May 18, 2016

Marketplace Lending Evolution: P2P, to Hedge Funds, to Whole Loans to banks to a Secondary Market


Marketplace lenders require more access to secondary markets in order to achieve a well-developed asset class.

Marketplace lending has certainly flourished over the recent past, but in order to develop into a legitimate asset class, it will require better access to the broader secondary markets and more rated securitizations.

While individual and fund investors who seek to purchase whole loans will continue to linger in the market, their presence won't be as strong as it once was. As such, the shift in focus from participations to an efficient secondary market needs to happen.

In 2015 institutional investors increasingly looked to marketplace lending, and hiked up their investments in this sector over that year. According to a 2016 survey by Richards Kibbe & Orbe LLP and Wharton FinTech, half of the institutional investors polled claimed to have invested in some form of marketplace lending, up from under 30 percent last year.

Such findings suggest an increasing level of confidence in investment funds within the marketplace lending industry. That confidence may be shaken by recent events and portfolio weakness.

While the pioneers in marketplace lending platforms, such as Prosper and LendingClub, may have started with peer-to-peer models, much of the lending capital is now being supplied by institutional investors, including banks. Thanks to excess yields and the promise of predictable credit performance across loan portfolios, institutional investors have been increasingly attracted to this asset class. With a broader range of investors entering the picture, the supply of capital is becoming increasingly focused on institutional investors.


The heightened level of confidence in investment capital within the marketplace lending niche may be fading.

Despite the fact that marketplace lending has seen incredible growth over the years, a recent report by Morgan Stanley anticipates marketplace lenders will only issue 10 times the volume in loans over the next ten years, to $122 billion per year by 2020. In order for marketplace lenders to reach even greater heights, they will have to become much more efficient.

While marketplace lenders have made it incredibly easy for consumers to obtain loans, not very many originators - aside from some of the bigger ones - have necessarily made it easier for investors to buy these loans. In the majority of circumstances, investors aren't able to choose the loans they want; instead, loans are arbitrarily allocated to them.

By developing a secondary market, investors are free to trade the loans they've purchased. Secondary market volume is crucial to continued growth and expansion in the world of marketplace lending.

Uncertainty in the Marketplace Lending Sector

Prosper Marketplace recently announced plans to layoff 28 percent of its workforce, and OnDeck Capital revealed that its loan volume is showing signs of lagging loan growth.

To add fuel to the fire, Lending Club Chief Executive Renaud Laplanche resigned without warning just last week amidst allegations that some executives did not act appropriately on more than one occasion. In addition, three senior managers within Lending Club were either terminated or have resigned.

These moves are leading a new market that was gaining credibility into turbulent waters. The ripple effect of the news led to significant unloading of the marketplace lender's shares, as well as an increased risk of more investors shying away from purchasing loans originated by Lending Club.

With questionable actions taking place at the executive level in the world's biggest marketplace lending company, many are concerned about the future of the sector. At the heart of the success of marketplace lenders is how much trust that borrowers, investors, and regulators can put into them, but such recent occurrences are putting this level of trust at risk.

Not only will Lending Club itself feel the effects of the recent departure of its founder and CEO, other marketplace lenders likely will too. Any supposed wrongdoings at Lending Club may cause investors to become increasingly concerned over perceived weakening loan quality and lack of transparency in the entire sector.

Lending Club and other marketplace lenders are starting to find it difficult to find sufficient investors to keep up with expected loan growth rates. In addition to current regulations, the suspect scenarios in upper management levels of Lending Club may encourage tighter regulatory inspection among marketplace lenders.

Despite the fact that recent events mark a setback for the industry, and recent securitization proceeds are lower, Garnet Capital can be a source of quality institutional investors for performing loan portfolios. Financial institutions may also find opportunities in the non-performing charge-off side of the loans, accelerating cash flow from nonperforming assets and banks can benefit from Garnet Capital's vast experience in coordinating such loan sales.

Optimizing Loan Portfolio Assets With Solid Advice

While there is plenty of capacity in the whole loan market, participants must have an experienced advisor to help craft a profitable deal. With specialization in managing loan portfolio sales and offering solid valuation services to financial institutions, Garnet Capital makes the ideal partner to help devise highly profitable and lucrative loan portfolios.

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