest UK banks in the run up to the 2007 financial crisis?

It’s also worth noting that even after 10 years, these products are still relatively new compared to other more established asset classes. Regulatory requirements for borrowers and platforms are far less demanding than those of the corporate debt markets for example. This is gradually changing, which is bound to put pressure on the underlying economics of the P2P model, raising overheads and inhibiting the ability of platforms to offer such attractive yields. In fact, the Financial Conduct Authority (FCA) recently proposed a range of new rules to address problems it has identified in the P2P lending sector. The FCA went as far as saying it believes P2P platforms tend to have very complicated business models, creating potential for harm to investors. Ouch.

Keeping your options open

So, where does this leave ordinary investors looking to earn a better rate of interest?

P2P is just one example from the world of alternative finance that is open to investors with a hearty risk appetite. Investors have also dabbled in Mini-bonds, retail energy bonds, invoice financing… the list is endless. Some have attracted lots of attention in recent years, not all of it positive.

Investors however should be wary and keep an open mind. After all, it’s free to review all of the options available to you but it’s not free to commit to them. We strongly believe that after assessing the plethora of opportunities out there at present, investors’ should focus on corporate bonds and remind themselves of the advantages of this extraordinary asset class.

The pros (and pros) of corporate bonds

Corporate bonds have so much to offer investors. The first thing to point out is that these are tried and tested products. They’ve been around for centuries. We know how they work and respond to different market conditions and economic scenarios, both microeconomic and macroeconomic. Default loss rates are lower in corporate debt versus peer-to-peer lending.

The longevity of the corporate bond asset class also means that the regulatory environment is established and robust. So to is the press coverage of the sector, an important but often overlooked criteria when it comes to assessing the maturity and stability of an asset class. Brand names found in the corporate debt space offer far more transparency in terms of financial data and news-flow than the less established names that drive returns in the P2P lending sector.

Institutional debt markets also benefit from high quality due diligence and underwriting standards demanded by powerful and informed institutional investors. Senior secured and high yield asset classes have been heavily invested in by the world’s largest banks, pension funds, national treasuries, asset managers, corporate treasuries and sovereign wealth funds.

WiseAlpha is the first digital bond platform making this asset class available to those with at least £100 to invest in a single bond. Ordinary investors can now invest alongside financial powerhouses who demand that their investments are properly structured and administered across their life cycle. These global players bring accountability.

Despite all of these qualities, the thing that gets me most excited about corporate bonds is choice. These instruments offer investors a wealth of options across the credit risk spectrum. It’s not all blue-chip companies and low yields — for investors with risk appetite, high yield bonds currently offer higher returns than mainstream P2P lenders. And whilst P2P platforms increasingly tend to offer a single rate generated from a black box portfolio, WiseAlpha allows investors to choose both single names and single rates whilst still offering yields of between 3% and 10%.

Financial products are constantly evolving. In an age characterised by black swan events and volatility, it pays to seek stability and transparency. It worth looking beyond the hype, towards the asset classes and products which have stood the test of time. For that, you need look no further than corporate bonds.

Until now, the full corporate loan and bond market has only been accessible to banks, pension funds and specialist funds and the wealthy. We are proud to be opening up this asset class on our digital marketplace and giving ordinary investors the chance to generate fixed income from some of the UK’s leading companies.

Please remember that bonds are investments not savings or deposit protected products and your capital and interest is at risk.

For more information about how corporate bonds can help your to grow your personal portfolio, download our investor guide here.

As with all investments your capital is at risk.

See full Risk Statement.