The AltFi Global Summit 2015 delivered what it set out to: a unique and compelling day of discussion, an intimate and curated business opportunity, and a great deal of industry and media buzz.
The first iterations of the “head-to-head” format were extremely well received. The audience of some 300 people featured every type of company from major institutional capital deployers to cutting-edge, newly launched online lending solutions. The audience was also truly global in feel, with attendees hailing from the US, UK, Continental Europe, Africa, Australasia, China and beyond. The bar has been set high for the AltFi Global Summit 2016. We look forward to seeing you there.
The Alternative Finance Road Map – by Aaron Vermut (Prosper)
Aaron Vermut from Prosper sets the road map for the alternative finance space, from the first platforms launched to the future.
Before the rise of P2P online lenders, borrowing without collateral was possible only with friends and family members. Then, in 2005, the first P2P online lenders started operating, such as Zopa and Prosper.
In the subsequent four-year period from 2005 to 2008, other platforms have been launched and the number of competitors in the space increased. From 2006 to 2008, the SEC intervened with the first forms of regulation in order to improve liquidity. This period was characterized by the participation of retail investors, since institutional participants did not yet believe in this phenomenon.
In 2013, the industry took off. Loan origination volumes notably increased, measures of lender protection were introduced and institutions started to develop a genuine interest in the space.
What about the future? Over the next few years, securitization and secondary markets will be better developed and the space will be better regulated.
Setting the scene: The hard numbers on marketplace lending in the UK and US – By Rupert Taylor
Rupert Tyalor from AltFi Data sheds light upon the space from a quantitative perspective. His findings focus on the difference between the US and the UK markets. The US market is four times bigger than the UK one and it is mainly centred on consumer lending, whereas the UK has a more diverse borrower base. However, the UK market is bigger on a relative basis. In terms of lenders, the institutional share of the UK market is approximately 42%, while in US it is 89%.
Interest rates net of defaults and fees are higher in the US market than in UK: 8.57% vs. 5.45%, but at the cost of higher volatility. However, this gap is definitely shrinking.
The UK market is dominated by three platforms – Zopa, Funding Circle and RateSetter – and their share is approximately 60% of the whole market. In the US, Lending Club and Prosper control a comparable share of the market. A critical trend has been highlighted: the UK bigger players’ market share is increasing, while in the US Lending Club and Prosper are seeing their market share eroded.
Marketplace lending as an asset class - Panel
Marketplace lending is spreading all around the world and it is inevitably disrupting the financial industry, offering borrowers cheaper loans and lenders higher returns. However, insiders tried to answer to a specific question: is marketplace lending an asset class in its own right?
Every panellist agreed about considering P2P loans as an asset class. However, the most difficult question is to determine what sort of asset class it is. Most agreed that it sits within fixed income.
Another important topic is leverage. Leverage is not a bad thing, however it is also possible to access very low risk credit with a small amount of leverage and obviously less risk.
Apart from leverage, transparency seems to be the key: platforms have to disclose everything.
How will the banks' involvement in the industry evolve? – Panel
Banks are the institutions that are most challenged by P2P lenders. Marketplace lending is disrupting the way money is lent and therefore is threatening one of the principal banks’ revenue streams.
Banks’ attention has been increasing in the last two years and they are trying to enter the space through partnerships with platforms. In this way, they might have the opportunity to more efficiently serve their customers.
In terms of regulation, governments, banks and platforms should “work together” and cooperate to set the most efficient set of rules.
Securitisation focus: Breaking down the rating process
The panel discussed the significance of existing securitisations especially those by the likes of SoFi and why they are transforming institutional interest
The panel also examined the rise of unrated securitisations, which exceed rated ones 10 to 1. There was a heated discussion as to whether this unrated flow presented dangers for the industry.
Miles from new outfit Ldger explained how his businesses approached the task of lessening the administrative burden of securitisation. The panel even broached the idea of a Marketplace for securitisation tranches.
The panel also discussed how loans are selected – random and blind – and how they are understood as an underlying asset class i.e student finance. The panel noted that although there are some who question whether there is to much risk in the underlying assets, many loan pools currently offer incredibly low default rates
How will equity crowdfunding returns take shape? - Keynote
After having presented his company’s mission, Gady Mazor from OurCrowd explains how equity crowdfunding will take shape in the near future.
In order to maximise returns, equity crowdfunding platforms should buy into the best deals, help the companies to grow and to exit. Furthermore, it is critical to be plugged into the local ecosystem and to invest in multiple stages and structures.
Funding success rate is highly correlated with the type of lead investor. Ourcrowd’s one is close to 100%.
IPO buzz: How should an alternative finance platform be valued? – Panel
Following on from the recent IPOs of Lending Club and OnDeck, it is likely that other platforms will follow suit in the future. But how should an alternative finance platform be valued? The best tools seem to be the DCF model (using WACC) and multiples. However, the DCF may raise some concern as it relies on assumptions and it might present some issues.
The panellists agree about the potentially high number of “unicorns” in the space - the term used by industry’s insiders to describe privately owned tech companies worth $1 billion or more.
Louise Beaumont from GLI Finance claims that her company invests in platforms with a high potential for origination growth and, when investing, it is essential to analyse platforms’ management team, their approach to risk, their technology and scalability. Moreover, regulatory issues are important, but they are not the only factor to monitor.
How will the majority of investors access alternative finance products in years to come - direct or indirect?
This consisted of a debate between Matt Burton from Orchard and Stuart from Assetz Capital.
Stuart accepted that there would be a mix between retail and institutional capital, but argued that retail funding would be attractive as it was sticky, and willing to be flexible.
Matt argued that to scale a business institutional capital is critical. He observed that in the US market accessing retail money was mainstream, though he also said they were working on a fund’s solution that might allow access in the future.
What can alternative finance learn from other disruptive markets? – Keynote
Manish Madhvani from GP Bullhound – a company that provides independent strategic advice to technology entrepreneurs, companies and investors – shares his experience about tech businesses in other industries, such as Uber and the like.
His data is extremely interesting. Over 58% of European “unicorns” have been founded by entrepreneurs in their 30s and just less than one quarter (23%) by under 30s. The average age of Unicorn founders between Europe and US is relatively consistent; 35 years and 34 years respectively.
Building a “unicorn” requires $230m in EU, $247m in US, while the median value is $140m. 20% of “unicorns” have raised less than $50m, and only 10% have raised more than $300m.
The overlapping of disruptive technologies: The factoring opportunity for e-invoicers.
Esa Tihilä from Basware – a company that provides purchase-to-pay and e- invoicing solutions – and Cedric Teissier from Finexkap – a French invoice-financing platform – explain the dynamics of their companies and of the invoice finance market.
Using Basware, small businesses and corporate giants alike, across all industries, can simplify key financial processes to strengthen control, reduce costs and gain proactive insight into cash flows.
Finexkap works as an electronic mailbox - where companies upload their invoices awaiting payment - which aims to feed corporate cash flow. It is based in France, but it gets financing mainly from the UK and US, while customers are French. Cedric explains that invoices are an asset class, but different from others, with short durations and therefore with quick possibility of disinvesting.
The fundamentals of credit: Adapting processes to suit different markets
SMEs in different markets have different structures and models, thus the main focus ought to be on data. Data helps to understand the differences and to adapt businesses to different environment.
Candace explains that in the beginning DealStruck’s portfolio was highly concentrated and it was a dangerous situation. Diversification seems to be the key and from a concentrated portfolio, Dealtruck moved to a diversified one, offering new and tailored products to different kinds of customers.
Panellists agree about the geographical variation of data. Data is different in every country and it is not only critical to rely on data, but to rely upon the right data. Jilliene from the RealtyMogul claims that it is difficult to expand internationally, since the right data is pretty difficult to gather.
Is broader better? Should marketplace lenders focus on a single vertical, or many?
According to Glenn Goldman (Credibly), looking at what platforms are doing, broader does indeed appear to be better. For instance, Lending Club has recently released a multi-draw line of credit product, giving small businesses convenient and flexible credit options; similarly, Funding Circle has expanded geographically with its acquisition of Zencap.
Building a sustainable credit model in the absence of traditional data sources
Paul Gu (Upstart) focuses on the lack of traditional data for consumers. In the past, credit reports seemed to be the rule, but what about for consumers that don’t have a credit history – i.e.: young borrowers?
Paul explains that young borrowers have a lot of education history rather than credit history: entrepreneurs are young and have a lot of school years behind them. It is worth considering also other kinds of variables, such as education, work experience, current job and the like, when making a lending decision.
Lastly, Paul claims that in the borrowing process, two scenarios might happen: people repay loans and people do not repay loans. Since the former class of people are more than 83% and the current level of interest rates not only includes the time value of money, but also the probability of defaults and the volatility, paying a non-risk free interest rate means people are covering the cost of other people defaulting. In other words, a borrower who repays a loan is actually paying too much, as he’s helping fund those who fail to repay.
Leveraging technology solutions in credit
Following on from the recent discussion about the importance of data for expansionary purposes, Rohit Arora (Biz2Credit), Snehal Fulzele (Cloud Lending Exchange), Mark Hookey (DemystData) and Adam Cohen (QuarterSpot) honed in on the importance of so-called “smart data”.
Indeed, it is not only critical to use data in decisions, but also the right kind of data. Data ought to be cleaned before entering models, otherwise they might give a biased interpretation of reality.
Rohit Arora explains that traditional models based on credit scores are obsolete and banks have tons of data, but they are not digital. In building credit models, it is essential to get rid of crud in the data. Banks statements more important source of data than accounting systems.
Which is the more durable source of capital - institutional or retail? - Debate
James Paris (Avant) and Rhydian Lewis (RateSetter) debate about which source of capital will be the most employed in the future: institutional or retail?
RateSetter is mainly focused on retail capital (90%), but in two years the business will decrease its retail base to 60/70%. However, platforms need both sources to stably grow and a 60% retail/40% institutional balance ought to be seriously taken in consideration by online lenders.
Rhydian claims that pricing honesty for retail investors is essential. P2P lenders are considered marketplaces and they have to remain so. In other words, it means that when institutions kick in, they shouldn’t set prices and businesses ought to be focused just on demand and supply dynamics.
James explains that the difference between institutional and retail capital is based on geographical factors. Moreover, assuming no regulation, he would prefer more institutional capital, rather then an equal division between the two.
Level terms? The future importance of the retail investor – Keynote
Adam Kaufman (Seedrs US) explains the importance of protection for retail investors. Retail investors should be equally protected and they must not be taken advantage of, since in many cases they cannot afford even a lawyer.
Adam suggested a general principle of not “screwing” over the customer, which extended to doing the “right thing”. This needs to be incorporated with a set of standard terms and conditions.
Level terms? The future importance of the retail investor – Panel
The panel were in agreement on the “stickiness” of retail money – a quality that may well come in useful in the event of an economic downturn.
The UK peer-to-peer sector’s stance on institutional “cherry picking” was lauded. The likes of Zopa operate a random allocation model in order to assign loans either to its institutional or retail pool of capital, rather than allowing institutions to scan its loan book at will and to scoop up the most attractive loan offerings before retail investors have the chance.
For retail investors to continue to play a major role in the equity crowdfunding space, more needs to be done in terms of investor protections. At the forefront of the sector’s priorities should be the need to ensure that all investors participate in equity rounds on the same terms as any lead investor.
JOBS Act focus: Title IV and III implications, and next steps
Erica Duignan Minnihan (Onevest), Darren Westlake (Crowdcube) and Ryan Feit (SeedInvest) discuss Title IV and III of the JOBS act. The focus is on the broader investor base allowed: not only accredited investors, but also unaccredited investors.
The new ruling permits individual investors, over a 12-month period, to invest in the aggregate across all crowdfunding offerings up to different limits, depending on their annual income or net worth.
Ryan Feit and Erica Duignan Minnihan explains that the new ruling would be really helpful for platforms. For now, the amount of investments will not explode, but will gradually increase. It will take time to transform the industry.
The inexorable advent of mobile
Barry Freeman (Jimubox) focuses on the importance of the quality of user experience and the relationship between platforms and customers. In order to achieve increased brand strength, lower cost of capital, lower user acquisition cost and increased user stickiness, platforms should constantly improve user experience. To drive customer interaction, offer real-time, personalized experiences that reach customers at the exact time they can take action on them; penetrate the market with mobile technologies.
Mobiles are great channels to keep in touch with customers, not only borrowers, but also lenders. Jimubox has a mobile strategy for each side of the platform.
Barry claims that growing the user base is critical and Jimubox’s core strength is its large investor base.
The challenges and opportunities involved in international expansion
When considering international expansion, platforms should consider differences in credit models, in data and in rules.
Cameron claims that thinking on a global scale is critical in order to survive in this space. Platforms ought to target different areas of the world and think about the best partners. Partnerships are the most powerful channel for penetrating different markets.
Pete from Kabbage explains his partnership with ING to allow Spanish small businesses to access capital in a quick and effective way. For Kabbage, this partnership represents new future revenues and a solid stepping-stone into the European markets, which are somewhat lacking in alternative financing activity, compared to UK and US.
Regulatory focus: The Treasury's RFI, Madden vs. Midland, and beyond
Brian Korn (Manatt, Phelps & Phillips) and Samuel Raymond (The World Bank) focus on regulation. The skin in the game critique, the Treasury’s RFIs, Madden vs. Midland and many more issues come under the microscope in this panel.
The Madden case may oblige non-bank lenders to comply with specific interest caps. Many platforms might be impacted, such as the well-known Lending Club, with 12.5% of loans at risk.
Is there real transparency in the space? Some platforms seem to be more transparent than others. Transparency is a key feature of the actors of this space and it should be preserved and improved.
Do platforms have skin in the game? In other words, do they have real risks in running their businesses? The critique essentially refers to a misalignment of incentives between lending platforms and private investors, primarily because the platforms generally charge an origination fee, but they do not invest in any of the loans that they originate. Panellists agree that more is yet to come about this controversy.
"What have we missed?" Introducing the next wave of alternative funders
The panel boasted two institutional capital deployers on the panel, allowing a proper examination of how institutional interaction with marketplace lending may change. The panel believed that larger players (pension funds, insurance funds, etc.) will move into the space
Many new niches are starting to emerge ranging from consumer insurance loans through to debt within the renewables space. The latter space offers huge opportunity not least because the duration of loans is long and well backed by reliable cash flows
The most likely means of access to this space will probably be through fund structures
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