Could it be that increased institutional activity that holds the answer to Zopa’s record breaking origination volumes over the past few months? It’s been a while since our last update on institutional activity so we thought we would take another look at how institutions are impacting origination volumes. The industry is going through an exciting development phase as platforms leverage the opportunity to serve a greater range of borrowers using their increasingly well diversified sources of capital.
Figure 1: Funding Circle whole loans (institutional) vs fractional loans
The percentage of whole loans funded through the Funding Circle platform has reached its highest point since the platform started to offer whole loans in May 2014. Whole loans are the preserve of institutions as retail investors do not have access to the pool. In contrast, fractional loan volume has remained fairly static over the last 6 months, averaging £20m. As the chart shows, institutional activity at the platform dipped in May with only 28% of the mix being whole loans, the lowest so far this year. Institutional activity has since bounced back, increasing in June and July to the current high. Funding Circle has almost realised its aim of achieving a 50:50 ratio between its retail and institutional investors with whole loans contributing to 48% of July’s volume origination.
Figure 2: RateSetter provision fund covered and non-provision fund covered loans.
RateSetter has always had a much higher proportion of loans covered by its provision fund vs those that are not covered (and only open to institutional investors). However, in the last three months there have been no loans originated that have not been covered by the provision fund. This raises two possibilities: a complete absence of institutional investment into RateSetter originated loans or the institutional investors have started to take loans covered by the provision fund. Considering the flat lining growth of RateSetter’s origination over the last 6 months, which is similar to the growth of the retail investor funded loans in both Zopa and Funding Circle, we believe the former is most likely.
Figure 3: Zopa Safeguarded loans vs non-safeguarded loans.
Non safeguarded loans, open to only institutional investors, continue to grow as a percentage of the total origination at Zopa and indeed explain the explosive growth that the platform is enjoying this summer. Indeed, the change in investor mix is bigger and has happened more quickly than it has at any other platform. 56.3% of loans in July were funded by institutional capital, a striking increase given the fact that the platform only started issuing non safeguarded loans in May of last year. This recent development suggests a paradigm shift at Zopa with a move towards the investor mix seen on the US marketplace lending platforms where institutional capital represents the dominant proportion of lending - estimated at 80%. At a time when Lending Club is taking steps aimed at making its marketplace more retail investor friendly, it could be that the historically divergent investor mixes of the market leaders on either side of the Atlantic are now becoming more aligned.