This raises what we think is a tantalising prospect – the UK becoming the jurisdiction of choice for an emerging alternative credit/lending space. First though, a bit of history. The world’s first p2p lending platform may have been British (Zopa) but much of the early momentum came from the US where institutional money was early to the game at a Lending Club and Prosper. This reflects a much broader culture around what could loosely be called alternative, non bank credit. Lots of diverse institutions have been lending money first via private markets and then publicly via fund vehicles for much of the last decade in the US. Listed business development companies or BDCs as they are nicknamed have been lending tens of billions of investors cash to all sorts of businesses in the US. Non bank lenders have also been very active in consumer loans markets in the US especially around more traditional securitisation structures, although we’re also seeing a growth in more direct lending.
But the massive discounts currently on offer for listed US based BDCs points to a worrying development. Alternative credit strategies may still be popular amongst hedge funds in the US, for instance, but regulatory issues and very different risk appetites have undermined the trust of many US public market investors. I’ve talked to a number of US funds in the last few months, active in all parts of the lending spectrum but especially BDCs, who’ve said that they now think the UK is the place to do business. US asset backed lending firm SQN, for instance, chose the London market to launch one of its funds. Ranger Direct has also chosen the UK over the US as has Victory Park. It's a similar story at MW Eaglewood where the more established US business has been eclipsed by the growth of its European operations.
The successful listing of consumer lending vehicle Honeycombe also speaks to this trend of switching to the UK. This ‘traditional’ non bank lender does of course do most of its business in the UK but its credit strategies would have been an ideal fit for US investors who understand this specialist asset class. However, it chose the UK.
If a Prosper or Lending Club does choose the UK for a closed end fund launch, we suspect this could be the start of a much bigger ‘migration’. Many more fund managers engaged in alternative lending or credit strategies could choose to set up shop on the UK market. This could mean an explosion of lending funds, of all shapes and sizes. Most importantly we could even see UK listed BDCs emerge as investment trusts, echoing Funding Circle’s own recently launched vehicle.
The much bigger story here though is the emergence of what we think is a whole new asset class based around alternative credit in the form of loans – of which marketplace lending is one part. Every part of the alternative credit spectrum will soon have a gaggle of funds competing for investor’s money, all charged with finding new forms of origination to service demand for loans with yields of more than 5%. And just as London has become a global centre for infrastructure investing, so might it become the capital of alternative credit.
