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Marketplace Lending Keynote Luxembourg School of Finance
- 1. CENTER FOR ALTERNATIVE MARKETPLACE LENDING: PRACTITIONERS PERSPECTIVE ON THE FUTURE DR. MARK R. BELL
- 2. CENTER FOR ALTERNATIVE The Practitioners Perspective A two sided brain leads to my view on the opportunity and pitfalls: ACADEMIC Senior Research Fellow at the Emory Goizueta Business School Center for Alterative Investments Academically trained Georgia Tech College of Computing Board Advisor PRACTITIONER Managing Partner at Diversified Trust Company, $6 billion independent comprehensive wealth manager that was an early buyer of Lending Club loans Director at Fund that Flip, fintech innovator Former Executive Vice Chairman at Brand Bank, a multibillion dollar depository bank Founder of Ethos Partners, private equity firm focused on growth equity and technology Director of Strategy at D.E. Shaw
- 3. CENTER FOR ALTERNATIVE Explosive Growth in Marketplace Lending 0 5 10 15 20 25 30 2011 2012 2013 2014 2015 2016 Expected Unsecured Consumer Loan New Originations Unsecured Consumer CAGR* 146% BILLIONS($) As of 1.31.2016 * CAGR – Compound Annual Growth Rate. Sources: Lend Academy, Lending Club, Prosper, Funding Circle USA, OnDeck Capital and Liberum Capital research
- 4. CENTER FOR ALTERNATIVE Exciting Growth in Innovative Companies• There are over 170 serious platforms in existence today, including • 67 countries have marketplace lenders • Finovate estimates there are over 70 fintech companies with valuations in excess of $500 million* *July 2015
- 5. CENTER FOR ALTERNATIVE Excitement is Warranted Because an Authentic Value Proposition Exists 20% 15% 10% 5% 0% Average Credit Card Rate 20.05%1 14.3%3 MPL ORIGINATORS 7.4%4 2.65%2 Aggregate Bond Index Return Average MPL Coupon Average Realized Return in MPL Loans Source: Lending Club 4th Quarter and Full Year 2015 Earning Presentation, February 11, 2016. 1 Source: Public filings and Citi ABS research. Based on simple average of average credit card rate of following credit card companies: Citi Credit, American Express, Bank of America, MBNA, Discover Card and GE Private Label card programs. 2 Barclays Capital U.S. Aggregate Bond Index 2016 annual total return. 3 Average interest rate for borrowers who received a loan to consolidate existing debt or pay off their credit card balance per the Lending Club survey. 4 As of 12.31.2015, Median Adjusted Net Annualized Return for investors with 100+ notes, note concentration of <2.5% of portfolio value, all loan grades, and portfolio age of 12-18 months (Source: Lending Club). Market Place Lender Spread Example MPL presents a true “win-win” for borrowers and investors
- 6. CENTER FOR ALTERNATIVE Fintech has also “Unbundled” the Bank • Most Americans dislike their bank and feel it is undifferentiated in its offering • Strong user interface (think gamification), compels high user acceptance • Rapid decline in relationship banking, likely irreversible JUST W O R KS. Namely" { WOVe HrlEFjTS @payroll mm zuora A V & N T C R E D IT • CoverHound zebra A Betterment FutureAdv1sor Personal Commercial Loans and Credit InsuranceInvesting and Retirement PROSPERP m !#Upstart Fraud lnimnation Center molifNVESTING I/ robinhood Affirm bills.com ·b o Lend p Credit()Kanna nerdwallet CID BOND STREET CAN CAPITAL <§fundera <::·lendio • Personal Banking Loans and Cred'1t Small Business Commercial Merchant ServicesInsurance Payrolland other Services ;iiLendingClub OnDeck> ... Braintree ULJ !:lil:Hli BlueVine Source: CB Insights.
- 7. CENTER FOR ALTERNATIVE There are Some Very Real Concerns to MPL’s Unbridled Success Venture capital investment remains very strong, fueling young companies… can the bubble endure a pullback? I. Source:Companyfilingsandbrokerresearch. (1)ReturnatIPO. Global FinTech private financing activity ($B) $1B SoFi Series E raise – largest equity funding in the FinTech space $12 $10 $8 56x return Series A LendingClub investors(1) 0.8 0.7 0.6 $6 $4 0.5 $2 0.4 $0 2010 2011 2012 2013 2014 0.3 DealVolume(000s) Source: Company filings and broker research. (1) Return at IPO Global – First Round Global – Non-First Round Global Deal Volume
- 8. CENTER FOR ALTERNATIVE There are Some Very Real Concerns, continued Charge-off rates (%) in the USA 12% 10% 8% 6% 4% 2% 0% Residential mortgages All consumer unsecured (including CCs) Creditcards(CCs) 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 Consumer remains remarkably strong… can the lenders endure a consumer pullback? II. • Nearly a decade of consumer credit improvement • Most recent data shows uptick in credit card charge offs
- 9. CENTER FOR ALTERNATIVE There are Some Very Real Concerns, continued Banks are coming into the space • Lighter regulation and a fast following approach make banks strong competitors (or allies?); Goldman chooses to build and not buy • Balance sheet FinTechs appear to be winning, as such, banks and companies that partners with banks have an advantage III. This raises the question: Is this really a new industry or a technology frontend for traditional banking? Banks, while not the majority, are the largest buyers of Lending Club loans
- 10. CENTER FOR ALTERNATIVE Additionally, many marketplace lenders are struggling “Prosper Marketplace to Cut Jobs and Shuffle Executives” - Wall Street Journal, 5/3/2016 There are Some Very Real Concerns, continued IV. “As Lending Club Stumbles, Its Entire Industry Faces Skepticism” - New York Times, 5/9/2016 “OnDeck Losses Grow as Lender Sells Fewer Loans” - Wall Street Journal, 5/2/2016
- 11. CENTER FOR ALTERNATIVE Important to Keep Perspective I. Since 2007, marketplace loan originators are only ~$40 billion compared to a US consumer credit market of $3.7 trillion (i.e., ~1%) II. Excitement is due to rate of growth, not amount of loans (which remain a tiny percentage of the market) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Consumeroriginations ($) Smallbusinessoriginations($) Source: Orchard Billions 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 Marketplace lending originations by quarter($billions) (Cumulative total in the USA since 2007is$35.7billion)
- 12. CENTER FOR ALTERNATIVE Fintech Competence Traditional Financial Competence Area of overlap will create new firms of the future III. As such, important to remember we are still dealing with a nascent sector with very few assets, the fate of which is uncertain. Like other areas of Fintech, a blended outcome more likely Important to Keep Perspective, continued New companies? Or new go to market for existing companies?
- 13. CENTER FOR ALTERNATIVE Marketplace Lending has Adapted Quickly and Been Adopted Faster Than Would Have Been Anticipated This is where we are moving This is where Diversified Trusts substantial investment began 6 Asset managers / pension funds / insurance Participate in rate / un‐rated securitizations Long‐term capital Explore publicly traded close‐end fund vehicles, other structures 5 4 Family offices (HNW) Attractive portfolio diversification with high yielding assets Banks High yielding asset and referral program for customers 3 2 1 Peer‐to‐peer Retail investors Hedge funds Leveraged SPVs trying to create arbitrage by selecting specific loans 2006 2009 2012 2015 2018 Question for investors: Is this an asset class or a trade?
- 14. CENTER FOR ALTERNATIVE What is the Future? Bellwethers to watch: 1. Kabbage Will they go public? 2. Greensky Part of bank platform or go public? These and others will dictate the viability of balance sheet vs. pure originator models Watch for continued M&A vs. in house development
- 15. CENTER FOR ALTERNATIVE Areas for Continued Research • A significant question remains as to what role marketplace lending can and should play in an institutional portfolio • The view is that the allegedly low correlation and high risk adjusted return would make it well-suited for portfolios • The challenge is the illiquid nature of the loans and the relative newness of the industry has prevented academic analysis • Spread compression leads to idea of trade over asset class • We are now working with industry sources, along with Professor Roman Kräussl and Zsofia Kräussl on analysis that should help answer this question
- 16. CENTER FOR ALTERNATIVE Takeaways 1. Marketplace lending growth continues, but has not yet been tested by a credit cycle or general pullback 2. Perhaps best to see marketplace lending as part of the evolution of lending rather than a revolution (traditional lenders will integrate technology through development or acquisition) 3. Further academic research needs to be done to confirm if marketplace lending can be viewed as a unique asset class in portfolio construction– watch this space!
- 17. CENTER FOR ALTERNATIVE MARKETPLACE LENDING: PRACTITIONERS PERSPECTIVE ON THE FUTURE DR. MARK R. BELL MBELL@DIVERSIFIEDTRUST.COM MARK_BELL@BUS.EMORY.EDU DIVERSIFIEDTRUST.COM EMORYCAI.ORG