Slowing Origination makes for Sliding Net Lending

By Sam Griffiths on Tuesday 9 August 2016


The month of July saw the UK Alternative finance industry report origination of £292.1m, meaning that the Liberum AltFi Volume Index topped £7.5bn in cumulative lending towards the end of the month.

5 platforms set new monthly origination high water marks for themselves:

  • Assetz Capital - £11.8m vs previous high of £8.3m in March 2016
  • Abundance - £1.84m vs a previous high of £1.81m in Nov 2015
  • MoneyThing - £3m vs a previous high of £2.8m last month
  • MarketInvoice - £37.7m vs a previous high of £36m last month
  • Crowdcube - £11.00m vs a previous high of £10.97m in March 2016

Crowdcube’s performance was buoyed by its own crowdfunding campaign which has raised £6.8m to date. July was a big month for the platform as it also passed the £150m mark of equity finance raised for UK companies. Other platforms to pass significant milestones during the month included:

  • Funding Secure £50m
  • Archover £20m
  • MoneyThing £20m

The monthly industry total of £292.1m is a 14% increase on July 2015 and slightly above industry origination totals of the past few months. However, as can be seen from Figure 1, the continuing theme is one of a flattening off in the growth of lending volumes. With the exception of the months of February and March, which saw decent volume in property secured loans pre the hike in stamp duty, there has been no significant growth in monthly origination since November 2016. We have previously discussed the reasons for this slow down and we continue to believe that this is due to a lack of available lending capital, notably from the equity listed trusts that have now largely deployed their capital. With last week’s Bank of England base rate cut many platforms are optimistic that investors would flock to marketplace lending in the hunt for yield. Here’s hoping…

Figure 1: UK Alternative Finance Monthly Origination Volume

The stagnation in origination growth of the past few months is not due to any one platform underperforming – all platforms appear to be feeling the pinch, particularly the more established platforms. The UK’s largest five platforms, Zopa, Funding Circle, RateSetter, LendInvest and MarketInvoice have seen their combined market share come off a recent high of 82% in February 2016 down to 75% today. The chart in figure 2 gives the full picture. Being bigger means that these platforms are more heavily reliant on institutional capital than the smaller platforms. We have previously highlighted the lack of new permanent capital flowing into the sector in recent months which would explain the reversal of the  market share of the big 5 given that they had been disproportionate beneficiaries of this form of capital.

Figure 2: Combined Market Share of Zopa, Funding Circle, RateSetter, LendInvest and MarketInvoice

The average term of a marketplace lending loan is just over four years. The vast majority of loans are amortising and prepayments are common. This means that the average life of UK marketplace loans is just less than two years. The impact of the stagnation in origination volume growth is therefore pronounced when looking at net lending figures i.e. the change in the amount of capital deployed by the industry. The chart in Figure 3 is a screenshot from AltFi Data Analytics and shows monthly net lending of the UK’s biggest four platforms. These four platforms’ combined monthly net lending reached a peak of £93m in November 2015. The subsequent decline has been sharp with July’s net lending being only £37.3m.

Figure 3: Monthly Net lending of the UK’s largest four platforms - Zopa, Funding Circle, RateSetter and MarketInvoice. Screenshot taken from AltFi Data Analytics

This is a worrying trend – net lending is often cited by industry insiders as the ‘real measure’ of the industry’s provision of credit to the UK economy. If origination growth continues to stagnate then the industry could well see net lending turn negative in early 2017. That is to say the amount of capital that the industry is providing to UK consumers and businesses will start to shrink. From where will new lending capital come? Time will tell, but early signs suggest that the IFISA will not provide a panacea. Meanwhile widespread institutional adoption, most likely catalysed by further securitisations, has yet to come to fruition. Lastly the advisory community remains reluctant to adopt this new asset class. AltFi Data believe that the industry must continue to work hard to provide all three of those investor cohorts with better information. Both to reassure on the industry lending track record and to encourage the recognition of the merits of this differentiated and high returning asset class. 

Sign up for our newsletters

Your daily 7am download of all things alternative finance and fintech.

Fintech and alternative finance headlines with an exclusive Editor's Note each week. Delivered Monday at midday.

AltFi's new weekly US newsletter breaking down the ins and outs of America's burgeoning fintech sector. Delivered Monday 9am EST/ 6am PST.