What is portfolio loan investment?
Portfolio loan investment is a loan investment that is simultaneously spreading over a diversified pool of loans. For example, a pool has 3 loans A, B and C. An investment in this loan portfolio is equivalent to investing in a part of loan A, a part of Loan B and a part of loan C. What proportion that you, an investor, invest in depends on how much you invest and how much the pool worths. So, say, you invest £10,000 in the above pool that worths £1,000,000 then you will be simultaneously investing in 1% (£10,000 /£1,000,000) of loan A, 1% of loan B and 1% of loan C.
How does portfolio loan investment work?
(1) It all starts with an asset originator/lending partner making, say, a working capital loan to an SME (e.g. your local store) borrower.
(2)The asset originator accumulates a pool of loans then sell it to a special-purpose vehicle ( SPV, a company that is separate from the originator's company).
(3) Untangled Platform then 'breaks' this pool into equal parts, ready to be participated by investors (you). How much you invest will then determine the proportion of the portfolio that you lend too.
(4) The proceeds from investment will then be used to pay the loan originator. This will allow the originator to continue to lend to other SMEs.
(5) At the end of the loan term, the SME (your local store) then repays the loan plus interest into a bank account of the SPV, ie separate from the originator's bank account.
(6) The SPV uses the money in its bank account to pay investors back principal plus interest. You enjoy the returns.
Why investing in portfolio loans is less risky than investing in single loans?
Apart from "Don't put all your eggs in a basket" as a benefit of diversification, we give you three more reasons why investing in portfolio loans is a good idea, because of a better risk/return:
(1) Risk sharing: The loans made with your investment are shared with loan originators. They are responsible for the higher risk part (called the ‘junior tranche’ or 3(b) in the diagram above). How much of the junior tranche depends on how risky the loan pool is. - A pool of loans secured by hard property is perhaps less risky than a pool of unsecured credit card debts. Because of this risk sharing by loan originators, there’s lower risk to you if a borrower defaults. If this does happen, your money will be repaid (plus interest) before the lending partner’s share (Step (7) in the diagrams above). This also means it’s in loan originator’ interest to check potential borrowers extensively.
(2) Loan selection: Only loans that fit certain criteria e.g. amount, duration, borrower type, credit rating etc will be selected to the pool. This is to further ensure no over concentration of borrower exposures, making the pool more diversified.
(3) Bankruptcy protection: even if the originator goes out of business, the loans are still safe as borrowers make repayment directly to the SPV's bank account.
How can I track asset performance?
Not only you are able to track performance of underlying assets on a live basis AFTER you have made the investment, your are able to conduct you own due diligence BEFORE investing. We provide asset-level performance reporting right at your finger tip. You will be able to check pool summary such as average loan sizes, duration and interest rate before zooming each asset to see its specific performance. There are performance charts to ensure the performance information is clear, even at a quick glance. We also automate the oversight of the pool, e.g. sending out an automatic reminder when an asset is due for repayment. Finally, you will be able to check the originator's track records through their previous pools on the platform.
Where can I invest?Currently, Untangled Platform is open for institution investors only who participate in the primary marketplace.
We are working with a number of peer-to-peer lending platforms to provide portfolio loan investment opportunities on their secondary trading marketplaces. Head over to your favourite P2P platform to participate in the secondary market offerings. If you don't see portfolio loan opportunities there, perhaps you could ask the P2P platform to speak to us.
If you are interested to invest in the primary market directly, please sign up for a free account. We will inform you when we will be accepting individual investors on our platform.
Many happy returns.