P2P foolishness and how to be a wiser investor

James Sherwin-Smith
3 min readMar 4, 2019


I just read this article on p2pfinance news about the bad debt situation facing a number of retail investors on the Crowdstacker marketplace lending platform. Collectively the investors are facing substantial losses of up to £7.5m with the unfortunate demise of BurningNight, a bar and nightclub operator.

I remember meeting the team behind Crowdstacker. At the time I was impressed that a relatively new and unknown platform had secured an enormous amount of crowd investment for their first few deals, as well as a relatively quick path to FCA authorisation and regulation.

But then I remembered what a co-worker had pointed out previously – that most investors will crawl over broken glass for a decent yield in a low base rate environment.

The average retail saver is very different to the average P2P investor. The latter takes on more risk for more return, acknowledging countless warnings on the way, thanks to the FCA, that the value of the investment is at risk. Even with FCA regulation of market place lending, I think, and hope, that the principle of caveat emptor still applies. However some unscrupulous platforms blur the lines in their marketing between savings in a bank account vs lending money via a marketplace platform.

What is clear to me, from when we were building Growth Street, is that not all marketplace platforms are created equal. We went out of our way to design a platform that was fair and equitable, that the risk of investor default was at least partially mitigated in multiple ways, and that the return was an appropriate premium for the risk that couldn’t be mitigated. P2P investors do not benefit from the FSCS, as their money is invested in counter parties that might not repay. They are not saving with a FCA and PRA regulated bank where their deposits are guaranteed for balances up to £85,000.

It’s interesting to me, but perhaps not a surprise, that two categories of solutions therefore exist to help P2P investors navigate this challenge further. While there is no substitute for doing your own due diligence on any investment you make, in many cases you will rely on two well-established principles – additional research by experts and diversification – to solve for the inherent challenge of lending: informational asymmetry. The borrower always has more information than the lender.

[Platforms should also work in the knowledge of these two principles. Where Crowdstacker has fallen down, in my opinion, is on diversification at the very least. According to their website, they have raised almost £56m to date. BurningNight, at £7.5m is on the larger end of the counterparties (one deal is for £15m). In total they have done 12 deals to date, far below the minimum threshold for the majority of diversification benefits that modern investment portfolio suggests – no holding should constitute more than 1/20th ie 5% of the value in your portfolio.]

The 4thWay, is an example of the first type of solution. This is an independent service that evaluates the risk of different platforms. Growth Street, I am pleased to note as the former CEO, still enjoys a “+++ exceptional” rating alongside some of the longest standing stalwarts of the industry, eg Zopa, and a low risk score of 3/10 (Zopa gets 5/10 and 7/10 by comparison for different products).

BondMason is an example of diversification across different marketplace assets. They will break up your investment into smaller individual pieces and invest in different platforms on your behalf. And there are now multiple providers that offer you an IFISA to shield returns from taxation. Some providers diversify your investment across multiple platforms.

Sadly, the old adage that “a fool is often parted from their money” still rings true. Too many investors seek returns but don’t evaluate the risks. If it feels too good to be true, it probably is. In which case, this Shakespeare quote is probably for you:

Neither a borrower nor a lender be,

For loan oft loses both itself and friend,

And borrowing dulls the edge of husbandry.

Hamlet Act 1, scene 3, 75 – 77

Finding the efficient frontier (the maximum return for a given risk) is a full time job, unless you leverage others’ expertise.

Be wise, and stand on the shoulders of giants.

Fair disclosure: I still own a few shares in Growth Street (and they’re running an investor night on Wednesday 6 March 2019 in London).



James Sherwin-Smith

Engineer by education, Consultant by experience, Entrepreneur at heart. My professional focus is #fintech & #payments, I’m an #avgeek + #cricket fan