September 25, 2015

Is marketplace-lending backed securitization poised for lift-off?

Marketplace lenders continue to capture the interest - and capital - of investors. To cite just one example, look at the rush to invest in Social Finance Inc. The Wall Street Journal estimates the student-loan focused startup has amassed an eye-popping valuation of about $4 billion, even though SoFi executives - who claim the company is profitable - won't release the underlying financials. And while tech startups are notorious for giddy valuations that outstrip a firm's real value, there's no denying the intense interest in the burgeoning peer-to-peer lending sector.

Securitizations of marketplace lending loans have already begun
Against this larger backdrop of bullishness about non-bank lenders come efforts to package their loans for investors. In August, Internet-based installment lender Avant announced a $139 million asset-backed securitization offering, plus partnerships with JP Morgan Chase and Credit Suisse for further bundled debt sales. Lending Club loans were already being securitized in 2013. And asset manager behemoth BlackRock Inc. cobbled together a $330 million loan portfolio from Prosper Marketplace, putting most of it up for sale.

'Massive increase in capital' coming to sector
The executive editor of Bank Innovation, JJ Hornblass, argued there's a significant upside left for the securitization of marketplace-lending backed assets. He focuses on one startup which impressed him at the recent FinovateFall conference in New York City, but makes it clear that should that one falter, the idea behind it won't fail.

Hornblass explains that new startups have the potential to lead to a massive increase in capital for marketplace lending. He acknowledges that the current level of securitizations in the marketplace lending space is peanuts. 

"Investors will demand securitizations of $1 billion-plus, and they will look to marketplace lenders to generate such volume," Hornblass wrote. "When there is capital, there is volume."

Regulatory risks loom
Marketplace lenders can innovate rapidly, in part because they are only beginning to receive attention for regulators - and still aren't facing the expensive regulatory burdens shouldered by traditional lenders. It was only this summer that the Treasury Department even began formally asking for information about the fast-growing sector, American Banker noted. It's not clear where this interest might lead. Conceivably, regulators could decide to remain hands-off as the marketplace lending sector evolves.

While much may depend on which party wins the presidency in 2016, regulation of some kind does seems likely for peer-to-peer lending and debt sales connected to the sector. Loan buyers and sellers in this market should remain diligent in their review process. The principals at loan sale advisory firm Garnet Capital Advisors have decades of experience in the loan sale markets and are actively involved in this constantly evolving sector of the market.