P2P Lending As An Alternative Investment – Should Singaporean Investors Get Into It?

Born from a market need for SME financing, P2P lending is one asset class that has been steadily gaining significant traction during the Covid-19 pandemic. SMEs were identified as one of the most underserved sectors in Southeast Asia in the last decade, with over 30% lacking access to funds. Covid-19 has made it even more difficult for businesses around the world to secure loans and provide collateral to fulfill loan requirements.

Stepping in to assuage cash flow crises are alternative online lending platforms, which provide high-net-worth individuals with a chance to pursue higher returns by lending to SMEs. This is advantageous to both sides. P2P investor funds can be used for anything from invoice financing to capital loans, and P2P lending platforms allow a direct connection with interested SME borrowers, who can now find financing without the usual burden of collateral, or a 2 to 3 year track record. Both are common requirements for conventional bank loans. 

In Singapore, P2P lenders are well regulated by the Monetary Authority of Singapore under the Capital Markets License. Platforms like Validus works with accredited investors who provide insurance against the risk of loan defaults, funds are also held in an escrow account, mitigating any third-party risk. This has established P2P loans as a new alternative asset class, with the unique qualities of a short maturity period, high fixed returns, and limited risks due to low buy-ins.  

In particular, Singaporean investors can benefit from P2P lending for the following reasons:

1. Absolute returns in an unpredictable economic situation 

Singapore is an export-based economy suffering heavily from the pandemic. Gross domestic product (GDP) fell by a record 13.2 percent year-on-year in Q2 2020—the worst contraction since the country’s independence in 1965. The GDP is also expected to contract by a total of five to seven per cent over the entire year.

The ongoing situation means investors may want to reconsider a portfolio heavy in equities, or one in which capital is tied up in long term bonds. 

Unlike equities, P2P lending delivers absolute returns. Regardless of the market situation, SME borrowers are required to repay the loans at the stated rates. This differs from equities, where dividends are subjected to the current economic forces. As for managed funds, they are likely to follow their benchmark indices downward, given the state of the markets. 

2. Offers liquidity to “asset rich, cash poor” Singaporeans 

Property remains the favourite asset class of affluent Singaporeans. Local investors are likely to be even more enthusiastic about it now, given that Singapore’s real estate is seen as a safe haven during challenging times. 

However, property lacks liquidity. At minimum, such investment requires a 25 per cent down payment on the property valuation price, which is compounded by a down payment of at least 12 per cent Additional Buyers Stamp Duty (ABSD) for a second purchase by a Singaporean citizen. This tends to be even higher for PRs and expatriates. In addition, property cannot be divested at a moment’s notice, and further taxes, such as Sellers Stamp Duty, are imposed if a property is sold within the first three years. 

As such, a more flexible investment class could be a P2P lending platform. It requires a low buy-in and investment sums are measured in months. This frees up a portion of the portfolio to be reinvested, or even used to cover the cost of occasional emergencies. Singapore’s property investors might do well to consider P2P loans as a complement to their existing portfolio. 

3. Rises above the low interest rate environment

The Singaporean government has allocated approximately 100 billion Singapore dollars ($73.26 billion) in stimuli to ease the country through the crisis. With government support, banks have reduced their lending rates to just two or three per cent to interested—and qualified—SMEs.

While this is all good news for SME borrowers, most forms of passive investment, such as simple fixed deposits, are likely to be unrewarding for investors. Given that Singaporeans’ CPF Special Accounts pay a guaranteed four per cent per annum, investors would be cautious about taking a risk on financial products yielding two to three per cent interest. 

In this environment, P2P lending will stand out as a passive investment class. Interest rates on savings accounts have been slashed several times during 2020, and returns for most other passive investments have been similarly reduced. SME P2P lending stands out for strong and resilient returns of over seven per cent, and investors can look forward to offsetting lower return assets, such as CPF top-ups and Singapore Savings Bonds. 

4. Taps into a growing SME market at lower risk 

Risk-averse Singaporean investors are less inclined to shoulder the considerable weight of starting a business, and they are losing out on growth opportunities. With Singapore SMEs ranked among the top exporters in the region last year, homegrown enterprises are also leading expansion into cross-border trade, with 78 percent of firms already exporting to other markets across Asia Pacific.

Through P2P loans, investors can benefit from Singapore SMEs’ performance, without the risk of being an SME owner, shareholder, or private investor. Short loan tenures also mean that P2P lenders can quickly shift funds once the maturity period ends. Regardless of the uncertain economic climate, investors can also avoid being tied down to one single SME.

5. Fills the gaps in an existing investor portfolio

As an added advantage to investors, P2P lenders are protective of their reputation. Credible setups provide careful scrutiny of SME borrowers, even cultivating a pool of growing companies. P2P lenders also have a solid track record of being backed by reputable institutional investors, providing strategic guidance and support where needed.  

Alternative lending as an asset class allows lenders to diversify their portfolio and increase resilience. Because these loans perform regardless of the economic situation—and with better returns—they are a valuable addition to make for any experienced HNWI. Loan tenors and risk can be selected according to each investor’s appetite.

Most importantly, P2P loans bridge a gap between equities and bonds. Providing fixed returns, some investments even offer yields that match managed funds. While capital is committed for the duration of the loan, tenures are short enough to provide investors with liquidity in a balanced portfolio.