A core goal for ThinCats is to increase the volume and range of deals available to lenders on the platform. As all our loans are introduced through Sponsors and other business professionals, it’s vital that we develop our relationships with those best able to provide the lifeblood for SME P2P lending.
Using ThinCats’ gradings
You want to go to cinema, but what to see? Easy – just pick the film with the highest rating. Five stars and you’re front and centre, with super large bucket of popcorn.
Western, scifi, romcom, action – doesn’t matter, just so long as it’s got the most stars.
No-one chooses a film like this, so why would you chose an investment on the same basis?
The above point is made to highlight a danger of total reliance on ThinCats’ star and padlock gradings, for credit and security quality respectively. We’ve put a lot of work into developing these, and we believe they are strongly predictive of outcomes in their respective areas. However, they are not a substitute for lenders’ own research, using the investment packs and other materials. They supplement this research.
For instance, a five-star loan is not ‘better’ than a four-star one. Our analysis, based on multiple quantitative metrics, shows the former to be a lower-risk one. Both should be priced accordingly. In the same way, an investment-grade bond is not better than a high-yield one; blue chip equity is not better than shares in small cap companies. It all depends on your risk tolerance and your investment objectives.
Crucially, it also depends on how a loan fits into your broader portfolio. Lenders should always be looking to build a diversified portfolio in order to arrive at a level of risk with which they are comfortable. It’s therefore inadvisable to invest in a loan just because it is underwritten – or on the basis if the institutions like a loan, then it must be good. An underwriter has its own clearly-determined investment strategy and portfolio guidelines. So if an institution invests in a loan, it will likely compliment or advance that strategy. However, that same loan, added to another very different individual portfolio, may adversely change the risk-reward trade-off of that portfolio.
Gradings are important and useful tools for the investor. But they are best used as a way of informing broader investment research. Your initial screening should not be your only screening.