Garnet Capital Advisors Blog

July 20, 2015

The little filing that could: Petition could revolutionize P2P lending

With one small filing with the Securities and Exchange Commission, the future of marketplace lending, otherwise known as peer-to-peer lending, could hang in the balance.

That is because the petition, if approved by the SEC, would authorize the first closed-end mutual fund tailored specifically for marketplace lending. Like water breaking through a dam, this first mutual fund will hardly be the last. And that means the near future could be full of closed-end mutual funds that invest solely in P2P lending.

Petition sits with the SEC
At the moment, the future of closed-end mutual funds in marketplace lending is with the SEC. The document was filed by RiverNorth Capital Management, a Chicago-based company.

American Banker reported that based on the filing, these funds would have at least 80 percent of the managed assets be loans originated through online lending marketplaces. RiverNorth hopes that the popularity of online and mobile lending platforms will increase the potential for closed-end mutual funds in this sector, ideally leading to large returns for investors.

In fact, closed-end mutual funds often attract high-net worth individuals. With closed-end funds, there is a fixed amount of permanent capital, making them ideal for long-term investors and extremely desirable for investment managers.

Cormac Leech, analyst for London-based Liberum Capital, told American Banker that closed-end mutual funds for marketplace lending are a plus for this U.S. niche. The U.K. currently has a couple such funds in this sector.

"Ultimately the name of the game is to make it as easy ... and as efficient as possible to get exposure to this asset class," he added.

Filing could open more doors
There are several interesting implications of the RiverNorth filing, both for investors and peer-to-peer lenders.

From an investment perspective, having closed-end mutual funds specifically geared toward marketplace lending is a unique and exciting opportunity. It could offer high returns and it targets a growing industry. It also opens up more diversified investments without having individual investors track down the loans they want. It can be easier and more lucrative, in the right scenario. 

From a lender's perspective, more closed-end mutual funds means more room for profit. With the fixed capital, they are easier to predict and manage and represent a foot into a growing market. With closed-end mutual funds, it's all optimism for lenders and money managers.

While the P2P lending sector is still growing, many investors and businesses are seeing the potential, and that could help grow the popularity of these specific closed-end mutual funds. Banks have entered the space through direct purchases or partnerships and Garnet Capital has advised participants on these relationships.

Overall, the petition represents possibilities. It can lead to a new type of mutual fund in the U.S., and it could create stronger returns for lenders and investors alike. Of course, it all hinges on the SEC decision on the filing.