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Investors see "perfect storm" in marketplace loan ABS

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By Sasha Padbidri
03 Nov 2017

A panel of investors speaking at a conference this week said that securitization was driving the growth of the marketplace lending industry, and that the combination of investor demand for yield and borrower demand for credit is creating a “perfect storm of good things” for the asset class.

An investor roundtable at the Digital Lending + Investing conference in New York on Thursday highlighted developments in the securitization of marketplace loans over the last 12-18 months. The transition to a hybrid funding model for lenders, in addition to the emergence of more sophisticated deal structures, have helped the sector attract a broad buyer base, allowing it to evolve from a niche, illiquid sector, to a market with over $23bn outstanding.

Joseph Roth, vice president at Prospect Capital Management, noted that securitization, especially the multi-seller deal format adopted by larger players like Marlette Funding, Prosper, Lending Club and SoFi, has brought down the cost of capital for issuers.

“That model is taking up a lot of momentum. Most platforms at this point do prefer to organize their own securitizations, where whole loan buyers contribute assets and in exchange for their contribution retain a portion of the equities certificate,” Roth said.

“We’re very bullish on securitization, but overall it comes down to performance of the collateral, understanding how these assets are performing both now and through potential economic downturns. We’re really looking for consistent performance that is established at the outset of lending,” he added.

Brendan Ross, CEO of Direct Lending Investments, added that lines between online and traditional lenders are blurring as the industry matures and investors gain familiarity with the product.

“What the future holds is more of the recognition that the rules of specialty finance and asset-backed lending are the same as they always have been, and the companies that succeed are those that follow those rules and match more closely with the traditional ways of attracting capital,” he said.

Capital market appetite for marketplace loan ABS is “healthy”, added Karrie Truglia, a specialty finance consultant. She pointed out the active pipeline of deals during the normally quiet fourth quarter. Since October, online lenders Avant, Prosper, SoFi and Marlette have hit the primary market, with investors eyeing more deals to come before the end of the year.

According to Truglia, the influx of rated deals over the last two years have allowed more investors to purchase the bonds. There has been a growing trend of pension funds and insurance companies buying triple-A rated tranches, while hedge funds have been players in the lower-rated classes.

Ross further added that the industry appears to have quieted down since the early days of big venture capital funding and the hype of "disruptive" technologies. He predicted that the drive for yield in securitization, combined with the need to open up access to credit for borrowers, will continue to drive growth of the industry.

“Investors want yield, borrowers want to borrow capital, there’s less ‘dumb’ money creating new companies and overfunding them, it’s just a kind of a perfect storm of good things,” Ross said.

Mark Simmer, managing director at Macquarie Group, added that industry consolidation of smaller players, including partnerships between banks and fintech players, will also be a major theme in 2018.

“Consolidation would likely continue but we’re going to see more platforms showing up in niche areas. I also think that we’re just in the first couple innings of platforms building themselves into real technology companies that the banks would want to partner with,” he said.

By Sasha Padbidri
03 Nov 2017