AltFi.com uses cookies on this website. They help us to know a little bit about how you use our website, which improves the browsing experience and marketing - both for you and for others. They are stored locally on your device. By continuing to use this site you accept this use of cookies. Go to the Privacy and Cookies page for more information. You'll see this message only once.
Not signed in. Log in here.

Your daily download of all things alternative finance and fintech, from us at AltFi


 

Is 'P2P' Lending a thing of the past?




By Sam Griffiths on 19th May 2015

goo.gl/GEJJeL

Looking at the webpages of the three largest members of the P2PFA, an interesting observation can be made. Only two of the three platforms, Zopa and RateSetter now call themsleves peer to peer lenders. The third, Funding Circle, has opted for the moniker 'marketplace lending' to describe what it does. Is this as a result of increasing institutional volume? Can platforms that facilitate large amounts of institutional volume continue to call themselves 'P2P'? Opinion is split as to whether the increasing volume of institutional lending through Alternative Finance platforms in the UK is a good or a bad thing. P2P purists are concerned that institutional lenders may crowd out the retail investor and reduce returns. Others argue that the inclusion of institutions is a necessary step in the continued evolution of the industry into a new asset class, rapidly enabling the industry to scale in a way that retail investment could not do alone and also bringing a greater level of professionalism and scrutiny.

Here at AltFi Data we have been tracking institutional involvement at Funding Circle for some time in a series of updates. Now, with Zopa and RateSetter publishing their loanbooks, we are able to investigate institutional activity at these platforms also giving a better picture of what is happening in the overall industry. 

Both the Zopa and RateSetter loanbooks indicate whether a loan is covered by the contingency fund or not. It is not currently possible to invest as a retail investor on these platforms and not be covered by the respective Safeguard or Provision funds. Therefore, if we assume that the lenders on loans not covered by these funds are institutional investors, we can look at the minimum involvement of institutions in the space (minimum because it is possible that some institutions will opt for provision fund coverage and therefore will not be picked up in this analysis).

Chart 1: Estimated aggregate institutional participation in Funding Circle, Zopa and RateSetter originated loans.

The picture of institutional involvement in these top three UK platforms (together representing a 55% market share) is, unsurprisingly, one of increased institutional involvement. As the aggregate chart above shows, at least 27% of the origination volume for the biggest three UK platforms last month came from institutions. Institutional involvement in the UK market is significantly lower that it is across the Pond. In the US, retail investors account for only 10-20% of volume originations with companies like Orchard seeking to facilitate ease of access and a depth of knowledge in this emerging asset class to match exploding institutional interest.

Since the listing of P2PGI in May 2014, a number of closed funds have launched in the UK (such as Victory Park Speciality Lending and Ranger) and significant amounts of institutional investor commitments have been announced. Might the amount of institutional involvement in the UK be headed a similar way to the US? Could these closed funds end up becoming the medium through which a retail investor accesses the asset class going forward?

Chart 2: Monthly Funding Circle whole loan origination.

 

Funding Circle’s percentage of whole loans originated has increased since they started providing them in May 2014. As can be seen from the chart above, recently the increase appears to have levelled off around 40% with a slight decrease in April, likely to be a one off ‘blip’ rather than a trend.

Chart 3: Monthly Zopa loan origination with and without Safeguard fund protection.

 

As can be seen from the above chart of Zopa’s Safeguarded vs non safeguarded loan origination, since June 2014 when Zopa started to once again issue loans that were not protected by their contingency fund, the proportion of non Safeguarded loans has steadily increased. The timing and scale of this increase is similar to that seen with Funding Circle’s whole loans and coincides with the listing of P2PGI earlier in May 2014.

Last month (April), Zopa set a new industry record for monthly origination volume. We can see that almost half (43.5%) of April’s origination volume was down to loans that were not protected by the Safeguard fund (ie institutionally funded).  Just today we learned of a partnership between Zopa and Metro Bank where Metro Bank will fund loans that Zopa originates, adding more fuel to the institutional engine.

Chart 4: Monthly RateSetter loan origination with and without Contigency fund protrection.

 

RateSetter’s non-provision fund protected loan origination is in stark contrast to the trend we see emerging at Zopa. Perhaps institutions investing in RateSetter loans invest in loans covered by their provision fund. Or maybe RateSetter is a more retail lender focussed platform? From RateSetter’s Blog post last December, we can see that over 93% of lending was by individuals. This would confirm our latter theory: RateSetter is a more retail lender focussed platform.

We have seen that mounting institutional interest in the UK has been gradually translating into a greater proportion of monthly originations funded by institutional investors. The launch of several new funds and large institutional commitments in 2015 may mark the beginnings of a shift in the channels of institutional capital directed to marketplace lending platforms. It is worth noting that for all three platforms, volumes from indivdual lenders continue to grow, albeit not as quickly as those from institutional lenders on Funding Circle and Zopa. However there appears to be a difference of opinion between the UK's three leading platforms as to the best way to grow with Funding Circle and Zopa courting the institutional money and RateSetter seemingly concentrating its efforts on the retail investor’s money. We'll be interested to see how the picture develops over the coming months and, as ever, we'll keep our readers updated.

Comments


Enter your name:

Enter a comment in the box below: