Digging into the data: the secondary market
In the second instalment of our data blog series, we take a look at the secondary market data in more detail. The secondary market enables investors to buy and sell their loan parts with each other. This means new investors are able to build up a diversified portfolio very quickly and it also gives investors the ability to access their money early if needed. This blog will take a look at the ability to sell loan parts and the average time it takes to access money.
Accessing your money
In total £77 million has been traded on the secondary market to date, with £2 million traded in October alone. Since we extended the types of loans we offer in April to include small businesses who develop or invest in property, the share of property loan parts listed for sale has also increased. In October 83% of loan parts listed for sale were for business loans and 17% for property. Given that the proportion of property loans is currently 7% of the total outstanding loans, we have split the data out to show access to business loans and property loans separately.
When investors look to sell their loan parts, approximately 50% are listed for sale at a premium. For example, a B loan part earning 9.0% per year might be listed on the secondary market at a premium so the buyer rate is 8.8% earning the seller a margin at sale. However we can see above that listing at par means loans parts are more likely to be sold.
Not only does listing at par affect the likelihood of loan parts being sold, it also helps to speed up the time taken to sell.
What about property?
Turning now to property loan part listings, we can see below that a lower proportion of these have sold over the summer compared to business loan parts. Comparing the lines on both graphs, discounted loan parts actually sell at a relatively similar rate (~70-80%) on both property and business loans, however fewer par and premium property loan part listings go on to be sold.
This difference appears to be primarily driven by the 2% cashback promotion we have been running on property loans. Early investors may remember that we ran a similar promotion when we launched back in 2010. It gives investors an incentive to try a new type of loan, as well as give us some time to learn and refine our processes. Now that we have passed over £23 million lent on property, we will be running this promotion down. We did the same when we reached a similar milestone four years ago.
Liquidity varies on the secondary market
You will have seen in both the business and property loan graphs that there have been variations in liquidity in 2014. This means that at times it has taken more or less time to sell loan parts to other investors. There were two particular events which contributed to lower secondary market liquidity.
The first was between January and March, when the supply of new investor funds was not growing as fast as the demand for loans from businesses. New money therefore predominantly went towards buying primary loan parts as interest rates increased, leading to a fall in liquidity on the secondary market.
The second event following this was the introduction of lending on property loans in April. This meant secondary market liquidity stayed at a similar level. When new types of loans are launched, we expect them to have a temporary impact on the marketplace during a cashback period.
We hope that this blog post has helped to provide some more information and data on how best to sell your loan parts, should you need to access your money quickly. It is important to remember that Funding Circle is a marketplace, so access is dependent on there being a buyer for your loan parts, however the data clearly shows that selling loan parts at par or a discount will ensure a higher proportion are sold quickly. For more information on exactly how the secondary market works, take a look at our FAQs.
The Funding Circle team