Citigroup’s CEO, Michael Corbat, has said that banks and P2P platforms are becoming increasingly interconnected in their growth. This new sector is both necessary and permanent and is attracting a range of institutional investors. In this new space the institutional investors were once just a selection of hedge-fund managers and private equity firms but now a more diverse group of investors are involved. The participation of these sophisticated investors in the peer-to-peer space is one of the reasons it is starting to be termed marketplace lending, as the sector moves away from retail investors.
Unsurprisingly BlackRock is the asset management firm leading the way and has invested the most in the sector. Fortress Investment Group and Waterfall Asset Management have also committed funds to the space. It is likely that we will see more pension funds and insurance companies investing in the space in the near future. A measure of the success of the industry is when pension funds start getting involved as they typically commit larger funds on a long-term basis. About 12 large funds are each committing $200 million to $400 million to purchase assets from platforms such Lending Club and Prosper. 25 midsize investors have already injected $50 million each to asset purchases.
Matt Burton, CEO of Orchard, estimates that institutional investors have already put $60 billion to work through almost 40 different funds. He said, “There are a lot more [investors] to come”. Charles Moldow, partner at Foundation Capital, estimates that about $9 billion is expected in total annual origination volume this year.
"We are seeing more passive investors for the first time. At first, investors wanted to do arbitrage. Today, we are seeing more retail and institutional money both coming in for exposure and diversification. ... Looking at the industry today, we are leveraging loans now and are looking to securitize them."
Jonathan Barlow, president of Eaglewood Capital Management, said he is seeing “significant” competition from bank entrants and from the largest sophisticated investors, including BlackRock and Fortress Investment Group. "Investors are going to have a lot more options pretty soon."
A great indicator of the growth of this nascent industry is the amount of well-known investors who are becoming involved in the alternative finance sector. There are whispers that George Soros and his company Soros Fund Management are preparing to enter the alternative finance space. They have repeatedly met with potential partners over recent months, according to sources that attended the meetings. The capital allocation from these funds has not yet been determined and it is likely that an announcement will not be made until next year.
Mohamed El-Erian caused a splash when he invested $12 million into the new P2P platform PayOff. This increased interest in the space as these high profile investors bring much needed publicity and credibility to the industry.
However, an issue that is constantly repeated by naysayers is that the industry has not yet weathered a full credit cycle. Platforms need to focus on which type of investor and borrower will be more resilient in a downturn.
Ravi Subbaraya, a senior vice president at TD Bank, explains:
"The problem will be with that borrower. A super-prime borrower who drops in credit score for a banker is only going to drop even more for peer lenders down the credit line. At that point your investor flees. Peer lending is like equity investing. In bad times, you won't get your money back."
If the exponential growth in the peer-to-peer sector is to continue investors will need to keep flocking to this space. The involvement of institutional investors is undoubtedly beneficial. It helps to give the sector much needed credibility and it can help platforms quickly boost volumes, which is beneficial for the end borrower. However, it is thought that retail money will be stickier in a downturn and platforms should not forget the value of these smaller investors.