Peer Lending and Risk Adjusted Returns explained by ablrate.com
After the successful launch, Ablrate the worlds first asset backed peer to peer lending platform in aircraft, is writing a few articles on questions asked by investors.
United Kingdom (PRUnderground) August 19th, 2014
The peer lending market is growing exponentially but there are a few bugs to iron out of the system. Right now there is an imbalance between the amount of loans available and the amount of people chasing those loans. In a market where there is balance each loan should be priced correctly, but that is not happening now and that is leading to some practices that are not popular with the majority of investors, such as ‘flipping’.
Basically when is a loan is placed on some platforms those loans fill very quickly with many of the loans being taken up by those looking to make a quick profit. An investor will buy the loan, or a large amount of the loan (and some restrict the amount of the loan that you can buy), when the loan closes the investor will immediately offer the loan in the secondary market and put a premium on the loan of a few percent, essentially reducing the return of the incoming lender by a small amount depending on the term of the loan.
As you can see from this a dedicated ‘flipper’ of loans could make 1%+ per day on his investment. If you are able to automate this via tools linked to peer lending sites’ API’s then you have a potentially very lucrative business.
However, this practice will die down soon. As platforms become more diligent at stopping this kind of market ‘manipulation’ (and it may even be regulated out of existence… gulp…) the markets will settle down. When these practices are cut out and the allocation of capital into loans becomes easier, addressing the ‘loan to investor’ imbalance, we will see a more reasoned approach to investing in loans.
Every platform believes they have a great range of loans, from a risk perspective or a diversification perspective and here at Ablrate.com we are no different. However, how do you compare our loans to those on other platforms?
Traditional investment models would look at the risk adjusted returns of a particular portfolio and we think that is something that needs to be addressed to give investors an opportunity to compare apples with apples. This is something that Ablrate.com is looking to implement as a first, by giving some kind of indication of risk adjustment that is baked into the transaction. It won’t be easy, and it probably won’t be something that others will do, but we at Ablrate feel that it is important.
In one of our current loans, featured on Ablrate, we have a government backed lessee as the customer, a major European bank as the debt provider and £750,000 of the lessors own money in a transaction; it pays 10% per annum for 6 years. How do you compare that with a 12% per annum unsecured loan to a small business?
That is the dilemma facing investors now, although most are not actually facing it at all. Right now it seems that the only thing that matters is yield and platform reputation. Basically some investors will take a lower return on the same basic loan (in terms of profile) because it is being offered by a certain platform, whereas others will seek yield almost regardless of risk.
What we have right now is a mispriced marketplace, and wherever mispricing is prevalent there is opportunity for the sophisticated to make money and the unsophisticated to be taken advantage of. At Ablrate we have a number of things in place to protect our lenders and make it fairer on everyone who uses the platform, but what we need is a) an approach to flipping that is dealt with by all platforms in the same way and b) a way of giving investors a view on how one loan compares to another.
Those of us who run platforms know that this is coming, there is going to be aggregation and with aggregation will come processes and systems that require all loans to be viewed through the same lense, where investors’ have a feel for returns vs risk. When that happens I believe we will see peer lending reach new highs and that is something that we all should be looking forward to.
Ablrate launched the worlds first asset backed peer to peer lending platform dealing primarily in aircraft deals. It allows investors for the first time to invest in aircraft transactions with high ROI\\’s.
Ablrate strives to be the global leader in asset backed lending against aircraft and other quality assets. Our purpose is to enable individuals and businesses to manage their own financial risk and returns. Helping our clients succeed and get a better, fairer deal in the world\\’s rapidly evolving financial markets. Our mission is to be the best in the eyes of our clients, employees and shareholders. For more information go to www.ablrate.com