The P2P sector is regulated by the Financial Conduct Authority, which last year announced a review of the sector.
So while P2P may still fit the risk/return profile for more sophisticated investors, and may be sensible for smaller investments as a stable and predictable means of generating income, the risk profile has certainly increased and investors may want to look elsewhere for less volatile income plays.
Direct lending: A predictable alternative
Another alternative option, which carefully balances risk with reward, and one that has become increasingly popular over the past few years, has been to invest in funds managed by specialist credit teams that are responsible for lending directly to small, growing businesses.
These funds provide asset-backed exposure to a large, diversified portfolio of UK SMEs operating across a broad range of sectors. The financing includes loans, leases, working capital and receivables finance and project finance, among others, all of which differ in size and in loan terms.
In my view, they provide a fixed-rate, predictable income stream that is uncorrelated to traditional listed equity and bond markets.
Such funds can be a good way to diversify investment portfolios. Volatility in the direct lending sector has been low when compared to traditional capital markets, with the returns stable through market cycles, relative to equity indices.
Direct lending also brings with it a number of protections as part of the rigorous due diligence process that is undertaken before a loan is made, adding another layer of investor protection.
For investors looking to build a balanced portfolio that provides them with dependable returns over a fixed term, combined with the low-risk profile that is not so easily found in emerging alternative investments, direct lending can be a considered choice.
Key Points
- Investment trusts are one option for clients seeking income returns
- P2P is another, albeit riskier, option for income seekers
- Direct lending, managed by credit teams, is another option
Belinda Thomas is a partner at Triple Point
