Here is a link to a research note from Paul Hill of Equity Development looking at the explosive growth, trends and dynamics of the Peer to Peer Finance market within the UK .
This report summarises what is a rapidly evolving and highly diverse model of finance, which has more than doubled in size year on year from £267 million in 2012 to £1.74 billion in 2014.
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Tuesday marked the end of the sell-side quiet period. This means underwriting banks can now publish their ratings and give us some insight as to where they see the stock price going in the coming months.
So how have Lending Club faired? All recognise the huge potential in terms of products, services, geography and the fact Lending Club is still growing at a significant pace. However, the general consensus seems to be that the current value reflects many of these points and the share price should begin to settle down at around $22.
There’s no doubt that the LendingClub’s IPO has put Marketplace Lending (P2P, Crowdlending etc.) firmly on the map. However, it is just as important for our industry that a stable share price, in-line with analysts’ expectations and Lending Club’s ambitions are delivered.
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Ernst & Young’s Item Club has upgraded its forecast for UK domestic product growth from 2.5% to 2.9%. Almost contemporaneously the IMF has cut its forecast for global growth by 0.3% and left its expected growth rate for the UK unchanged at 2.7%. Good news for the UK, if these forecasts turns out to be correct.
Forecasting for the UK economy is almost the fool’s errand that predicting the British weather is. However in a globalized world and one in which our nearest neighbours and largest market for our goods and services are probably about the embark on quantative easing driving sterling higher and making their locally produced goods cheaper, it seems unlikely that we will be unaffected by this. And still less that we can grow faster than others when we rely so heavily on them for our growth.
There’s also what might be termed a micro economic problem too. Capita Asset Services suggest that FTSE 100 companies are hording rather than investing cash. In October 2014 there was £53.5Bn in cash on their balance sheets, an increase of some £16.5Bn. The BofE report for 4Q14 shows demand for lending in medium sized companies once again exceeded supply. For companies to grow there needs to be confidence, which it doesn’t appear some of the largest companies in the UK have and companies need working capital, which is not being provided in sufficient quantity.
Of course HMG is doing its best to build confidence, with some success and is helping with the working capital. The AltFi companies are also helping with working capital, but the industry has a very long way to go to replace what has been lost from bank lending.
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In the UK there has been a notable shift in the P2P Lending model over the last year towards increased involvement from institutional investors. The UK market is sometimes said to be two years behind the US P2P market, and this statement certainly holds true when it comes to attracting funds from this class of investor. Indeed, in the US it is estimated that around 80% of loans made through the two largest platforms, Lending Club and Prosper, are currently taken by institutional investors replacing the retail lenders that previously dominated the space.
There are two principal explanations for this shift beginning to occur in the UK: firstly, institutions are seeking access to new asset classes, and secondly, institutions see in P2P a scalable opportunity. Return is also key. With record low interest rates, volatile stock markets, and low bond yields, the P2P lending space offers investors the chance to earn considerably better returns without a proportionate increase in risk – an undeniable positive.
Thus far there have already been some high profile institutional involvements. In October, Eaglewood Capital finalized a $75 million securitization of P2P loans that were originated by Lending Club. In addition to this, Funding Circle has done a deal with KLS Diversified Asset Management, a US fixed income fund, to lend £132 million to UK businesses. This is the first time a US investment firm has lent money to British business on a P2P platform, further proof that the UK lending model is following the trends in the US but also that institutional money in the UK is not solely limited to UK institutions.
There is an obvious argument that institutional involvement could signify the end of ‘P2P’ and the ‘democratisation of finance,’ but in the author’s opinion this is simply not the case. Firstly, institutional involvement signifies an extra layer of due diligence, a form of due diligence that individuals are realistically unlikely to have available. This allows individuals to follow the smart money. Furthermore, the weight of additional institutional capital allows for larger loans to be funded over platforms, allowing more businesses to gain access to the financing they are sorely lacking. Lastly, it allows platforms to scale and reach targets at a far superior rate to relying on retail investment alone. In short, everyone’s a winner.
So whilst institutional money may currently represent only 30% of P2P funds in the UK, I expect that figure to be much, much higher in 2015.