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What is Growth Street? How does it work?
Growth Street is an interesting P2P platform that has been around since 2016. It is still quite small (£31m sized portfolio as of November 2019). Growth Street competes against Funding Circle and RateSetter. It has an unusual structure for its loans – all loans are 30 days which are then ‘rolled over’ at the end of this period. This structure means that investors can sell their entire investment within a 30 day period (in normal circumstances, subject to certain terms and conditions that are worth checking on their site). An interesting feature of Growth Street’s platform is that investors cannot select individual loans, they instead receive exposure across all loans. A protection fund exists which is designed to cover losses from company defaults. The protection fund is currently well funded versus Growth Street’s 12 month expected loss estimates, but this is something that investors should monitor.
Growth Street says that it uses ‘Advanced Data Integration’ which is designed to provide real-time access to the banking and accounting records of its borrowers, and spot emerging risks. What does this actually mean? Growth Street requires their borrowers to allow them to plug into their accounting systems, which gives them real time access to information such as revenues, profits, and cash position.
The owners of Growth Street have had to top up the provision fund regularly over the last few years. Their head of risk attributes this to some specific mistakes made in their early lending decisions, which has now been rectified. However in late 2019 Growth Street decided to take 2 new large defaulted loans out of the investment pool and put it onto its own balance sheet, to protect its investors from loss.
Let’s start with the risk. How risky is an investment with Growth Street? The positive risk factors are the diversification of investments across a large number of loans, the use of ‘Advanced Data Integration’, and the existence of a provision fund. The fund spreads the impact of individual loan defaults and reduces the potential for any single Growth Street investor to lose money.
There are some negative risk factors however that we would highlight. Firstly, in November 2019 Growth Street announced that it was laying off a high proportion of its staff, as it focused on sourcing new customers through relationships with partners such as Xero (the impressive cloud accounting firm) and Starling Bank (a high profile startup commercial bank). While this strategy makes sense to us, it is clear that Growth Street hasn’t really been achieving the success it would have hoped for up to now. While we think the management team, and shareholders, are strong and capable, the small size of the platform makes it have higher ‘platform risk’ than the other larger British platforms.
Secondly, Growth Street’s customers are sensitive to economic conditions. They tend to be smaller business customers. If there is an economic downturn (whether Brexit related or not) we would expect defaults to increase above the level of the provision fund. If that happens, investors will continue to be relying on Growth Street shareholders further contributing to the provision fund, or alternatively see their returns fall.
Up to know, Growth Street investors have earned a very consistent return in the 5-6% region. That will be attractive to many P2P investors, particularly those that prefer very simple, ‘set and forget’ style investments. However, we also think that there will be many of our readers, who are willing to devote a bit more time to their portfolios, who will want higher returns than this.
One very positive thing that we would like to highlight however is that Growth Street tends to offer very generous welcome bonuses of up to 5%. When those are taken into account, and the tax savings of the ISA product, we think this will then be an interesting investment for many people.
Growth Street won’t be attractive to everyone. It will be most attractive to P2P investors looking for a simple product, without too much risk, that can be liquidated quickly. We would expect that most funds going into Growth Street will be investors in the ISA product, which gives investors a tax free income of between 5 and 6%. It will also appeal to people who will like to know that their savings are going directly towards supporting dynamic small and growing British businesses.
As time goes on, we expect that Growth Street will improve their lending decisions and algorithms, as they take advantage of the increased amount of real time banking and accounting data that their borrowers provide. However, as of know they are still yet to fully show that this approach works.
The diversification of risk, and the provision fund, reduces the likelihood that any investor will lose any money investing in Growth Street. To become a very successful business, and to grow further, they will need to get through the Brexit period of uncertainty, and to develop a longer and improved lending track record.
The Growth Street shareholders have so far been very supportive of the business, by regularly topping up the provision fund, and taking some recent defaulted loans onto the Growth Street balance sheet. They won’t want to keep doing this though, so the next 12 months will be very important.
Growth Street is offering a sign up bonus to new investors for a limited time period. To earn this bonus follow the following steps:
1. Open an account with Growth Street using this link. (Note – this link must be used to qualify for the bonus)
2. Make an investment into a Growth Street product within 14 days of opening an account.
3. Growth Street will pay you your welcome bonus on the 12 month anniversary of your investment.
4. The amount of the bonus is tiered according to amount invested. Full details, and terms and conditions are provided in the link. However investors can earn up to 5%, or £2,000 on the amount they invest which we think is a very generous introductory offer.
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