The HNWI’s guide to investing in P2P Lending

Image by Gerd Altmann from Pixabay

Today’s global market volatility necessitates that investors and high-net-worth individuals (HNWIs) find alternative financial solutions to diversify their existing portfolio. The onset of Covid-19 has caused unprecedented market swings, and investors are seeking other asset classes with more stability than bonds and equities.

Peer-to-peer (P2P) lending, which involves lending to individuals or to businesses, provides an attractive opportunity to meet HNWIs’ demand for alternative investments. It connects them directly with these consumers and small and medium enterprises (SMEs), often through convenient and digital channels.

In 2019, the global P2P lending market was valued at US$67.9 billion (S$92.4 billion) and is projected to reach US$558.9 billion (S$760.4 billion) by 2027, according to the Allied Market Research report. Furthermore, a significant portion of this growth is expected to come from the Asia-Pacific (APAC) region.

With the internet and technological advancements at the forefront, P2P lending has become more accessible and feasible for HNWIs to earn alternative returns from their SME investments.

How do P2P investments work?

P2P lending is a form of crowdfunding that connects lenders to borrowers without the need for traditional financial intermediaries. Online P2P lending platforms have made financial processes and requirements faster and more straightforward for investors and HNWIs to invest in vetted opportunities, and to track their loans and frequent (or periodic) interest earnings.

Types of P2P Lending

P2P lending has certainly evolved since its early days of crowdsourcing loans from lenders who have personal connections to borrowers.

Nowadays, the scope and depth of P2P lending has grown to include HNWIs, banks, and other financial institutions looking to participate in crowdfunding. There are several market segments to which P2P lending caters:

Consumer lending
P2P lending initially began as a way for consumers to borrow money at favourable interest rates to pay off student, credit card, and personal loans. P2P platforms that orchestrate consumer lending will typically have the consumers’ personal data and rank them based on the likelihood of repaying their loan.

Property lending
Property lending is similar to consumer lending with regards to the consumer acting as the borrower, except that consumers will use the loans to pay off their mortgages and residential developments. However, property lending is more secure than consumer lending as P2P platforms can repossess and sell the property should the borrower fail to repay the loan.

SME business lending
SMEs can also borrow money to raise extra funds via several means—such as invoice financing, purchase order financing, and working capital loan. In recent years, P2P lending has become one of the drivers for SME growth in Southeast Asia (SEA) and serve as a source of capital for sustaining and growing SME businesses.

There are more than 70 million SMEs in SEA, accounting for 89% to 99% of all businesses and employing over 140 million people. Not to mention, these SMEs contribute between 30% and 53% to each of these SEA countries’ Gross Domestic Product.

Yet, there is insufficient financial backing for the SMEs. Last year’s global trade financing gap stood at around S$1.5 trillion, with over 40% coming from the APAC region and over 74% attributable to the SME segment. Banks had also rejected 45% of SMEs finance applications, posing considerable barriers to working capital.

Consequently, SMEs have looked elsewhere for sources of funding for their businesses. P2P lending platforms have provided an alternative financing option for these underbanked SMEs while acting as a viable investment opportunity for HNWIs.

The scope and depth of P2P lending has grown to include HNWIs, banks, and other financial institutions looking to participate in crowdfunding. 

Why are HNWIs turning to P2P lending?

For HNWIs who are looking to diversify their portfolio and for stable returns, P2P lending provides an alternative financial solution with market-plus yields

In the Validus Vietnam Investor Survey 2020, which surveyed over 200 Vietnamese investors and HNWIs, 79.5% of the respondents shared that the key reason they seek out alternative investment opportunities is to diversify their portfolio. 61% of respondents also said that alternative investments could give them a better return compared to more traditional options, like stocks and property. 

Technology provided on P2P platforms allows HNWIs to conveniently monitor and control their investments at any time, and from any location. These advances in financial technology digitalization enable online P2P lending to provide a greater degree of transparency and decrease the often-associated risk of loan default. Moreover, as online P2P lending gets more recognised, HNWIs can expect better system checks and policies in the future to guard their interests.

Amid the market volatility and the cycle of low interest rates witnessed over the past year, more HNWIs are turning to P2P lending as a viable option to weather the current irregular economic climate, protect their savings, and receive market plus returns for their SME loan investments.

This article was exclusively written by Milena Naitoh, Head of Investor Relations & Corporate Development at Validus Capital. Image Source: Gerd Altmann from Pixabay 

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Last updated on

December 3rd 2020, 10:06 am

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