The Customer Effect
With new mutual funds, marketplace lenders continue to seek diversified sources of capital
- The first two marketplace lending mutual funds were approved in the U.S.
- Total size of marketplace lending securitization issuance volume to date is $10.3 billion.
Marketplace lending is getting somewhat of a bad rap recently. Just last week, the Consumer Financial Protection Bureau slapped LendUp, with a $1.8 million civil penalty and ordered the company to provide more than 50,000 consumers with approximately $1.83 million in refunds. Earlier this year, the Lending Club scandal, which caught the CEO creating undisclosed sources of capital, sent pundits into a frenzy about the fate of marketplace lending. The scandal was indicative of the capital crunch happening to marketplace lenders. As hedge fund pools dried up, new sources of capital are emerging. The first two marketplace lending mutual funds, sponsored by Stone Ridge Asset Management and RiverNorth Capital Management, were approved recently in the U.S. by the S.E.C., with similar funds launched earlier in the U.K. “This is an exciting opportunity for RiverNorth and our investors,” said Philip Bartow, co-portfolio manager of the RiverNorth fund. “The benefit of being early to the retail market will give us the enhanced ability to purchase loans directly from quality online lending partners with whom RiverNorth has negotiated loan acquisition and servicing relationships.” More funds have filed to become '40 Act funds for marketplace lending and are awaiting S.E.C. approval. The marketplace lending funds were designed as interval funds, which means that investors can invest money into the fund at any time. Redemptions, however, are restricted to certain time periods and certain amounts. Both U.S. funds only allow redemption on a quarterly basis. Though anyone can invest directly on the marketplace lending platforms, they are cumbersome compared to mutual funds, a product investors and advisors know how to manage. In order to invest in marketplace lending, one needs to open a new account and learn a new set of analytical tools to aggregate and select loans that fit his risk preferences. If an investor wants to invest in more than one platform, this problem might become prohibitive. Alternatively, hedge funds, which comprise a big chunk of the capital in marketplace lending, are only open to accredited investors. Launching these mutual funds will give retail investors easier access to consumer debt. "By expanding marketplace loans to a broader investor base, these new funds will transform the industry and could eventually move today’s platforms towards principal broker-dealer markets, similar to other fixed income instruments," Monja, a marketplace lending analytics solution, explained in a blog post. To access other sources of capital, marketplace lenders have also begun securitizing their loans. According to PeerIQ, Q2 2016 marketplace lending securitization volume topped $1.7 billion, up 14.8 percent from Q1. Also that quarter, SoFi issued its first rated unsecured consumer loan deal and received an industry first ever AAA rating from Moody’s on its recent student loan transaction. The growth in Q2 brings the total size of marketplace lending securitization issuance volume to date to $10.3 billion. The upswing in marketplace lending securitization comes against a backdrop of an uptick in collateralized loan obligations of all sorts. According to the Financial Times, banks project $50-$60 billion in CLOs sold by end of year in a ‘frenzy of issuance’. Citi, Morgan Stanley, and Credit Suisse are leading in marketplace lending securitization deals. The top five bookrunners captured 75 percent market share, or 34 of 41 deals. Earlier this year, Citi suspended an agreement to securitize Proper's loans, but that did not affect general trends. As these products establish a track record for performance, demand for them is expected to grow as well.