Louis Schwartz, chief executive of Loanpad, explains why the provision fund model isn’t always the most effective way to protect retail investors…
DEFAULT RATES ARE beginning to loom large for the peer-to-peer lending community, as platforms start to see large tranches of loans reach maturity. As a result, the ways that platforms protect their investors from capital losses have been under scrutiny, with two methods proving to be the most popular: provision funds or ‘skin in the game’. For Louis Schwartz, chief executive of recently-launched P2P platform Loanpad, ‘skin in the game’ could be a more viable option.
“Provision funds can provide a somewhat false sense of security, or at least an unknowable level of security,” he says. “They are often funded by reducing lender returns, so basically these funds are built with money that may otherwise have been paid to investors, and the overall value of the provision fund represents a very nominal amount when compared to the total size of the loanbook – often just one or two per cent.
“If the rate of defaults is higher than that, the provision fund would essentially get wiped out. And then you have to make the decision, what investors are going to be covered, and at what point in time are they going to be covered? And can the platform even continue without the provision fund?”
Schwartz, unsurprisingly, is an advocate for the ‘skin in the game’ model, and Loanpad has devised a system whereby all of its retail investors will see a sizable part of any loan being funded by lending partners.
These carefully-selected lending partners invest at least 25 per cent alongside retail lenders on every single loan on the Loanpad platform on a first-loss basis. Schwartz says that this 25 per cent acts like a provision on each specific loan, as opposed to a provision fund that is aggregated across all loans.
“Provision funds can hide the level of risk when everything’s good and everyone’s getting their returns as expected, until a time when the provision fund may no longer be able to keep up,” says Schwartz. “At that point, the underlying loans and their risk profile would become more noticeable and relevant to investors, as will the duration of the underlying loans and thereby liquidity.
“We feel that the ‘skin in the game’ model provides a more sustainable and transparent approach to risk management.” The other undeniable benefit of the ‘skin in the game’ model is that retail investors have the peace of mind that comes with investing alongside established large-scale investors who have already done in-depth due diligence on each loan. This adds another layer of quality control, says Schwartz, and should help reassure retail investors.
However, communicating this message presents a challenge. Schwartz believes that more needs to be done to educate investors, as there is a huge difference between the two methods of mitigating risk.
He adds: “In the current environment and with Brexit uncertainty, investors should assess what they are investing in carefully, to ensure they fully understand the features, risks and benefits of each platform and its risk management methods.”
Unique offering gives investors shared access to lower-risk property loans alongside established property lenders
30th January 2019 – London – Loanpad, www.loanpad.com, today announces the UK launch of a unique prime peer-to-peer (P2P) lending platform. Fully authorised and regulated by the Financial Conduct Authority (FCA), Loanpad gives investors the operational simplicity and control of an online account in one easy-to-use online lending platform that’s built for lower-risk property loans.
The Loanpad lending model is the first of its kind in this sector to offer investors the chance to share loans with established property lenders (lending partners). The lending partners take on the higher risk part of each loan for a higher rate of interest; Investors receive the safer senior part and are shielded from much of the risk. Investors’ money is then spread evenly every day across a portfolio of secured property loans to ensure diversification.
Targeting investors looking to diversify an investment portfolio, or an everyday saver looking for other ways to grow their money, Loanpad focuses on making lower-risk secured lending accessible to smaller investors.
Describing the platform’s unique lending model, Louis Schwartz, Loanpad’s Founder and CEO said: “We wanted our model to give everyday investors access to a premier lending experience. By partnering with lending partners who originate our loans, we’re able to offer greater security than a typical property loan. As a Loanpad investor, you only fund the lower-risk senior part of the loan, while the lending partners fund the junior part and retain the first loss position. So if a loan goes bad, their investment suffers a complete loss before investors are affected.”
He continued: “Every aspect of the model is laser focused on protecting our investors’ money as much as we can. We only take on carefully vetted lower-risk property loans, originated by experienced lending partners; investments are diversified across our entire portfolio of loans which helps reduce the impact of any one borrower defaulting; interest is paid daily and access to money is free every day with our Classic account*. Of course, no lending account is completely risk-free, but Loanpad is built to keep the risk to people’s money as low as possible.”
Investors will be able to choose from two different accounts: the Classic account gives investors daily access to their money for free, and the Premium account offers a higher interest rate, with a 60-day notice period for free withdrawals or a small charge for early access. The minimum investment for either account is £10 with a maximum balance of £20,000 in the Classic account and £250,000 in the Premium account. The interest rates on the Classic and Premium accounts are variable and will be updated on the platform in real time.
Loanpad also offers a flexible innovative finance ISA, a new type of ISA which allows investors using P2P lending platforms to receive tax-free interest. The Classic and Premium accounts are both ISA eligible; investors can put in up to £20,000 per year and/or transfer funds from an existing ISA.
Loanpad was founded by Louis Schwartz, an experienced lawyer who has specialised in real estate finance since 2007.
P2P INSIDERSupercharge your understanding of Peer to Peer investing today
Whether you’re an experienced investor looking to diversify your investment portfolio, or an everyday saver looking for other ways to grow your money, there’s a new peer-to-peer lending platform on the market that provides you with a unique way to invest.
Loanpad offers a ground-breaking hybrid lending model that combines the most attractive features of pure P2P lending with the best of balance sheet lending. As an investor-centric business, Loanpad focuses on making lower-risk, secured lending accessible to smaller investors.
The platform is not only geared towards safety and security, but also simplicity and efficiency. Loanpad is as easy to use as a bank account, yet investors earn higher interest rates compared with traditional savings accounts albeit with a higher degree of risk, thanks to the platform’s innovative lending model.
Here are seven reasons to invest with Loanpad – and change the way you think about investing:
1. A P2P platform with ‘skin in the game’
Loanpad does not originate loans directly. Rather, it partners with established property lenders (lending partners) that originate the loans and share a portion of these loans with the investors on the Loanpad platform.
Like pure P2P models, Loanpad is a matchmaker and does not lend any of its own money. However, the lending partners fund at least 25% of any loan. This means, there’s always ‘skin in the game’, protecting you as an investor on the platform.
2. Greater security than a typical loan
Loanpad converts each loan into two entirely different risk classes: a lower risk senior part and a higher risk/return junior part. This unique lending model aims to offer greater security than a typical P2P loan. As a Loanpad investor, you are only funding the lower risk senior part, while the lending partners fund the junior part and retain the first loss position. This means they stand to lose capital before you do.
3. Both the chance and impact of loss are minimised
While any investment carries a certain degree of risk, Loanpad’s lower risk senior tranche structure has been designed to minimise the chances of any loss. Should such a loss occur, the platform also aims to minimise the impact of this loss, by diversifying your investment across the entire performing loanbook daily.
4. Loan transparency
The platform provides investors with the ability to check every loan, as well as data relevant to the overall loanbook. This means you’re making an informed choice to be invested with Loanpad every day.
5. Direct borrower/lender relationship
To maintain a simple, efficient and risk-controlled structure, Loanpad ensures that you have a direct lending relationship with the borrowers, rather than a contract entitling you to the proceeds of the loan. You never lend to Loanpad or its lending partners.
6. Layers of due diligence
All loans are first evaluated by Loanpad’s lending partners, who conduct a full pack of due diligence as thoroughly as you’d expect from a specialist lending business with ‘skin in the game’.
With the aim of only listing the most appropriate loans for investment, Loanpad then conducts its own thorough due diligence, including extensive checks against all end-borrowers to review items such as:
- previous history;
- experience and activity;
- assets and liabilities (including net assets);
- the fit between the borrower and loan in terms of suitability; and
- whether they have sufficient means to repay the loan within the time permitted.
All security is then independently checked by surveyors and solicitors.
7. An investor-focused business model
Loanpad’s business model is focused on providing investors with access to a premier lending experience. Loanpad earns revenue from a margin between the rates paid by borrowers and the rates paid to investors. This margin acts as Loanpad’s fee, which means that the platform’s income – and best interests – are aligned with yours, as an investor.
Peer-to-peer lending is not just for adventurous investors, as Loanpad founder and chief executive Louis Schwartz explains…
ALTERNATIVE finance is – by its very nature – outside of the mainstream. It is a form of lending that comes with a different type of risk and as such it often attracts a different type of investor. But Louis Schwartz, founder and chief executive of peer-to-peer lending platform Loanpad, is on a mission to try to reduce risk to a point where even the more conservative investors are catered for.
“Of course, savings and investments are different and shouldn’t be compared,” says Schwartz. “So, whilst we don’t want to compare our product to savings, we are trying to be the closest thing to a savings product in the alternative space.”
Loanpad is doing this by taking an unusual approach to account management and credit risk – an approach that has been two years in the making.
The platform offers two accounts, where users can view a clear transaction history at the touch of a button. Interest is paid daily, and it can be reinvested or withdrawn at any point so that investors can benefit from compound interest as well as a high level of liquidity.
But Loanpad’s real USP is its attitude towards investor risk. In the case of a default, the platform’s structure enables it to shield investors from at least the first 25 per cent of any shortfalls and often 50 per cent or more.
“We’ve created a senior structure whereby our investors are only exposed to a certain level of the security, as we have an experienced balance sheet lender retaining a large amount – generally 25 per cent to 50 per cent – on a first-loss basis,” says Schwartz.
“There is no one else in the P2P sector creating a structure with this much ‘skin in the game’. Obviously, many companies have provision funds but they generally represent a very small percentage of the overall loanbook – maybe one or two per cent.
“We are enabling investment into loans where there’s at least 25 per cent ‘skin in the game’ from an experienced balance sheet lender.”
By prioritising investor security, Schwartz concedes that Loanpad is not going to be the platform that offers the highest rates, but this was never his end goal.
“We’re very clearly aimed at the lower end of the risk scale, offering unparalleled security for our investors,” he says. “We aim to be the lowest-risk P2P platform bar none. And we can’t wait to bring a fresh new approach to alternative lending.”
Click here for more information on Loanpad.