A year on from my last report and Funding Circle (a peer-to-peer lending website in the UK) is still going strong. It is approaching nearly £600 million in funded loans. Whenever I check there is usually 50 or more loans available. It has been sometime since I saw a loan fail to reach its funding minimum. The company has also expanded to property development loans, albeit at a fixed rate rather than the normal auction system (with first charge on the property).
So has the continued success of the company translated into improved returns for the customers/investors? You may remember two year ago my annual return (~2%) was barely better than a bank deposit – largely due to a rash of bankruptcies. Last year was better, the return was a respectable 4.1% as recoveries picked up significantly. This year the result is:
After Fees: 7.3%
After Bad Debt & Recoveries: 6.3%
I consider that a very good return. It is roughly equivalent to the return on the UK stock market (FTSE-100) over the same time period. The gross and after fees returns are roughly consistent with last year, and recoveries were down a little. The difference in return is down to bad debt more than halving.
Over all this time my investment system has not changed, no extra money has been invested (but all profits reinvested). I only bid on loans under 24 months, from profitable firms that are paying tax at the expected rate and have positive working capital. People have asked about the “paying tax filter” – these loans are to small companies unlikely to have access to the tax minimisation systems heard about in the press. Thus a company showing an accounting profit that is not paying roughly the expected tax on that profit (given various UK tax breaks – historical losses or research costs for example) should be a warning sign there may be something strange going on in the accounts. I don’t have the time to dig deeper into such firms – they are just cut at this stage.
So if I haven’t changed anything, why has bad debt dropped? I’m not sure. My bad debt rate is now about average compared to all investors. It could be better risk management by Funding Circle, or just a more favourable UK business environment. According to their statistics page, bad debt on Funding Circle loans made in the last couple of years has trended below expectations. However, bad debt in loans made during the first two years (2010-11), when I was an early adopter, have been much greater than expected. This explains why my annualised return since joining the site is 5.1% compared to the average of 5.7% for equivalent investors.
Decisions should be made on future benefits not historical costs. On that basis I’m considering adding a little extra money to the capital. There are a few concerning issues with the UK economy and I believe the possibility of returning to the “bad years” is non-trivial. However, if the return from Funding Circle is around 2% in the bad years, then it seems a reasonable risk to take. I hope.