Marketplace Lending Shows Its Strength

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Includes: AVNAT, FCLE, KBGE, ONDK, SFTBY, SOFI
by: VanEck

By Jan van Eck, CEO

We are very excited about this new asset class. To give you a compelling top-down perspective, my colleagues Bill Ullman, Director, Van Eck Associates Corporation, and Carlos Nogueira, Member of Van Eck's Fixed Income Investment Team have co-authored this special post. Bill Ullman is also Senior Advisor to fintech and marketplace lending companies including: Orchard Platform, Mirador Financial, Drive Sally, and Vetr.

Yearend Review: Marketplace Lending

2015, and in particular the fourth quarter of the year, was another period of robust growth for the marketplace lending industry. Industry estimates indicate that approximately $15 billion of online loans were originated during the year.1 While the majority of these were unsecured consumer loans, small business, student, real estate, and mortgage loans were also part of the mix. Capital continued to flow into new marketplace loan origination platforms to fund both the loans being originated and the businesses themselves. Strategic transactions - partnerships and mergers and acquisitions - also became part of this young industry as it began to mature and companies sought expanded distribution channels, new technology, and more diversified funding sources. Another key theme underscored in 2015 was that the marketplace lending industry is now a global one, with disruption patterns inherent to the online finance landscape occurring here in the U.S., in Europe, and in Asia.

Industry Performance

Over the course of 2015, the asset class continued to see positive performance with low volatility. The Orchard US Consumer Marketplace Lending Index, which aggregates the investment performance of loans originated by the two largest consumer lending platforms, Lending Club and Prosper, was up 6.24% year to date through November of 2015 and 6.84% over the trailing 12 months through November 2015. This Index was up 8.66% in 2014 and 7.80% in 2013. Over the last nearly three-year period, the Index was up approximately 24.4% in aggregate.2

Let's review the key trends one by one.

Continued Rapid Industry Growth

The industry overall has grown at rates sometimes approaching 100% annually (depending on the platform). Looking at Lending Club and Prosper, the two largest platforms in the U.S., we've seen nothing short of tremendous growth. In the third quarter of 2014, Lending Club issued approximately $1.17 billion of loans. A year later (3Q '15), the company originated over $2.24 billion of loans, nearly 100% growth.3 Loan origination growth at Prosper was just as impressive, if not more so. There was a total of $3.7 billion of originations on the platform in 2015, up from $1.6 billion in 2014, representing over 100% year-on-year growth.4 Industry leaders weren't the only ones to enjoy growth. Social Finance Inc. ("SoFi"), OnDeck (NYSE:ONDK), Kabbage, Avant, Funding Circle and many other smaller platforms experienced rapid growth.

Diversified and Institutional Capital Inflows

The continuation of "institutionalized" capital flows into online loans is a key trend to watch as we enter 2016. In the last year — and the last quarter — we have seen rated securitizations of Prosper loans by BlackRock (NYSE:BLK) and Citibank (NYSE:C); we have seen successive capital raisings by four closed-end funds listed on the London Stock Exchange —all of which invest in marketplace loans; we have seen growing involvement in the industry by registered investment advisers, hedge/private funds, banks, diversified financial institutions, family offices and, of course, individuals. We believe this institutionalization and diversification of capital funding will likely support the marketplace lending industry's continued growth.

Additionally, major amounts of venture capital and private equity funding have flowed into marketplace lending platforms, allowing them to hire talent, expand operations, and market aggressively to borrowers. SoFi raised over $1.25 billion from Softbank Group Corp. (OTCPK:SFTBY) (of Japan) and Third Point Ventures (New York)5, among others. Several smaller platforms raised money from venture capitalists in Series A and Series B rounds, including RealtyMogul.com, AssetAvenue, Lon Operations (dba Bread and/or GetBread), Orchard Platform, and Mirador Financial. Indeed, 2015 was a record year for fintech investment (almost doubling from 2014)6, helping to create the next generation of online lending companies.

Strategic Transactions

Consistent with increased flows of capital into the industry, the frequency of strategic transactions has increased. An example is Prosper's acquisition of Israel-based financial app company BillGuard. According to Prosper, this transaction has enabled the firm to expand its reach to many more potential borrowers in the U.S. and to do so in an efficient and cost-effective way. Customer (borrower) acquisition remains a major cost and burden for origination platforms and this acquisition appears to directly address that issue for Prosper. A second transaction worth noting is JPMorgan's (NYSE:JPM) partnership with small business lender OnDeck, which was announced in December 2015. This partnership is particularly significant as it shows just how powerful and valuable the technology of these platforms can be, even to a major global financial institution with extensive internal capabilities.

Globalization

The industry is truly a global one, not unlike other internet-disrupted industries such as travel, stock trading, taxis or media. China's marketplace lending business is larger than that of the U.S.7, and in the UK, consumer lender Zopa recently crossed the £1 billion in outstanding loans milestone.8

For further information on the industry and more commentary in graphical form, we encourage you to take a look at an article from Crowdfund Insider: Orchard Shares "Most Interesting Charts" of 2015; it offers insights from Orchard about the loans being originated and this rapidly growing industry.

IMPORTANT DISCLOSURE

  1. $12B projected for the largest platforms, Proper and Lending Club, combined: Marketplace Lending Predictions for 2016, Lend Academy
  2. Orchard US Consumer Marketplace Lending Index, Orchard Indexes; latest data available
  3. Lending Club Statistics, Lending Club
  4. Prosper's 2015 in numbers, AltFi
  5. SoFi raises whopping $1 billion to refinance student loans, Fortune
  6. The Top 15 Most Important Fintech Stories of 2015, Forbes ; note online lending represents a portion of the overall fintech industry.
  7. Peer-to-Peer Lending Takes Off in China, The Wall Street Journal
  8. Peer-to-peer lender Zopa is growing like crazy and will do £1 billion next year, Business Insider

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Online-sourced loans are subject to certain investment risks, including interest rate risk. When interest rates rise, the market value of a loan will generally fall. This risk may be particularly acute because market interest rates are currently at historically low levels. There is currently no active secondary trading market for platform loans. Online loans are also subject to credit risk, which can result in loss of the entire principal. Online loans may be unsecured and have speculative characteristics and therefore may be high risk.

Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, expressed or implied is made regarding future performance.

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