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Has the marketplace lending sector fully recovered in the USA?




By Peter Renton on 1st September 2017


The year 2016 will be forever remembered as the annus horribilis in the marketplace lending industry in the US.

 

We had the famous troubles at Lending Club, Prosper and Avant laid off a good chunk of their staff, several platforms went out of business and there was a spike in defaults at many platforms leading to a significant investor pullback. No companies went public and few companies tried to raise money in what was a pretty hostile environment. The two public companies, Lending Club and OnDeck both saw major declines in their stock price. Then to top it all off at the end of the year we had one of the largest online small business lenders, CAN Capital, firing their top three executives and ceasing the issuance of new loans.

 

Phew!

 

But wait, there was more. Goldman Sachs launched their own online consumer lending platform called Marcus with no origination fees, a great user experience and competitive rates. The Supreme Court refused to hear the Madden v. Midland case leaving in place the decision of the Second Circuit and creating uncertainty for the industry. There were numerous stories in the press chronicling the downfall of the industry with many saying it simply would not survive.

 

But survive it has. If you had never read a word of news about 2016 and just started following the space this year you might think that the industry is in fact thriving.

 

Equity investments are back

 

One of the most important data points to gauge the health of an industry is to look at the amount of equity investments. According to Pitchbook, online lending equity investment was $2.3 billion in the USA in 2016. Through August 3rd of this year the total stood at $2.5 billion. While this is still down from the heady days of 2015 when $5.6 billion came flowing into the industry we are having a much better year in 2017 than in 2016.

 

Here are some interesting deals that have closed so far in 2017:

 

  1. SoFi raised $500 million in a Series F round led by Silver Lake.
  2. Kabbage raised $250 million in a Series F led by SoftBank.
  3. Bread raised $126 million in a Series B led by Menlo Ventures.
  4. Funding Circle raised $100 million in a Series F led by Accel Partners.
  5. Upgrade raised $60 million in a Series A, the largest ever Series A for a US fintech company.

 

There have been dozens of other companies that have also raised money this year often with healthy up rounds. According to Pitchbook there have been 84 funding deals so far this year. Now, I should point out that several of these deals were at down rounds so it is not as if everything is rosy in the world of raising money.

 

More startups are being launched

 

I was talking with Matt Burton, the CEO of Orchard, the other day and he commented that he has noticed something different this year than last. He is coming across more and more new origination platforms, many of them startups that have launched in the past year. I have noticed the same thing.

 

LendIt’s annual startup competition, called PitchIt @ LendIt, had over 160 entries this year, a record, and many of these were lending startups. Most entrepreneurs laid low in 2016 as the money dried up but they are out starting companies and raising money in 2017.

 

Personal Loans are Popular Among Millennials

 

Transunion conducted a study recently of millennials (born 1980-1994) and their credit preferences. They discovered that this generation is using credit cards less and at the same time using personal loans more. Transunion puts that down to primarily the growth in online lending.

 

The biggest segment of online lending is still unsecured consumer loans. And with millennials now coming into their peak borrowing years this will provide a significant tailwind for the industry in the US.

 

There is Bad News: Returns are Dropping

 

I share my personal marketplace lending investment returns every quarter on Lend Academy and for the past two years the trend has been steadily downwards. My Q2 2017 returns are a full 400 basis points lower than my Q2 2015 returns. I am not alone here. Returns for investors in the US are down at many platforms.

 

Why? There are two reasons. In the go-go days of 2015 when the easy money was sloshing around many platforms loosened their credit box chasing more borrowers. At the same time large investors continued to pour more money into these loans driving down yields.

 

When there is a combination of lower interest rates and higher defaults there is only one way returns can go and that is down. The major platforms have addressed this in late 2016 and 2017 but for investors like myself still holding three and five-year loans issued in 2015 it will be some time before our returns start going back up.

 

Recovering But Not Recovered

 

Has the industry fully recovered from the headwinds experienced in 2016? I would say no, but it is in the process of recovering. The reality is that we will never return to the heady days of 2015 when every startup was getting funded and debt capital was plentiful. And I think that is a good thing.

 

What is happening now is something of a separation. The strong platforms are getting stronger and are attracting more of the available investment capital. The middle tier players are surviving but it is a struggle. The weak players have either gone out of business or are in a serious downward trajectory.

 

This is completely normal and healthy. So, I would argue that the pullback has been a good thing. While the good old days of 2015 were fun it was not sustainable so in some sense we will never fully “recover”. But the process the industry has gone through over the past 18 months will result in a healthy and thriving industry going forward. And that will be the best kind of recovery.

 

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