Richards Kibbe & Orbe LLP and Wharton FinTech have completed a survey that polled over 300 institutional investors on their views on Marketplace lending.
PwC predicts that lending platforms could easily issue $150 billion annually within a decade and it is a space that institutional investors are increasingly paying attention to. The survey explained the need for the move from the moniker peer-to-peer to marketplace lending. This is a trend we have been observing in the UK, where the transition is still taking place with many platforms still referring to themselves as peer-to-peer lenders. In the US however, most are using the term marketplace lenders due to the large amounts of institutional capital deployed on the platforms.
Almost half of those surveyed worked at investment funds with more than $500 million in assets under management, while over 10% worked at larger funds with more than $10 billion in assets under management.
- 75% said they were already very familiar or somewhat familiar with the sector
- 71% of the respondents expect strong or moderate growth in the sector over the next 18 months
- Over 60% of the respondents expect returns to outperform those for corporate credit of a similar quality, such as corporate bonds
- But less than a third had discussed marketplace lending with their investor base and only 29% currently have capital allocated to the marketplace lending space, although 85% expressed an interest in making some from of investment in the space
- When asked what type of investments within marketplace lending they are most interested in 27% of respondents said purchasing whole loans and 23% said direct investment in a lending platform. There has been some discussion recently over the ability of institutional investors to ‘cherry pick’ whole loans and get a first look at loans before retail investors. Although the discussion focused around the UK market – it being more widely accepted that this process takes place in the US. But it will be interesting to see whether any steps are taken to retain the balance of institutional and retail investors on the platforms.
One of the risk factors highlighted was declining credit quality over time, along with market wide credit events. Some leaders from the marketplace lending space have commented saying they would welcome a recession to test the platforms, allowing the weaker ones to be weeded out, and the sounder ones to prove their credit models to investors. When asked about what would lessen their concerns about investing in marketplace lending, respondents said that a mature secondary market would have the largest impact.
This survey confirms the view that more institutional investors are going to become involved in the marketplace lending space in time. We have seen this trend developing by the large amounts of capital that are being deployed. One challenge that the industry needs to overcome is sourcing enough borrowers to keep up with the amount of money that investors are willing to put to work.