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The Market Place Lending (MPL) investment opportunity
The Market Place Lending (MPL) investment opportunity
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MPL yields offer attractive returns, with $40bn+ of
deployment capacity by 2016e in US & UK
Equities
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Property
5y Junk Bonds
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Non Investment Grade 2y Bonds
2yr Cash ISA
Consumer finance MPL – likely to be surprisingly resilient
through the cycle in UK & US…
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MPL SME finance/ property lending data set more limited….
but still encouraging for ‘Through The Cycle’ returns
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MPL yields 2-5% ‘more than ‘expected’ based on wholesale
ABS market data
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MPL net yields should be
c5% based on ABS
market
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Survey data suggest MPL still in early adopter phase
implying 10-20x upside in terms of public participation rates
Cash ISA Holders
Potential
P2P take up
Equity
Investors
Have
already
invested in
P2P
2% 14%
Number of obvious catalysts over the next 6-12 months:
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50%
Market Place Lending (MPL) – bigger story than just P2P
The Market Place Lending (MPL) investment opportunity
Traditional banking- 12th Century Knights Templar/ Medici
type solution to ‘Market for Lemons’* problem!
1100
1695
1397
1694
1818
1913
1880
1986
1930
1998
1989
2007
2005
2008
2012
Traditional banking model…. increasingly anachronistic…
1989
2005
2007
2014
MPL sustainability (1/2): offers efficiency; lower systemic
risk; better credit access
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425bps Lower
Operating Expenses
400
Peer 2 Peer
Government endorsed
Attractive Rates
Convenient & flexible
300
135
Marketing
Total OPEX
270
29
IT
19
28
Other
39
0
20
G&A
100
Origination
200
CS/Collection
Billing/Fraud
Total OPEX
Marketing
IT
FDIC
0
Other
220
500
FDIC
695
600
Branch
35
OPEX / Total Balance Outstanding (bps)
30
10
200
100
30
170
300
700
100
G&A
400
Origination
500
CS/Collection…
600
Banks
Cost inefficiencies
High margins
Restrictive lending
100
Branch
OPEX / Total Balance Outstanding (bps)
700
MPL sustainability (2/2): web access to credit information =
effective way to solve Market for Lemon’s problem
The Market Place Lending (MPL) investment opportunity
Lack of transparency and misalignment of interests are two
key risks for MPL
Insufficient ‘skin in game’: Many lenders rely heavily on
platforms’ credit risk assessment; platforms incentives not
aligned with lenders
Mis-selling risks: i) Lack of disclosure around loan type on some
platforms with returns to lenders inconsistent with credit risk.
Simplicity should not mean opacity. ii) Some Retail investors
apparently using rate offered as risk proxy heuristic. iii) Risk that
Provision funds are implicitly positioned as guaranteeing capital.
Alignment of incentives: Platforms should have capital at
risk (Wellesley & Co already operate in this way). CEO
compensation should be linked to net 3 year yields
remaining above a minimum threshold ( e.g. 2%)
Transparency & regulation key to long term health of
sector. Without rating agencies, transparency is vital to
avoid MPL becoming the next sub prime crisis. Retail
lenders must have info to make informed decisions.
Lack of borrower relationships: adverse selection problems,
leading to poor lending decisions.
Web enabled credit assessment technologies: new ways
to solve ‘market for lemons’ problems: XERO / YODLEE/
Big Data/ Experian etc..
Fraud risk: Significant risk that a platform engages in fraud
negatively impacting the sector’s international reputation.
Frequent external audit requirements; regulatory
oversight by FCA/ SEC of lending; transparency
clearly segregated clients accounts; investor scrutiny.
Pro-active digital response by banks: improved user experience;
step change improvement in efficiency by closing branches
investing in digital offering
Banks likely to respond too slowly:
Impeded by employment contracts; social contract ;
Short term CEO incentives ; ‘Denial’ mind-set.
Transparency an emerging point of differentiation
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Despite the potential issues, top bank executives are
betting on MPL sector
Banks investing in / through platforms
The Market Place Lending (MPL) investment opportunity
Limited MPL investment opportunities currently
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$250bn equity market cap for US & UK MPL sector by 2025e
$bn
Avg Balances
MPL Balances
MPL Revenue
Equity Market Cap
Basware – Arrowgrass JV unlocking value via innovation
‘Basware 2013 annual report’
total spend across the Basware
Commerce Network
“Basware and Arrowgrass Capital Partners
LLP to jointly develop a new e-invoicing
based factoring service”, September 2014
GLIF Finance - well diversified MPL equity & debt play
Disclaimer