Investors bullish on MPL, but changes needed

Many interesting topics were raised about the current state and potential future of marketplace lending at SCI's Marketplace Lending and Securitisation Seminar in New York in June. During a panel on investor perspectives, several matters that concern buyers of marketplace loans were discussed.

The turmoil at Lending Club was initially touched upon during the panel, as well as the subsequent dip in marketplace lending as a whole. Brian Weinstein, managing partner at Blue Elephant Capital Management, felt that while the industry has taken a few knocks, strong signs remain.

He says: "At the start of last year, there were a lot of assumptions made about the industry, about how big it will grow and so on. Now we've seen a few road bumps and a bit of a public breakdown in trust. However, there was still US$1bn of securitisation activity in Q1 in the consumer space."

While Weinstein was honest about the limitations facing the sector, he also expected it to remain growing, even if it doesn't "double in size". Although there may have been a slowdown in securitisation activity and a pull-back from some firms, like Prosper, he added that deals will continue to be executed.

"There might be warehouse lines trapped because they don't want to securitise right now as the price isn't right. Eventually, though, they'll be forced to at some point," he said.

Additionally, there have been some signs of improvements in the industry in terms of investor confidence, as exemplified by the long-awaited securitisation of Lending Club loans.

However, one issue remains for investors and others in the sector - skin in the game. Lending Club, for example, still sticks fairly closely to its original model by not retaining many loans on balance sheet.

Aaron Goldman, principal at General Atlantic, suggested that this is a question that may need to be answered before the industry can become truly comfortable with marketplace lending as an asset class. "Lack of skin in the game causes loan buyers to be sceptical; Lending Club's recent issues have exacerbated this scepticism. We will see how the market responds going forwards, although it's possible all platforms will be required either by regulators or loan purchasers to eat their own cooking and have skin in the game to build investor confidence," he added.

Another potential bump in the road that has become more pressing recently is that of loan stacking. Several questions were asked throughout the seminar about the potential negative impact loan stacking could have on marketplace lending platforms, and what it might mean in terms of their ability to accurately assess a borrower's ability to repay.

Weinstein said: "For an investor, there is a concern about how you get rid of stacking. There are ways to mitigate it, but ultimately the investor has to make the decisions about the quality of the loans offered before investing."

Loan stacking could obviously have an impact further down the line on securitisation, if it negatively impacts default rates, for example. One way that marketplace lending securitisations could perhaps be made more attractive to investors is through increased diversification of platform, product or even location.

Weinstein mooted such an idea: "In order for things to develop or improve, you need pressure and time. Pressure comes from us, investors and other figures with a stake. Only with time can you see it play out. Perhaps what would be more interesting in terms of securitisation now - or what could be needed - is for a mixed securitisation from different platforms, of different asset classes and potentially different geographies," he said.

One area that the panel had confidence in is the likelihood of banks or more niche companies becoming involved. With banks still unable to make the loans that they essentially need to, they have a problem that marketplace lending platforms may be able to solve.

Goldman suggested that they are likely to become much more heavily involved at some point. He concluded: "Every bank we see has an asset origination problem. Big banks may mimic platforms or may acquire them, or, indeed, we may see banks buy the loans up rather than make total acquisitions."

RB