Is the tide beginning to turn in favour of online lending companies?
It’s often been said that Moody’s decision to put a Prosper loans backed securitisation on review for downgrading precipitated a general cooling of investor demand for marketplace loans. At the tail end of last week, the ratings agency at length decided against a cut, citing “the absence of material deterioration”, according to an article in the Wall Street Journal. That’s a real victory for Prosper, but also for the marketplace lending sector as a whole. And it begs the question: are online lenders out of the woods? Not quite yet, perhaps, but they certainly seem to be emerging.
Let’s look at the facts. We’ve seen significant up-rounds on both sides of the pond. In the UK, MarketInvoice pulled in £7.2m in a round led by MCI Capital, which has been confirmed as an up-round. In the US, student lending platform CommonBond closed a $30m Series C. While exact valuation metrics have not been disclosed, CEO David Klein told AltFi: “if we were a public stock and you invested in us a year ago, you’d be happy today”.
CommonBond also clinched an additional $300m in loan purchases from an unnamed global asset management firm. Meanwhile, Blue Elephant has resumed its loan purchasing programme with Prosper, while Bloomberg reported last week that Jefferies and Lending Club are looking revive their “scuttled bond sale”.
We’ve heard nothing but tales of waning investor demand within the online lending space over the past six months. Lending Club was rumoured to be considering funding loans on balance sheet, OnDeck saw marketplace loan sales slow up in the first quarter of the year, and a number of companies (such as Avant) have been laying off staff in response to dwindling lending volumes. Anecdotally, we’ve also heard that it’s been a great deal more difficult for online lenders to raise equity capital – as valuation metrics have been adjusted in the face of falling share prices at Lending Club and OnDeck.
But in the past month or so, both equity and debt investors appear to have been showing signs of life – which is a promising sign for the industry as a whole.
There’s even cause for measured optimism at the individual investor level. Both Lending Club and Prosper have taken steps to improve their retail investor offerings. Lending Club launched a new individual investor product with robo-advisor platform Lending Robot, while Prosper gave its retail investor experience a makeover, which included the introduction of an auto-invest tool.
In the UK, Lending Works (which, incidentally, closed a £3m Series A two weeks ago) recently polled its investor base and found that 62% planned to maintain current investment levels in P2P in the aftermath of Brexit, while around 20% intend to increase their current level of investment as a direct result of the Leave vote.
Confidence among investors in the major UK-listed marketplace lending trusts appeared undimmed by the potential threat of Brexit. Prior to the Leave result, Polar Capital’s Nick Brind, who manages the Polar Capital Income Opportunities fund, which has stakes in P2P Global Investments as well VPC Specialty Lending, said: “I can see no reason why P2P/market lending would not be a good portfolio addition especially if the shares were weaker on the day. I don’t think a vote to Leave will ultimately have a significant impact on returns”. Sure enough, P2P GI, VPC Specialty Lending et al held up in the aftermath of the Leave vote, while all around them markets were plummeting.
Indeed, this idea that Brexit might prove to be an opportunity for alternative lenders has proven rather popular – in terms of investment, but also in terms of origination. Capify recently ran a poll of 1,000 UK SMEs. The headline finding was that 74.18% of respondents thought that Brexit would have a slight effect on, no effect on, or even improve the health of their businesses over the coming year. RateSetter boss Rhydian Lewis recently argued that “leaving the EU may discombobulate big banking conglomerates and FinTech businesses will look to fill any spaces”. Nucleus Commercial Finance CEO Chirag Shah has called Brexit “the best opportunity for us to establish ourselves as a key part in the UK business credit market”.
Personnel moves have been another factor in shoring up confidence in the market. Jeremy Bennett joined Funding Circle as global chief financial officer last week. Bennett previously served as CEO of Nomura in Europe, Middle East and Africa, and CEO of Nomura International. Meanwhile in the US, Lending Club has hired ex-BlackRock executive Patrick Dunne as chief capital officer. Dunne has held a number of senior investment roles at BlackRock, iShares, and Barclays Global Investors (prior to its acquisition by BlackRock).
Even share prices seem to be stabilising. Lending Club is currently a dollar up from its all time low of $3.51. OnDeck is also about a dollar up from its low-point of $4.31.
In summary, the online lending industry continues to be plagued by uncertainty, but we may well be seeing the first signs of a bounce-back. Will the industry’s recent run of positive developments continue uninterrupted?
21 March 2023
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