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Marketplace Lending in Europe

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Emerging trends in marketplace lending, venture perspectives, and how the EU is learning from the US

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Marketplace Lending in Europe

  1. 1. 1 www.frontline.vc Marketplace Lending in Europe BROUGHT TO YOU BY: Lending emerges on the internet
  2. 2. European alternative finance continues to grow rapidly 2Sustaining Momentum - Cambridge University EU Online Alternative Lending Vol 2013-2015 € Online Alternative Lending Volume by Country 2015 € The UK accounts for 81% of volume 92% 151%
  3. 3. Continental and Eastern Europe are growing even faster 3 Online finance by Country and Region ex-UK 2015 Online Finance Market Vol in Continental & Eastern EU 2013-15 Sustaining Momentum - Cambridge University Growing at 2x EU averages 191% 167%
  4. 4. Attractive yields vs traditional assets Despite negative headlines, market fundamentals healthy 4 Banks pull away from SME lending Successful securitizations Continuing growth 2015 Volume Growth Global 264% UK 71% China 319% Japan 188% France 90% USA 213% http://blog.lendit.com/wp-content/uploads/2016/10/Samir-Desai-Fintech-Combining-the-Best-of-Both-Worlds.pdf
  5. 5. “Entering a golden age in our industry” - Samir Desai Some winners have emerged, penetration remains low 5 Funding Circle has 20k business borrowers, £1.5b in loans outstanding Operates in the UK, US, Spain, Germany and the Netherlands Their are 8 platforms of scale globally (originated £1b+, hold less than 5% of loans) Liquidity concentrates in financial markets, creates network effects Expanding internationally “challenging” Banks are pulling away from SME lending, yields remain attractive Will Funding Circle acquire more regional players? Will they win in Europe? http://www.lendit.com/europe/2016/videos/samir-desai-best-both-worlds-eu16
  6. 6. 6 Will banks and credit card companies get their act together? “What about Goldman’s announcement to enter the space? I hear they have 100 people working on this product” - Peter Renton “Numerous delays…startups are in a better position to ship” “Cost of capital advantage for Goldman, can reduce funding time, better terms for borrowers” “…not a mature area, everything changes every 6 months…small piece of the revenue pie, not a priority (for Goldman)” Incumbents launch new products New entrants express doubt banks will be able to compete
  7. 7. Debt yields attractive relative to other asset classes 7 Annual return from UK P2P (LARI index) vs expected returns from other assets http://blog.lendit.com/wp-content/uploads/2016/10/Cormac-Leech-State-of-the-European-Marketplace-Lending-Industry.pdf “…never been a better time in the last 4 years to switch out equities and in to P2P Loans… …never been a better time to sell speculative EU high yield bonds and switch that money into P2P…” - Cormac Leech, Victory Park S&P 500 = 6%P2P Yield = 5.5% EU High Yield = 3% EU Benchmark = .75%
  8. 8. 8 Preparing for a downturn, 3 different approaches • Safeguard provision fund allows for 10% defaults • Cut volume in 2008 by 40% • Defaults exceed 5% in 2008, was expecting 2.8% • Lender returns were still on average positive • Price the assets so customers don’t lose money in a downturn • Technology needs to be such that it can easily be changed • Having long term sticky money is the best insurance • Liquidation of companies in the UK lowest in 30 years • The worst its ever been is twice as bad as what it is now • Not a fan of provision funds: unclear/ complicated “partial protection” • There is a secondary market for FC loans • Market Invoice specialises in short term 45-60 day notes • No need for secondary market when loan duration is shorter • FC losses occur in the 2nd year, by then MI customers have renewed 6+ times • Purely financial asset, easier to liquidate • MI believes provision funds do not provide sufficient protection
  9. 9. 9 Venture perspectives
  10. 10. Who is funding marketplace lenders globally? 10 Lending Club Kabbage Square Assetz Avant OnDeck GreenSky Prosper CommonBond Funding Circle Biz2Credit QuarterSpot Harmoney Ppdai Fundation auxmoney WeLab Weidai LendUp 0 350 700 1050 1400 Total funds raised $m USD QED Sequoia Ribbit Canaan Thomvest Foundation Index First Rond USV Victory Park KPCB Baseline Accel Renren Nyca Kima 500 Startups Accion DCM 0 4.5 9 13.5 18 Investor Deal Count Pitchbook Data
  11. 11. Global VC marketplace lending investment peaked in 2015 11
  12. 12. “Profitable” 12 Signs of maturing industry, still no major European exits Peer-to-peer lender Zopa is now profitable — a year ahead of schedule “..we were profitable in September and we'll be profitable moving forward” “Our profit is negative, but our EBITDA rate is 40%…” “Profitable in the early years, accelerated burn to go after new markets” Large European players financial sound One small acquisition
  13. 13. 13 Venture capital and equity fundraising perspectives “The bar has doubled (for equity fundraising)” “Seeing more people take the collaborative approach as they have struggled to raise (funding)” No “proof” that models are sustainable, jury still out on quality of underwriting - Growth Equity Investor “Venture funding has largely left the pie” Specialty finance and vertical players look more attractive in a market where many new entrants look similar
  14. 14. 14 Lessons from America
  15. 15. 15 Alternative Lending in the USA . While it took Prosper 8 years to reach the first $1bn loans issued via its P2P lending platform, it took just six months to reach the second billion. The future of finance, rise of the new shadow bank. Goldman Sachs Research
  16. 16. 16 Incumbents and Lending Club have similar origination costs The future of finance, rise of the new shadow bank. Goldman Sachs Research Lending Clubs expenses as a % of receivables are in-line with peers Card services GCB Dom. Cards Cons. banking USCS
  17. 17. 17 Lending Clubs advantage is lower capital requirements Tangible equity as a % of receivables The future of finance, rise of the new shadow bank. Goldman Sachs Research
  18. 18. Recurring nature of B2B loans is more attractive than consumer loans. If consumers are coming back, its because they are in trouble. Consumer lending in EU is small compared to USA 18 • The total outstanding consumer debt is $3.4t 1 in the USA vs €16b 2 in Ireland, and £183b in the UK 3 • The average consumer debt per capita is €3,500 in Ireland, $10,700 in the USA and £2,850 in the UK • In the USA, student debt, auto loans, and credit card debt account for $1.2t, $1.0t, and $714b respectively 4 1 Consumer Creidt & Payment Statistics, Philadelphia Federal Reserve, 2 Irish Central Bank, Household Credit Report 2H 2015. 3 The Money Charity, UK Lending Statistcs 4 New York Fed: Quarterly Report on Household Debt and Credit. Consumer debt is ex-mortgages Lending Club Reported Loan Purpose
  19. 19. 19 Emerging players
  20. 20. 20 Borderless alternative online lenders emerging US based Bitcoin marketplace lender, $17m loans originated Consumer loans to individuals in Russia, Poland, Mexico and Spain Latvia, Estonia, Lithuania and Georgia. €73m in loans transacted through the Mintos Platform Mexico, Brazil, HK, India, Japan Singapore, South Korea, and Australia+. €69m loans originated Latvia, Poland, Czech Republic, Georgia, Slovakia Latvia, Czech Republic, Poland, Russia, Georgia, Denmark and Mexico. €330m loans originated
  21. 21. 21 Infrastructure, data, investment and connectivity players USA Europe Data Connect Invest ?
  22. 22. 22 Takeways
  23. 23. • Online alternative lending in Europe will likely continue to grow from current penetration of <1%, to 10-30% of the total market • Some large players have been established, and it is not clear what the competitive advantage of new entrants will be • As the market grows in Europe, there are opportunities for new companies to build connectivity, data & analytics and investment tools • While there are regional barriers to entry, some companies have been successful in building origination volumes in a multi-market approach 23 Conclusions
  24. 24. 24 Thomas Olszewski @TROlszewski thomas@frontline.vc

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