Heating Up in Europe
The sleeping giant that has been the alternative finance market in continental Europe is beginning to stir. LendIt Europe opened with a bang, thanks to the news that Funding Circle had acquired the Rocket Internet backed peer-to-peer SME lender Zencap. The move is the first significant example of M&A activity in Europe, and Liberum’sCormac Leech believes that it’s been timed to perfection. Mr. Leech asserted (in a data-driven keynote) that regulatory issues in particular have been holding back the continental players, but that these hurdles have now been mostly cleared.
Cormac went so far as to predict that, by the year 2020, continental Europe will have outstripped the UK in terms of cumulative lending volumes, despite the former being 3x smaller than the latter at present.
One key European P2P player that many readers may not be familiar with is Smava. The platform has maintained a fairly low profile to date, but Cormac suggested that the German lender accounts for perhaps half of peer-to-peer lending volumes on the continent at present.
To summarise, the outspoken Liberum analyst singled out continental Europe as “the tremendous growth opportunity” globally, claiming that lenders are currently servicing just 0.1% of the addressable market.
Cormac’s enthusiasm appears to be shared by investors. The German consumer lending outfit Auxmoney announced at LendIt that it had closed a €150m debt and equity fundraise. That seems to be the amount of money that will be required to fend off future M&A entrants. Funding Circle boss Samir Desai’s presentation was entitled “Opening Up Global Pools of Capital”, and you can bet that more than a few UK/US consumer lenders will be looking to open up pools of their own.
Transparency and Balance Sheet Risk
Transparency was a recurring talking point, as it always is, but never before have I seen it so often invoked as the panacea to requiring balance sheet capacity. Samir asserted that those lenders that lend their own money will, when their backs are against the wall, inevitably suffer from a temptation to keep the most attractive loans on balance sheet. But he added that transparency serves as Funding Circle’s license not to take balance sheet risk, because it provides their lenders with total clarity as to how well the platform is performing. Samir’s core message? “You can’t be half-pregnant as a marketplace lender” – you either are, or you are not.
Another interesting tidbit from Mr. Leech on the matter of industry transparency: he envisages the development of a central peer-to-peer data repository in the future – one which is capable of verifying the flow of client money into borrower loans, and of borrower payments back to lenders, and so on. This idea becomes all the more relevant in the wake of the recently unearthed Trustbuddy misconduct scandal, which to my mind wasn't talked about enough at LendIt Europe.
Rupert Taylor, CEO of AltFi Data, gave a presentation on institutional investment trends in the UK market. We’ll return to the nitty gritty of the findings later. The overarching point of the presentation was that trust is absolutely fundamental to the success of the marketplace lending sector, and that price discovery cannot take place without benchmarking of some kind. Taylor explained that benchmarking is an essential ingredient in broadening the institutional appeal of the space. He pitched the Liberum AltFi Returns Index (LARI) as the ideal tool for asset managers to benchmark against.
Rupert closed out his presentation by reminding the audience that the market share of the “big 3” platforms has been rebounding in recent times, after having been steadily eroded since around 2010/11. Could this be a result of their market-leading standards in disclosure?
Institutional Activity
Peter Renton held court with Mariano Belinky of Santander on the subject of how the major banks are thinking about peer-to-peer lending. What I gleaned from the conversation is that the banks – or Santander, at least – are a lot more opportunistic than one might expect. Belinky runs the Santander InnoVentures fund, which has $100m to invest within the FinTech arena. But whilst the vehicle’s mandate is equity only, Mariano admitted that strategic opportunities – such as, for example, supplying debt capital to a lending platform – may well be explored. The fund’s equity investments do not always necessitate a board seat. InnoVentures usually invests in late A Stage companies, but has invested across the spectrum. All in all, a much more lithe instrument than I was expecting!
We also heard a little something about the government’s British Business Bank.Peter Wilson, CEO of British Business Bank Investments, talked about the origins of the organisation to Christine Farnish. Pre-2008, 85% of UK SME lending was accounted for by 4 major banks, resulting in a political drive to attempt to improve access to capital for small businesses. The British Business Bank became the orchestrator of that ambition, and from the outset discovered a number of alternative lenders to be worthy of tax-payer money.
A quick note on Funding Circle’sSME Income Fund. Samir Desai described the vehicle as not dissimilar to an Exchange Traded Fund (ETF), based on the passive exposure to the platform’s loan book that it will offer to investors.
Are institutional investors outperforming retail investors in the marketplace lending battleground? Rupert Taylor’s presentation suggested that the average loss-adjusted returns being enjoyed by institutional investors (on the big 3 platforms) stand at 7.04%, versus 6.02% for retail investors. Remember though that this result came attached with an important caveat: the majority of institutional investment activity has taken place within the past 18 months, and thus it’s too early to definitively gauge their performance.
Evolution
“Maturity transformation” was touched upon often as an emergent risk within the peer-to-peer space. The term refers to the matching of short term capital to longer term products. Samir Desai argued that this is not a risk that marketplace lenders (or, more specifically, Funding Circle) can fall foul of, setting them apart from banks like Northern Rock. Desai called the model operated by Funding Circle “perfectly matched duration lending”. While investors may be able to sell loan parts, it’s not a guarantee. Desai thus argued that you cannot have a “run” on a marketplace lending platform.
Kevin Caley of secured lending platform Thincats played devil’s advocate by declaring that peer-to-peer is “doomed”. Caley sees the build up of institutional pressure resulting in conflicts arising between managing the interests of both institutional and retail investors. And given the increasing importance of institutional money in the UK’s marketplace lending ecosystem, Mr. Caley believes that retail investors will become increasingly marginalised.
Finally, a few words from Harriet Baldwin – Economic Secretary to the Treasury. As you might expect, Baldwin offered a fairly high level appraisal of the impact of the online lending space to date. But the message was overwhelmingly positive. The MP for West Worcestershire reasserted the government’s ambition to entrench the UK’s position as a global hub for financial technology. She added that P2P is “a brilliantly innovative” form of finance, and ended her speech with the following:
“We’re already a major player in FinTech, but we want to be the major player. We cannot afford to let the grass grow under our feet. We have to keep up with change.”
Watch all of the presentations from LendIt Europe here.
