I was in London last week to attend and speak at the AltFi (short for alternative finance) conference. The focus of this conference was on peer to peer lending, invoice financing as well as crowdfunding although p2p lending certainly took up the bulk of the program. The event was put on by David Stephenson, a long time finance journalist and commentator, and his new organization Alt Finance News.
While the event was most centered on the European p2p market I was surprised by how much coverage and interest there was in the US market. Lending Club, in particular, was mentioned many times throughout the day.
Less Than 1% of Deutsche Bank’s Balance Sheet
The first keynote speaker was Simon Champ of P2P Capital Solutions, a London-based company that is getting ready to launch the first publicly traded closed-end fund in the p2p lending space. He pointed out how far we have to go as an industry – if you combine loans issued by every company in the history of the entire global p2p lending industry that number would be less than 1% of the assets currently held on Deutsche Bank’s balance sheet. And they are just one of many large banks around the world.
Champ also pointed out that up until this point the UK p2p lending industry has been completely focused on the retail investor. But that is about to change. Institutional capital is starting to flow into the space which is a good thing because unlike in the US, the platforms in the UK, as a whole, have a shortage of lender money. And it is going to take institutional capital to really grow p2p. Champ believes that this new institutional capital will help drive down costs, benefiting everybody and it will be the primary way that average investors will access this asset class in five years time.
Cormac Leech of Liberum on the Opportunity of P2P Lending
This was my favorite presentation of the day. Cormac Leech is a research analyst at Liberum Capital, a mid-sized UK investment bank, where he covers the financial sector. He started out with an excellent comparison of the growth of the five main platforms in the US and UK (Zopa, Ratesetter and Funding Circle are the he main players in the UK). While Lending Club is bigger than the four other platforms combined, together the five platforms have shown an impressive 136% compound annual growth rate over the last five years.
Leech presented a staggering slide that demonstrated the total lack of efficiency gains in the US banking sector since 1900. What he was saying is that it costs roughly same in percentage terms for a bank to issue a loan today as it did in 1900. I was floored by this statement. I cannot think of another industry that is still around with a similar lack of productivity gains over the past century. Clearly banking is ripe for some disruption.
There were several more interesting points Leech made. He presented the argument that p2p lending will be able to maintain its cost advantages over banks in a higher interest rate environment. He also showed the difference it will make when investors are able to hold p2p lending investments inside their ISA accounts (the UK equivalent of an IRA). He made a bold prediction on the Lending Club IPO, saying that his research justifies a valuation for Lending Club of around $6.2 billion later this year.
Unfortunately, Leech was only given 15 minutes for this presentation. He had put together one of the most thorough p2p lending slide decks I had ever seen and I would have liked more time spent on each slide. But not to worry, I not only have a copy of his presentation here, I organized to interview him after the conference and you will hear more from Leech in an upcoming podcast.
Matt Burton from Orchard on the US Experience
Ron Suber from Prosper was supposed to present at AltFi but he had to cancel at the last minute. Matt Burton, the CEO of Orchard filled in for Suber and gave an excellent presentation. He said that the big story in the US this year is the Lending Club IPO. While nothing has been announced yet Burton said it is the story that everyone is watching. He said that Lending Club is being viewed as a technology company and not as a financial services company because it really doesn’t fit the mold of any other company in finance.
There are four trends that Burton is seeing in the US market right now:
- Institutional investors have overwhelmed the consumer p2p platforms – not really news for Lend Academy readers.
- Balance sheet lenders (such as OnDeck Capital) are looking to diversify their funding sources and potentially adopting more of a marketplace-type model.
- There is a proliferation of new real estate platforms launching this year.
- There is demand for additional securitizations in the p2p lending industry.
Regarding the future Burton talked about a number of predictions, many of which I think will come to pass:
- Additional loan products will be released – we know Lending Club is launching small business loans soon. Burton also expects to see platforms start to move down the credit spectrum a little and we are already seeing this with the Policy Code 2 loans from Lending Club.
- The introduction of credit default swaps where investors can insure against credit losses.
- An industry group in the United States similar to the UK P2P Finance Association that will help set standards.
- A secondary market for whole loans (currently in development at Orchard).
- An index to track the performance of Lending Club and Prosper (also something being developed at Orchard).
After Burton’s presentation we had the first panel of the day – one that was focused on the US market. There were three members of the panel: Burton, Richard Swart from UC Berkeley (focused on crowdfunding) and myself. Ron Suber was supposed to join us but as I said he couldn’t make it. We just covered the basics of the differences between the US and UK models: the large percentage of institutional investors in the US, the higher returns and the higher default rates here, the impact of the JOBS Act and of course we talked about the Lending Club IPO.
There were many more presentations and panels throughout the day featuring most of the players in the UK and continental Europe. The day ended with a presentation from a senior UK government official and one by Mark James of PwC. Running concurrently throughout the day was a breakout room focused on the platforms where the audience could ask questions. The day ended well with a wine tasting for speakers.
While I enjoyed this conference and meeting so many people in the UK and European markets, I was surprised not to see a larger involvement from Zopa and Funding Circle. Zopa is not only the first p2p lender, launching a year before Prosper, they are the largest in Europe. And Funding Circle are by far the largest peer to business lender in the world and one of the big three in the UK and yet neither CEO was given a keynote presentation.
LendIt Europe is Coming Later This Year
One thing I should mention here is that this trip to London had a dual purpose. Aside from attending this conference I was also in the UK, along with my Lend Academy Investments partner Bo Brustkern, to scope out sites for LendIt Europe. We met with an event planner, visited several conference locations, and we now have a tentative location and date. Nothing has been signed yet so I can’t reveal any details but I will do so as soon everything is confirmed.
While in London I also visited the offices of Zopa, Ratesetter and Funding Circle. I sat down with the top executives at each company and recorded an audio interview. You will be hearing these interviews in an upcoming edition of the Lend Academy Podcast.