By guest contributor John Baini, CEO, TruePillars
A new asset class?
As an asset class, an investor taking exposure to loans is not exactly new. Mortgage funds have been around for many years. Some investors may have even had experience with old style “solicitor’s loans”, where a local solicitor helped connect clients who wanted to borrow with those that wanted to invest via a private mortgage.
P2P lending is closer to a solicitor’s loan than a mortgage fund in the sense that an investor has a unique exposure to a specific loan or portfolio of loans, whereas a typical mortgage fund generally results in all participants having pro-rata exposure to the same portfolio of loans.
P2P lending is however similar to a mortgage fund in the sense that in most circumstances, investors will participate in a managed investment scheme (MIS), usually via a trust structure. In the Australian landscape, there are a growing number of P2P offerings, but there are clear differences in the legal structure they are administered through, along with the associated investor protections offered.
Doing your homework is important
Whilst it can be tedious, it is always worth taking the time to read the product disclosure statement (PDS) if the MIS is retail investor compliant, or the information memorandum if it is restricted to sophisticated / wholesale investors. Some key things investors need to know are exactly what it is they are investing in, what risks they are taking on, how liquid their investment is likely to be, how will taxation work and exactly what role the P2P operator will play.
In all cases, the role of the P2P operator is similar to a professional fund manager. That is, to use their expertise and experience to approve the right borrower applications, then administer the loans through to their scheduled maturity.
Some P2P platforms will share information about each borrower / loan with investors, but even when that is the case, in most instances the investor is at least in part relying on the expertise of the investment manager. The relevant disclosure documents will explain exactly what role the investment manager (or platform operator) will play.