Low bond yields and negative interest rates are putting investors under pressure. It is no longer even a question of earning something, but rather of losing as little money as possible. What could be more obvious than investing in Swiss SMEs via private debt as an alternative and thus keeping an attractive addition to the portfolio from a return and risk perspective?

Private debt is not new and, in simple terms, refers to the financing of a project by several people. The construction of the Statue of Liberty in 1885 is considered the world’s first crowdfunding project. Originally, the statue was intended as a gift from France, but the base and the construction were to be financed by the United States.

But the money was lacking until the American publisher Josef Pulitzer launched a fundraising campaign in his newspaper “The New York World. Every donor was to be named in the newspaper. Within a few months, around 100,000 dollars were raised from 120,000 donors. Private debt or peer-to-peer (P2P) investments are a relatively new investment segment in Switzerland. P2P is a form of crowd lending, which expresses the mediation of debt capital between capital providers and capital borrowers via the Internet. There are various other terms such as Marketplace Lending, which is mainly used in the USA. What they all have in common is the fact that they mean loan brokering via the Internet or Internet platforms. The oldest P2P platform is Zopa, founded in England in 2005. It was followed by US companies such as Prosper and Lending Club. There are now over 321 platforms in Europe, including the UK, that enable alternative forms of financing (including factoring and equity financing). In Switzerland, there were fifteen platforms at the end of 2018.

How private debt works

The principle or process of P2P transactions is similar for all P2P platforms. A potential borrower (private individual or company) fills in the information about his or her loan request on the platform. This includes personal information as well as the amount and term of the credit request. The data is needed for the credit check, which can be automatic or manual. Most platforms have their own credit analysts and their own credit rating system. According to this, borrowers are placed in a rating class depending on their creditworthiness. Here, the lower the rating, the higher the interest rate one can expect. After the credit check has been created, the borrower is notified of the classification and the conditions. Once the borrower has given his consent, the loan project is placed or published on the platform. The lender must be registered and identified on the platform (analogous to a bank account). The open credit projects are visible on the platform and the lender can invest in the desired credit projects. As soon as a loan project is 100% funded, the borrower and the lenders receive a corresponding information. The lenders must then transfer the committed money. Usually, they are compensated monthly with an interest. Usually, the loans are also amortized with a constant monthly installment.

What are the arguments in favor of private debt investments?

Compared to standard bonds, the return on P2P investments is significantly higher. The higher risk and the low liquidity for P2P loans are often cited as reasons for the better interest rate. If the risk is considered, P2P platforms are very transparent. According to CreditGate24, the historical default rate is 0.29%. Lend.ch states this to be 1.5%. But even in an international comparison, P2P loans prove to be significantly safer than, for example, high-yield bonds, which are considered very popular among institutional investors. So then there remains the liquidity premium, which should explain the higher return on P2P investments. It is true that most P2P platforms now also offer a secondary market, which certainly increases the liquidity of P2P investments. But compared to the bond sector, there are still significant differences in terms of market liquidity. A study by lend.ch shows that their A+ rated loans are roughly equivalent to a BBB rating in terms of risk profile. According to Andreas Dietrich – who is Professor in Banking and Finance as well as Head of the Institute of Financial Services at the Lucerne University of Applied Sciences and Arts and co-author of the study “Crowdlending Survey 2019” – investors can invest their money via crowdlending at fixed interest rates and achieve respectable returns. According to his data, SME loans across all risk classes generated a return of 4.46% in 2017, and in 2018 they yielded 5.64%.

How can private debt be invested in this country?

P2P investments are an attractive solution from both a risk and a return perspective. As an investor, there are many ways to get involved in the P2P sector. One option is direct investment. For this purpose, an account can be opened with a P2P platform. After successfully opening an account, the investor can then decide for himself which loans he wants to finance. Some platforms also offer the option of investing according to defined criteria by means of robo advisory. However, for a good two years now, products (notes, bonds, funds) have also been established on the Swiss market that allow investors to be active in the P2P market in a cost-effective and efficient manner without any major administrative effort. Hérens Quality AM offers such a solution with the Quality P2P Fund. Driven by the client’s need to find alternatives to the unfavorable return and risk ratio in CHF corporate bonds, the company launched a fully regulated investment fund in mid-2018, which invests a predominant part directly in Swiss corporate loans. The advantages of the Quality P2P Fund are its efficient handling and transparency. Also in terms of diversification, an optimal allocation can be achieved with a relatively small investment amount. Another advantage of the Quality P2P Fund is the bookability as well as the monthly valuation.