Has peer-to-peer lending has turned into hedge fund-to-consumer lending? According to a recent report in Risk this may be the case. While P2P lending started out by matching an individual borrower with an individual investor things have rapidly changed. The outsized returns generated by the various P2P platforms have not been missed by institutions and hedge funds – this we all know. But to what degree are the peers becoming institutions?
To quote Risk;
“During the last quarter, almost 60% of the $1.1 billion in loans originated on California-based Lending Club – the largest P2P lender in the US – were snapped up by asset managers, banks, hedge funds, insurance companies, pension funds and other institutions. At Lending Club’s main competitor, Prosper Marketplace, 66% of loans went to these same types of investors.”
The new capital flowing to the various P2P platforms has fueled recent industry growth. We have already seen ratings agencies slowly move into the space following their clients who are searching for greater yield. CircleBack, a new P2P lender just announced a deal backed by Jeffries to securitize up to $500 million in loans. This past April UK based Marshall Wace bought in the the P2P rave by purchasing US based Eaglewood Capital Management; a P2P specialist.
According to “the head of structured credit at a large NYC bank”;
“Some hedge funds have acquired large portfolios of P2P loans and they’re securitising them to obtain leverage, so they can take an 8% unleveraged return and turn it into a 16% or 24% return. That creates some unique misalignments of interest. The originators and servicers – the P2P platforms – don’t have much experience across market cycles and they don’t have skin in the game. The whole thing has shades of the subprime mortgage crisis.”
Prosper CEO Aaron Vermut was quoted on the issue, “It’s only a risk if all our investors are getting leverage from the same banks. We monitor the amount of leverage on the platform and work with the leverage providers to control that”.
All industry participants are very aware of the new capital that both benefits their growth but increases certain aspects of risk. Back in March of this year, Lending Club announced they had cracked down on automatic investors and screen scrapers. Prosper has taken similar action.
As the industry evolves there will always be growing pains. But when you generate the risk adjusted returns that P2P lenders offer you virtually guarantee increased capital flow. The banking industry for their part is not totally on the sidelines. While they may not be agile enough to quickly move into the space this does not mean they cannot partner with their more innovative brethren, something exemplified by Lending Club’s deal with Union Bank.
As the industry matures and platforms adapt the process will obviously need to update and change. But the question remains will the small investor be able to participate as a peer? Or will this term fade as P2P lending becomes an automated and institutionalized process dominated by hedge funds and other big money players.