Ever since Funding Circle announced in late July that it planned to list an investment trust on the Stock Exchange that would participate in every loan advanced across its international set of platforms – now including Continental Europe, of course – two questions have been intriguing me.

The first is whether any of the other leading platforms would follow suit and it’s subsequently become clear that LendInvest is seriously considering it too – certainly the founders buy the idea that a listed investment trust partnered with an online lending platform makes a lot of sense as a way to structure their business for reasons including the ones I set out HERE. GLI Alternative Finance has, of course, already listed as a specialist trust that invests across GLI Finance’s 20-strong stable of alternative lenders rather than being a captive vehicle for one, so the structure is a little different but principle is much the same. There is also gossip that other leading platforms are looking at the idea so I strongly suspect that the Funding Circle SME Income Fund won’t be the last launch we hear about.

The other question concerns what role the P2P funds that are already listed – P2P Global Investments and Victory Park Capital Speciality Lending Investments – would play in a world where the leading platforms have their own captive vehicles. Would these “non-captive” funds find themselves pushed more to the margins by the captives? Would captives have any sort of preferential access to their sponsor’s marketplace? Would investors come to value the diversified exposure to P2P platforms that a non-captive provides more highly than the concentrated exposure to one platform that they get by owning a captive fund? Would the non-captives ultimately transform themselves into “fund of funds” vehicles, holding stakes in a range of captive funds and providing investors with easy diversification that way? Would Exchange Traded Funds spring up to track a basket of captive funds? Would Funding Circle’s launch of a captive investment trust enable it to raise money by selling on baskets of loans owned by the trust to institutional investors (otherwise known as securitisation)? On the last point, a very interesting piece has just appeared on the Structured Credit Investor website suggesting that the Funding Circle trust is indeed intended to be the precursor to a securitisation fairly shortly. Other platforms such as Zopa and Ratesetter are also quoted in the piece as suggesting they have an interest in securitisation as a way to raise institutional funding for their lending activities – we should clearly watch this space.

Overall, however, I’ve no idea of the long-term answers to any of these questions although I can’t help noticing that the share prices of both P2PGI and VSL have been trending steadily lower over recent weeks, particularly since about mid-September, which is roughly when Funding Circle confirmed it would go ahead with its investment trust launch. Where both P2PGI and VSL originally traded at a premium to the value of the loans they had invested in, they have now both moved to small discounts. A discount is much more normal than a premium where investment trusts are concerned and so the shift will not raise any alarms in itself, but their share prices have yet to bottom out so a change in the way stock market investors view them is clearly still unfolding.

There could be any number of reasons for this, including:

• A large supply of shares. Both trusts have completed follow-on issues themselves and the prospect of Funding Circle and others bringing new funds to market may well be temporarily weighing on demand
• The fact that both trusts are leveraged, meaning that they use cheap borrowed money to supplement the equity they have raised by selling shares. The enables them to enhance the yields they can offer to shareholders. Leverage will tend to increase risk and to amplify losses as well as gains and investors may be wondering whether the yields currently on offer are sustainable in the longer term.
• Uncertainty over these funds’ evolving role in the UK market as captives gain prominence. This is possible, although the majority of P2PGI and VSL’s funds are invested in the US, where captives don’t appear poised to take hold in the same way. 

As I say, I have no special insight to guide me to the answers. But as a finance-nerd, I find the questions about captives and non-captives totally captivating.