"There's something out there waiting for us, and it ain't no man", whispered Billy Sole in the 1987 movie Predator, the looming threat of being picked off by some monster in the shadows stalking the global economy has been the hot talking point in international financial media this week, with opaque reporting, worries about regional banks, and the collapse First Brands and Tricolour drawing an ominous warning from JP Morgan about Private Credit risks. Is there a three trillion-dollar monster out there waiting to pick everyone off? Is it time for Investors to "get to the chopper!" or is this just par for the course of what is a complicated and non-traditional market operating in a challenging macro environment?
In this week's blog, we muse that in the evolving landscape of alternative investments, peer-to-peer (P2P) lending, as we perceive it, has emerged as a compelling choice for investors seeking yield, transparency, and asset-backed protection. We also ask the question that, compared to private credit funds where capital is often exposed to opaque portfolios of corporate loans, distressed debt, or excessive amounts of mezzanine finance, the P2P real estate model offers a more direct, comprehensible, and asset-secured route to attractive risk-adjusted returns. When times are difficult, risk can often mean lack of knowledge, so firstly, let's assess the situation.
Private credit markets have been around since the time of the movie ‘Predator’, emerging back in the mid-late 1980s, although it was originally a small industry of business lending, it was only really post the 2008 crash when the market took off to where it is today. Substantial capital requirements for banks and deeper due diligence on borrowers post the crisis created a gap in the market, and coupled with suppressed rates feeding borrower appetites, a new sector was born. At this juncture, most people with an opinion on this fall into two groups, group one, those who believe that risk was just moved from the banks to the private credit markets, allowing the banks to continue to profit from risky debt by investing in these private credit businesses indirectly, rather than holding the debt assets directly as they would have done before the crisis, ergo skilfully sidestepping the red tape designed to curtail the risk. Group two see it as a more positive and organic change; a new industry has appeared - ringfenced from the mainstream banking world so that risks can be profited from, without a systemic risk across the system.
The reality is, as with many complicated stories, it's both, but the pendulum of public opinion swings depending on the times. At the moment the collapse of multiple subprime lenders in the states has revealed that the banks behind them are now facing hundreds of millions in losses, and due to the very fact that these private credit businesses are so tightly ringfenced, the IMF is warning they don't know how far the rabbit hole may go, or the total exposure banks and pension providers may actually have to these businesses, but they know something is out there...
There are several positives to take from the situation, which is where our '80s movie-themed metaphor perhaps ends. The fact that there is such a solid awareness of the issues ahead of the curve is a vast difference between today's heavily regulated world and the pre-08 law of the jungle. One of the fundamental advantages of P2P real estate lending is transparency, which is an entirely organic side effect of the assets not being packaged in a bewildering bundle of complex funds and financial products. This allows investors to make informed decisions based on tangible, verifiable data. In contrast, private credit funds often pool investors’ capital into diversified yet highly opaque structures. Investors rarely see the underlying borrowers, credit terms, or collateral quality they are investing in a brand, and as a result, they rely heavily on the fund manager’s discretion and reporting accuracy, potentially exposing them to hidden concentration or liquidity risks. In a decentralised sector like ours, it's painfully open, so investors can see that they are not being subtly exposed to what would have been dubbed "subprime risk" in the eras gone by.
The direct-to-borrower structure of P2P lending cuts out layers of fund management fees, carried interest, and performance charges. Investors capture a greater share of gross yield without the drag of complex fee waterfalls, often more challenging than the one Arnie jumps down in the aforementioned movie. Because P2P platforms operate with a reasonably digital infrastructure and lean cost bases, more of the income generated by loans flows to the investor; it's thin in the middle, the metaphorical guts have been ripped out of the banking model, which would have been perhaps a movie reference too far for this week.
While both our sector and private credit funds offer alternatives to public markets, we believe our sector provides superior transparency, asset security, and investor control. Backed by tangible UK property and governed by clear legal frameworks, P2P lending offers a stable and comprehensible path to yield, particularly when the actual condition of assets within private credit portfolios may be difficult to assess or verify, so what has historically been seen as a fragility is actually, when all is considered, perhaps the sector's greatest strength.
Invest & Fund has returned over £330 million of capital and interest to lenders with zero losses, showing the rigour that governs our business.
To take maximum advantage of this robust and exciting asset class, please visit www.investandfund.com
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