ALTFI GLOBAL SUMMIT 2016
HOSTED AT THE PIERRE, NEW YORK CITY
WEDNESDAY, 14TH SEPTEMBER 2016
WELCOME TO OUR 2016 GLOBAL SUMMIT REVIEW
Firstly, an enormous thank you to all those who attended and supported the AltFi Global Summit 2016.
The AltFi Global Summit 2016 was the first event to rigorously explore the positioning of the marketplace/online lending asset class within the broader alternative credit spectrum. The event also challenged key industry participants on the trials of 2016, and galvanised discussion around the emergent marketplace lending "ecosystem".
Ron Suber (Prosper Marketplace)
- Ron opened the event by drawing a comparison between marketplace lending and Boeing – which endured a period of turbulence itself, only to later make a full recovery. What once looked like a catastrophe for Boeing, now looks like a blip – a “growth phase”. It’s the same for marketplace lending, says Ron: “Our promise to bring credit online isn’t diminished.”
- Two years ago, Ron introduced the Necessary Nine for success in marketplace lending, with the focus very much on platforms. At the AltFi Global Summit 2016, Ron unveiled his New Necessary Nine, with the focus shifted onto fund structures.
- “I can’t stress enough that we support the ecosystem, because that’s what’s going to lead to efficiency in the market.”
- Ron spoke about the pros and cons of the pure marketplace model, the balance sheet based lending model, and the hybrid lending model, ultimately concluding that there “is no silver bullet” for success.
- Perhaps the most salient question in the whole presentation: “How do we get permanent capital?”
Where are the boundaries? How do investors define "alternative"?
Simon Champ (MW Eaglewood Europe LLP), Tom Welch (Victory Park Capital), Michael Gilroy (Canaan Partners), Etienne Boillot (Eiffel eCapital), Ryan Randall (Point)
- The big question in this panel was about how best to position online lending within the broader alternative credit spectrum. Eiffel eCapital’s Etienne Boillot said that this “absolutely matters” if the industry wants to unlock deeper pools of long-term capital.
- Several barriers to luring longer-term capital providers were identified, including the precise requirements of such investors, the absence of standardised data and the present lack of track record within the sector.
- The fact that pension funds and insurance funds have “extremely high standards of due diligence” was noted, and Simon Champ of MW Eaglewood suggested that not all specialist managers would make it “through the net”. However, those that do will be primed to unlock “huge amounts of capital”.
Transforming platform disclosure into practicable transparency
Rupert Taylor (AltFi Data)
- The thrust of Taylor’s keynote was that transparency, while commendable, does not go far enough in its present form. “Disclosure is not an absolute,” said Taylor. “It’s only worthwhile if it allows actual scrutiny to be brought to bear.”
- If done well, Taylor believes that transparency can create investor alignment and bring significant adoption. But the sector will need to move towards “transparency 2.0” before new cohorts of investors can be accessed.
- Taylor’s answer to the inadequacies of static loanbook disclosure is to monitor loan-by-loan, cash flow level data, “bringing practicable transparency and effective comparison”. According to Taylor, loan-by-loan, cash-flow level granularity is the only way to offer investors “comparable, consistent, consumable and credible” data.
In defense of online lending
Telis Demos (WSJ) (Moderator), Eric Thaller (Prosper), Glenn Goldman (Credibly), Christian Faes (LendInvest), Nathaniel Hoopes (Marketplace Lending Association)
- Nat Hoopes, Chair of the Marketplace Lending Association, said that the industry body is looking to represent the industry to Washington, and that policy-makers are “cautious to disrupt an industry which helps ordinary people”.
- On the capital side, there was much talk about the ongoing feasibility of a pure marketplace model. But a number of panelists said that it doesn’t really matter how the assets that they originate are funded, so long as there is sufficient diversification on the investor side.
- Glenn Goldman, CEO of Credibly and former CEO of CAN Capital, says that a sophisticated secondary market – which spans the entire industry – will be essential in driving retail investment. Although all panelists agreed that this could only work with standardised data across platforms.
- Session moderator Telis Demos of The Wall Street Journal put a tough question to the speakers when he asked what – with a growing number of “gatekeepers” on both the investor and borrower side of the marketplace – is the real value-add of the platforms themselves.
The evolution of the marketplace lending ecosystem
Eric Thaller (Prosper) (Moderator), Rupert Taylor (AltFi Data), Bill Ullman (Orchard), Ram Ahluwalia (PeerIQ), Charlie Moore (Global Debt Registry), Perry Rahbar (dv01)
- Eric Thaller opened this panel full of third party data analytics providers in fitting style: “As we look to the future, the standardisation of data will only become more important.”
- Both Ram Ahluwalia of PeerIQ and Charlie Moore of Global Debt Registry spoke to the importance of having confidence in loan data. Both argued that having third parties validate platform disclosure is crucial, all the more so in securitisation markets.
- The need for more granularity in platform disclosure was touched upon by both Rupert Taylor of AltFi Data and Perry Rahbar of dv01, with the latter saying that portfolio level snapshots are not especially helpful in ABS deals. Taylor pointed again to loan-by-loan, cash flow level data as the most practically useful form of industry disclosure for investors.
- There was much talk about the formation of a pan-industry secondary market, with Orchard’s Bill Ullman saying that the industry would find it “really difficult to scale” without one.
Why diversity of funding matters
Albert Periu (Funding Circle US)
- “What has driven the platforms up to now, won’t necessarily in the future,” said Albert, seemingly referring to Funding Circle’s intention to court a new breed of fixed income investor (pension funds, insurance funds, etc.).
- On opening up new pools of capital, Albert revealed that Funding Circle takes a truly global view. He has recently spent a lot of time speaking with investors in Asia that are keen to gain access to Funding Circle loans. “We have more investors buying across multiple geographies than we do in only one,” said Albert.
- While Albert admitted that retail capital can be expensive, he nonetheless sees it as an essential part of the capital stack for marketplace lending platforms, primarily due to its stickiness.
"Retail investors will become the more important source of capital in marketplace lending" - Debate
Peter Renton (LendAcademy) vs. David Stevenson (AltFi)
- Peter of LendAcademy and David of AltFi clashed in a heated debate over the future importance of retail money within the marketplace lending sector. David’s fundamental argument was that retail investors can’t be trusted, that they “encompass all the worst traits in the investment world”, and that their involvement in the sector – should anything go wrong – will inevitably lead to severe interventions from the regulator.
- Peter countered by arguing that open ended mutual funds – fuelled by retail money – could in years to come account for 50-70 per cent of the liquidity in marketplace lending. He said that this market hasn’t been tapped up at all so far, but that we could see “a flood of assets” when such structures arrive.
- Again David pointed out the herd mentality problem with retail investors, arguing that they were prone to panic and sell out at the slightest sign of trouble – with potentially harmful effects. “How do you ever solve that mismatch?” He asked.
- Renton admitted that there is “no perfect vehicle”, but said that with $12 trillion stored up in mutual funds currently, there remains a huge opportunity for marketplace lenders to access retail investors through these vehicles. Peter also believes that the simplicity of marketplace lending as an investment product will make it all the more appealing to the retail investor as the industry scales.
Defining the Universe: How broad is alternative credit as an asset class?
Jeremiah Silkowski (SQN)
- Jeremiah Silkowski from SQN Capital Management explored the ins and outs of the investable universe of alternative credit and its rapid growth in the post financial crisis era.
- The dynamics of this where two-fold. Firstly banks stopped lending and borrowers had no option while investors where faced with a dearth of yield.
- Silkowski explained that alternative credit is simply all sources of credit provided from non-traditional sources such as banks to solve this quandary as well as providing attractive investment opportunities. Litigation finance, direct lending, BDCs marketplace lending and asset back finance are all examples of different iterations or sectors within alternative credit.
- While some have come to think of this as 'shadow banking', Silkowski argued this nascent market was anything but 'shadowy' and an important source of capital for the global economy.
- SQN's own area of specialism within alternative credit, equipment leasing, has also proved a growth area for the firm with businesses, hospitals and manufacturers in several countries all turned down by banks.
Transparency in Direct Lending
Meg Zwick (Millennium Trust) (Moderator), Chris Reilly (LiftForward), Azba Habib (Kabbage), Chi-Pei Tseng (PeerStreet)
- The importance of 'standardisation' was a re-occurring theme of the the day and all the panel agreed it was essential for the continued maturation of online lending.
- Disclosure around communicating returns methodologies of key lending metrics such as returns and delinquencies was an important flagged example by one of the panel.
- An industry-wide implementation of a code of ethics was another idea raised as a way to increase transparency for investors.
Accessing Balance Sheet Portfolios
Bill Kassul (Ranger Direct Lending), Zhengyuan Lu (OnDeck), Michael Finkelstein (The Credit Junction), Andrew Whelan (GLI Finance), George Shapiro (The Interface Financial Group)
- The panel kicked off by looking at why having your own balance sheet may be better for all involved in the lending process, particularly investors.
- Agility was one reason given by several panelists allowing capital to be deployed more quickly.
- Ranger Direct Lending's Bill Kassul noted that diversification of different types of loans as well as sources of funding was wholly important from the fund manager's point of view and that sometimes the balance sheet model was viewed as a passive style of investment which he said it was not.
- The potential for tie-ups with large banks was huge, one panelist argued with balance sheet lenders likely becoming 'a feeder' for banks.
Secured vs Unsecured: Which offers the best risk adjusted returns
James Wu (MonJa) (Moderator), Jason Drattell (Praesidian Capital), Graham Smith (Open Energy Group), John Goodall (Landbay), Andrew Bertolina (Finvoice)
- A question increasingly raised is whether holding collateral or not is preferable for investors.
- Praesidian's Jason Drattell said pre - 2008 he thought there was not a concrete answer but post the crisis unsecured loans performed better than secured loans for the firm.
- The value of big data was another discussion point with several panelists stating their belief in its suitability for direct lending and the broader alternative credit space in improving underwriting standards.
- The panel lastly all gave their thoughts as to what the best opportunities will be in 2017. The US and UK small business market was touted as being hugely under served and therefore attractive as was solar energy.
Better Banking? How and why are the banks beginning to make use of new technologies?
Jeff Mitelman (Thinking Capital), Chris Harris (EY), Joel Rackham (Lendio)
- In the final session of the day the growing relationship between banks and online lenders as well as fintech service providers was explored. Are these upstarts threats or opportunities for the banking giants?
- The many tie-ups between these two sectors were are evidence of the latter with one panelist saying the disruptors are still not even 'moving the banks' needles' in their behaviour.
- There was some agreement that collaboration was the likely future path rather than the idea - popular in recent years - that online lenders could usurp the banking business model.