Growth Street: Is Its Reserve Fund In Trouble?
4thWay user David Bradshaw had this question for us about Growth Street*:
“Firstly, I’d just like to compliment you on your excellent website as it’s been a helpful resource for me as I’m sure many others before me, on starting with P2P investments.
I now have investments with most of the major P2P platforms, and am looking a adding into Growth Street, which I have yet to use.
“However, I had a look at their provision fund statistics and it seems that the amounts required to cover defaults over the last two years (£729k), is far greater than the provision fund contributions they receive from borrowers (£571k), so in effect the losses have been covered by money put in by the founders (£160k).
This worries me as being unsustainable unless either a) the total loan turnover is now such that the fund income is now sufficient, or b) they have tightened up the lending risk criteria and lowered the default risk. But I cannot see whether either of these are now anticipated to improve the situation from your risk rating.
Would anyone be able to enlighten me on whether you see this as an ongoing risk, or just an early years ‘blip’ and therefore likely to correct itself ?
Thanks for asking this; it's a good question.
Claims on the reserve fund due to bad debt been around £730,000.
The borrower contributions to the reserve fund from borrower fees and the recoveries of bad debt that were made after the loans were transferred to the reserve fund have been around £670,000 (after costs in administering the fund).
So, as you point out, the claims have been around £60,000 more than the amounts paid into the fund from borrowers' contributions.
The difference has been pre-funded by founders, who have contributed and segregated an additional £1,150,000 of their own money to the reserve fund. This is far more than the £60,000 difference.
Our experts monitor the situation regularly, but at present, with the founders' large contribution, it means that there is a vast, funded pot of money of over £1,000,000 that should protect lenders for a long time.
And that's still going to be the case even if the founders do not contribute any more and the maturing loan book does not see the improved results that Growth Street expects, or if more recoveries aren't completed after the reserve fund pays for bad debts. Because at the current rate it would take over a decade for the pot to be worn down, even assuming Growth Street continues to grow pretty fast.
Looking at this another way, a more important defence against losses than the reserve fund is the interest lenders earn. Bad debt so far has been around 2.7% and interest rates have massively exceeded that, being for between 5% and 6.5%. If there was no reserve fund, lender rates would likely be one percentage point higher still, offering additional cover against losses.
If the situation ever deteriorates at Growth Street, one of 4thWay's experts will update Growth Street's entry in the comparison table along with its review, and we will send you notice of it in our newsletter.
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