Historically, commercial banking doesn't always fare well during a recession, particularly in lending. Investment banks and hedge funds can usually capitalise on downward markets; however, balance sheet lenders have to contain with a slowdown, coupled with rising costs & delinquencies that inhibit growth, and over-leveraging quickly becomes a concern. In this week's blog, we look at the resiliency of P2P, an industry that came of age during the last financial crisis, resilient businesses that not only provide solution-based funding for these kinds of markets but also avoid taking on some of the problems of the banks as an economic recession takes hold.
P2P lending is a financial mechanism that has become so entrenched in people's portfolios in the last ten years that it's now viewed as an 'asset class' due to the similarities shared amongst the platforms in the space; however, that isn't the case. Most asset classes (excluding arbitrage opportunities) tend to maintain consistent pricing across the market; however, the success of exposure to P2P lending varies completely from platform to platform, as it's a financial mechanism rather than an asset class, and the mechanism's success depends on each platform's management - not the overall market's sentiment towards the underlying asset. So, for example, house prices could fall, and platforms can do very well; house prices can rise sharply, and platforms can fail; it's the management of the mechanism that ultimately counts, not the underlying asset's price movement.
So why is this important? At Invest & Fund, our platform's governance and management have always driven performance, and controlling that mechanism is why we have been so successful. Markets usually dictate that businesses step in to fill the demand when an opportunity arises. There is a genuine concern that the direction of travel in a recession is just absorbing greater risk to fuel growth. If history repeats itself, some businesses will take that route, and some won't, and that's where it ceases to become an asset class and becomes a reasonably diverse industry of varying risk tolerances. To be reminded of a quote from Warren Buffet, "A rising tide floats all boats…. only when the tide goes out do you discover who's been swimming naked." So, to continue Warren's analogy, that scenario would reveal Invest & Fund in the most conservative of bathing attire; the 'race to the bottom', excuse the pun - is not something we have ever engaged in, as we believe that the management of the underlying p2p mechanism is the business, and that's reflected in the depth of experience in our team, and the rigour in our processes.
It's also important to remember the longevity of the P2P industry has primarily been fuelled by a solution-based approach to small business liquidity provision. In an environment where that may become an issue, the well-managed mechanisms will allow lenders to access a market where demand only increases; it's a significant opportunity to take advantage of circumstance; however, sensible portfolio and loan management is the selling point here, rather than reckless opportunistic growth. The goal at Invest & Fund has been to fill the market's demand without compromising our lending standards, which means our approach is the same regardless of the macro challenges.
For the last point, looking at the macro consumer sentiment of the previous ten years, particularly the pandemic years, we have seen an enormous explosion in disrupters, neo-banks, challengers, fintech, and people challenging the legacy norm. Back in 2005, when P2P was an unpalatable fringe concept, you could have argued that any significant disruption in the markets would have finished it off; however, quite the opposite happened; the industry boomed during the wake of the financial crisis, and the challenges drove the innovation. Moving forward to 2023, the appetite for challenging the established norm is more significant than ever before, mirroring those post-2008 years. We believe that consumer desire will continue to fuel the success of the P2P industry, a sector that's earned its place as a resilient member of the modern establishment.
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