Dutch investment firm looking to launch P2P linked note

HJCO Capital Partners (HJCO), a Dutch investment firm for active and alternative investments, is looking to launch a financial product linked to peer-to-peer (P2P) lending (the practice of lending money to individuals or businesses through online services which match lenders directly with borrowers) in the Netherlands. The firm is currently working on a structure - together with VI Company who will be looking after the technology side - which will provide access to portfolios of P2P loans which originate in the US.

"P2P has interesting risk/return characteristics," said Arthur Hopstaken (pictured), director and partner at HJCO. "As of yet, there are very few platforms which are suitable for investors because disclosure is very important to us in the sense that we want to be able to see the entire loan-book, backdated, and we want transparency about the risk models used by the platforms," he said. Apart from the US there are also a number of good platforms in the UK but these are more difficult to access for the firm, while in continental Europe the market is still very small and not transparent enough, according to Hopstaken. For the time being HJCO's portfolios target US platforms Prosper and Lending Club because the firm primarily focuses on prime consumer credit, said Hopstaken. "In the US it is easy to assess what you let yourself in for and what the risk/return characteristics are of the loans originated on those platforms."

HJCO has set-up a special purpose vehicle (SPV) which buys portfolios of loans of which there must be a minimum of 250 to be able to achieve sufficient spread, according to Hopstaken. "On those portfolios we issue securities, preferably in the shape of bonds but it could also be that we will do this in the shape of participations or shares," he said. "The securities give you access to the portfolio which spreads risk and return in this category."

The product will not get a listing, at least not for the time being, said Hopstaken. "This could change in the future but for the moment, what we want is to offer an investment which is separate from the exchanges," he said. "In a sense, if you look at the volatility but also at the pricing which we have seen on the interest rate markets, we don't want to list the product because the underlying loans are not liquid. There is no secondary market. The loans generate a lot of cash-but we don't want to turn something which is relatively illiquid into something liquid."

Hopstaken expects that at some stage a secondary market will develop but he said he is very curious how the pricing of this market will work. "We focus now on three-year and five-year loans. Our securities themselves will also have a term of three or five years," he said. The three-year security returns all profits and repays the nominal invested directly to the investors while for the five-year loan the first two years will be reinvested and two fixed coupons will be paid during this time, according to Hopstaken. "The following years we will return the nominal plus interest on a quarterly basis. So if you are looking at the duration of those products, this is shorter than the maturity because you generate a lot of cash-flow."

The project is ready to be launched but HJCO is awaiting approval of one of the Dutch regulators, De Nederlandsche Bank (DNB), according to Hopstaken. "The DNB is still wrestling with the idea whether the structure needs a banking license or not. We are currently waiting what the outcome will be and if it appears a banking license is needed we will have to change the structure."

Although the product will be targeted at institutional investors, the firm has also plans to make the product available for retail investors. "[Retail] is an interesting category and many investors are looking for alternative fixed-income investments," he said. "But of course we would need all the regulatory approvals first and for that we depend on the DNB. There are a number of developments in the field of crowdfunding and P2P lending but in that respect the harmonisation of legislation and the future of legislation is not entirely clear yet."

HJCO used to be part of Man Investments for five years. The company is now independent but still does business for Man Investments in the Netherlands. SRP lists 110 structured solutions from Man Investments across all jurisdictions. The products, of which the majority are linked to Man AHL Diversified, were issued in collaboration with Barclays, Citibank, Credit Suisse, Deutsche Bank, HSBC, National Bank of Australia, Rabobank and Societe Generale, amongst others.

SRP's Dutch database lists 38 structured products linked to alternatives (underlyings composed of non-traditional asset classes such as hedge funds) including eight products which are currently still live.