Historically Peer to Peer lending in the UK has been the preserve of the retail investor. Some would argue that the UK industry has benefited from this - many cite it as one of the reasons that the P2P industry in the UK has been, and continues to be, innovative in its approach. However, it appears to be accepted wisdom that for the industry to continue growing at its current rate, it needs to tap new sources of capital and cultivate new classes of investor.
Across the Pond, the US platforms have embraced the institutional investor. The majority of both Lending Club and Prosper’s lending capital comes from institutions (between 80% and 90%, depending on how you measure it). Even Funding Circle’s US arm, which kicked off about a year ago, is 80% funded by institutions.
Whilst institutional money has been investing in UK P2P for some time now, the listing of P2PGI in June of this year, has acted as a catalyst for many platforms to adapt their processes and make themselves more accessible to institutional money. One of these strategies has been to offer ‘Whole Loans’ to investors as opposed to ‘Part’, or ‘Fractional’, loans. Whole loan buyers are almost exclusively institutions (for reasons of size and diversification, a whole loan is unlikely to be within the reach of individuals).
From the data that Funding Circle provides we are able to observe exactly how the institutional take-up of whole loans is progressing. Of course, some institutions participate in the fractional loan market – for example the British Business Bank lends 10% to the majority of Funding Circle’s borrowers – but this is almost impossible to track.
Figure 1: Funding Circle’s Monthly Loan origination, split into Fractional (Purple) and Whole Loans (Grey). Source: AltFi Data
Funding Circle’s monthly loan origination volume has grown steadily since April, with the platform achieving consecutive record performances for each of the last 3 months. Indeed, Funding Circle has departed from the growth trajectory that AltFi Data calculated in June of this year with the latest projection suggesting that they will exceed this by upwards of £20m. So what is driving this acceleration in growth? We can see from Figure 1 that much of this acceleration has been driven by the growth in whole loans. Funding Circle introduced whole loans in May of this year and by September they made up just under 30% of total origination volume. So far this month both trends are continuing with Funding Circle set for another record volume month and whole loans making up 38% of month to date volume.
Speaking to Funding Circle, they tell us that they are targeting roughly a 50:50 split between whole and part loans both in their US and UK businesses. One of the big challenges of this nascent industry has been to increase awareness. This is now happening and it is because of this increased awareness that the institutional investor is taking an interest. An even greater challenge is now to keep the roots of the industry, the retail investor, connected and engaged. Institutional money will help to build even further momentum and bring new innovation in the development of both products and risk management procedures. However, a diversified source of capital for the industry is key. Retail investors have historically been less cyclical and more dependable with their capital - albeit smaller in scale than institutional capital.
To date, Funding Circle is managing to grow both its retail investor volume whilst at the same time successfully courting the institutional investor. Hopefully this will continue – but there may be some conflicts to manage. We’ll be keeping a close eye on the situation.
We have seen upticks in the growth trajectories of a number of other UK Platforms in the past few months, most notably RateSetter. It is not hard to imagine that a similar story with increasing proportions of institutional capital is happening across the UK AltFi space. This is a very positive development for the industry and it will be interesting to see how platforms evolve to satisfy the different groupings within their increasingly well diversified investor base.