Investment tranching – A different attitude to risk

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Date Published: 2018-05-01

Proplend CEO Brian Bartaby is featured in P2P Finance News’ property special discussing risk mitigation and transparency. He highlights how a different approach enables them to explain risk in simpler terms.

In a feature called Property Risk? It’s as easy as A, B, C, Brian discusses the LTV-based investment tranching system the platform uses to help its ‘Lenders’ clearly quantify capital risk and identify investments they’re comfortable with.

At 0-50% loan to value (LTV), Proplend’s safest Tranche A investments enable more risk averse investors and those new to P2P lending to participate in all loans available on the platform – whilst limiting their capital risk. The risk-adjusted returns available from Tranche A convinced industry experts 4thWay to award these investments their maximum 5 Plus rating a couple of years ago and the benefits of the tranching system are now being enjoyed by Innovative Finance ISA (IFISA) investors on the platform.

Proplend Tranche	Loan To Value	Comparative Risk	Comparative Return
Tranche C	66-75% LTV	Highest Risk	Highest Return
Tranche B	51-65% LTV	Intermediate Risk	Intermediate Return
Tranche A	0-50% LTV	Lowest Risk	Lowest Return

“As well as enjoying tax-free returns, our ISA Lenders, investing in Tranche A, know they’re also first in line to be repaid should there be any problems with loan capital repayment”, explains Bartaby. “Should we need to enforce the first legal charge we hold over the securing commercial property, the property value would need to fall by more than 50% before there is any risk to their capital.”

“They know exactly what level of risk they’re taking,” he says. “We can explain it very simply to them and they know what value buffer they have.” The same risk clarity and transparency is appreciated by Tranche B and C investors too; “… the higher up the capital structure you sit, the more you should be rewarded for the relatively higher risk you’re taking”, he continued.

Despite not having any defaults or investor losses to date, with capital at risk (and P2P loans not covered by the FSCS), it’s important that people investing on peer to peer platforms understand the risk of their holding and this is a big reason why Proplend took this different approach to clearly quantifying this for their Lenders.

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The simplicity and security of Tranche A investments will be used by the platform when Proplend launches its new Auto-Lend feature (expected in August). This automated investment and diversification option will be available to both Classic account and Tax-Free ISA platform users and will see Lender’s portfolios split across five or more available loans when they enable the facility.

“Following our ISA launch and Lender Dashboard enhancements, Auto-Lend is another way we’re making P2P lending simpler, safer and more accessible”, concludes Bartaby. It will offer hassle-free investment allocation and diversification for those who don’t have the time or experience to evaluate commercial lending opportunties for manual selection.”

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With inflation continuing to dwarf cash interest rates, more people are diversifying into secured P2P lending and innovative ISAs. They are increasingly aware that the real value of their old Cash ISAs is actually reducing, that they’re free to transfer existing ISAs and that Stocks and Shares ISAs aren’t the only alternative any more.

Around half of funding for Proplend ISAs has come from ISA transfers, so it appears that having worked hard to save to their ISAs, people are now taking action to help ensure they don’t lose interest now.