Where Does P2P Lending Fit in a Family Office Portfolio?

[Editor’s note: This post originally appeared on the LendIt Conference blog.]

Where does P2P lending fit in a family office portfolio? This is the question that was posed to me by a very prominent family office who was kind enough to share their asset allocation plans with me:

2013 2014e 2015e Long Term
Cash 8% 3% 3% 3%
Fixed Income 33% 39% 33% 20%
Public Equities 31% 23% 23% 20%
Alternative Investments 7% 5% 5% 9%
Real Assets 9% 14% 17% 20%
Private Investments 12% 17% 20% 29%
Total 100% 100% 100% 100%

 

Just taking a close look at this chart, P2P could fit in many places, but where should it fit? 

Should P2P fit into the fixed income bucket?

P2P lending is obviously a fixed income product, but it doesn’t share the same characteristics as a traditional family office fixed income portfolio, which is typically comprised of government treasuries and tax-free municipal bonds. P2P yields are much higher, the asset class is not liquid, the borrowers are vastly different, durations are shorter, and there is no independent ratings system like a traditional public bond. P2P is an awkward fit for the fixed income portfolio, it should probably be allocated to another bucket.

Should P2P fit into the public equities bucket?

P2P lending is clearly not a public equity, but the notes share some characteristics with public equities. Namely, the 7-9% target returns (in the US) match the long term trends of the public markets. Plus, the P2P lending platforms are mostly early stage businesses that carry operational risk similar to an equity investment (yes, the risk is minimized through bankruptcy remote structures). Overall, there is probably a better bucket for P2P lending.

Should P2P fit into the alternative investments bucket?

This category is a potential fit. P2P lending is high yielding, short duration, uncorrelated investing. The Alternative Investment bucket often is the bucket for things that are uncorrelated to the markets and are difficult to benchmark, which sounds a lot like P2P lending. Alternative Investments typically include long/short hedge funds, macro funds, and liquid credit funds. These strategies are typically very scalable and relatively liquid, which differs from P2P lending. You could probably include P2P in this category but there still may be a better fit elsewhere.

Should P2P fit into the real assets bucket?

Maybe we are thinking about P2P lending wrong since marketplace lending is just a methodology for allocating capital and not really an asset class. The three broad categories for P2P lending are consumer, small business, and real estate. Real estate crowdfunding is a real asset and should be allocated to the Real Assets bucket. It makes sense to split up P2P lending into its asset classes and allocate real estate to the real assets bucket. 

Should P2P fit into the private investments bucket?

What is this category private investments? It includes private equity, venture capital, and direct private investing. This category probably makes the most sense for consumer and small business P2P lending. In the consumer space, this is a market that has been monopolized by banks for 30 years through credit cards. Now that marketplace technology has cracked it open for everyone else, it is a newly investible asset class of private debt. In the small business space, this is a market that has been overlooked because of the structural and regulatory issues faced by banks. While the banks cannot economically originate and underwrite small loans for small businesses, P2P technology platforms are able to proceed efficiently without competition creating financing where no market existed previously. Again, this is a newly investible asset class of private debt. Private debt seems like a close cousin of private equity. The private investment bucket is probably a nice home for consumer and small business P2P lending.

P2P Lending is Catching a Rising Tide

It is interesting that this family office had decided to reduce exposure to Fixed Income and Public Equities and increase exposure to Real Assets and Private Investments. P2P lending fits nicely into this shifting allocation. I suspect that many family offices are going through a similar allocation shift just as P2P lending is rising in prominence. This allocation shift is evidence that P2P lending is catching a rising tide.

For those family offices that are ahead of the curve, LendIt Europe will the place to go to network with Europe’s top P2P platforms and the industry’s most important investment managers. Perhaps you will leave with a better understanding of where to put P2P lending in your portfolio.

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