Institutional money is making a comeback in the RateSetter marketplace.
RateSetter’s full loan book went live on AltFi Data towards the beginning of the 2015, as part of the platform’s entry into the Liberum AltFi Returns Index (LARI). Since then, we’ve been able to keep tabs on the extent to which RateSetter has been making use of institutional money, by tracking the coverage of the platform’s provision fund. Only institutional lenders may forego the coverage of the provision fund. We’ve therefore been able to easily identify institutional footprints (or a lack thereof) within the platform’s loan book.
In August, we discovered that it had been three months since RateSetter had issued a loan without the protection of the provision fund attached – or, in other words, three months since the platform had played host to institutional money. That trend within RateSetter’s loan book has run diametrically opposed to the shifts that have been taking place at Zopa and Funding Circle, where the direction of traffic has increasingly favoured institutional money. 56.3% of the loans originated by Zopa in July were funded by institutions, 48% for Funding Circle. And then of course we have the mighty US marketplace lenders, such as Lending Club and Prosper, which have for a long time been up to 80% or 90% funded by institutional money.
Clearly, the lack of institutional funding at play within the RateSetter marketplace is a major point-of-difference, and the platform hasn’t missed the opportunity to cement its status as a consumer focused brand. But now, after having cut off anything not resembling retail funding, RateSetter is once again opening its doors to a carefully defined measure of institutional capital.
Where previously P2PGI money had accounted for around 5% of the platform’s lending volume (between May 2014 and May 2015), the contributions of the Marshall Wace backed fund will henceforth account for roughly 3% of the capital at work within the marketplace. Whilst the actual amount of institutional money may rise (potentially to as high as 30% in the medium term), we’re told that P2PGI's 3% allocation will not.
But why, with so low a proportion of its loans on offer to P2PGI, has RateSetter chosen to retread the institutional path at all?
The platform highlighted a number of key reasons. The first and perhaps most important is that RateSetter is determined always to be able to meet borrower demand. Having institutional money on tap helps here, as the platform isn’t forced to rely upon a constant supply of retail money. Secondly, RateSetter explained to AltFi that the P2PGI stamp of approval is in itself a valuable marker – demonstrating to the world that the debt originated by the platform is deemed investible by a highly sophisticated investor. Finally, RateSetter is looking to the future, and sees diversity among its capital sources as enhancing the overall stability of the platform.
As is in line with standard procedure in the UK market, whole loans will be randomly allocated to P2PGI for financing. RateSetter provided AltFi with a statement on the development:
“RateSetter has agreed to receive funding from P2PGI. This is part of RateSetter’s strategy of diversifying its source of investor capital, while for P2PGI it represents an important platform relationship. P2PGI will take a random selection of loans, it will not be able to cherry-pick loans. The arrangement is expected to grow in line with the growth of the RateSetter market.”
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.