June 25, 2013 11:58 pm

Peer lending beats equity returns

Lending directly to small growth companies via peer-to-peer exchanges has delivered a higher return to investors than buying into smaller companies’ shares, according to research into alternative finance.

In the year to March 31, private investments in short-term secured loans generated an average return of 11.2 per cent, according to West One Loans, an alternative finance provider. During the same period, shares quoted on the Alternative Investment Market provided an average return of only 0.96 per cent.

A combination of strong yields and having the return of lenders’ capital secured against real estate enabled peer-to-peer investments to generate strong returns over the 12-month period, the study found.

By contrast, Aim-quoted shares paid weaker dividend yields and suffered some capital depreciation over the period.

Total returns from secured peer-to-peer loans were also found to be more stable than their equity equivalents. Between February 2011 and March 2013, returns from secured peer-to-peer loans showed a 3 per cent maximum variation, compared with a 55.5 per cent maximum variation in the total annual return from Aim shares.

Mark Abrahams, director at West One Loans, said: “Equities have their place, but when it comes to funding the most entrepreneurial small businesses, alternative lending has a growing importance, too.”

Peer-to-peer lenders have been expanding their businesses quickly – albeit from a low base – helped by disenchantment with traditional bank lending and by people with money to invest facing low returns from savings accounts.

A study of the sector by the think-tank Nesta, based on data from the largest player in the sector, Funding Circle, predicted that peer-to-peer lending could be responsible for as much as £12.3bn in business lending annually in the next decade. Of all the borrowers interviewed by Nesta, 77 per cent said they would return to a peer-to-peer service for their financing needs. One-third said they were unlikely to have secured finance from any other source.

A separate survey among 2,042 UK adults found that 26 per cent would consider loaning money to small businesses through a peer-to-peer lending scheme when the sector is fully regulated by the Financial Conduct Authority in 2014.

The poll, commissioned by peer-to-peer lender Rebuildingsociety.com, also found that 17 per cent of those asked would consider doing so in the next 12 months, before the additional regulatory protection is introduced.

The London Stock Exchange, which operates Aim, declined to comment on the findings.

Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.

SHARE THIS QUOTE