We have a different type of guest in this episode of the Lend Academy Podcast. Tracy Alloway is a journalist based in New York who covers the banking industry for the Financial Times, the leading UK financial newspaper. She has also taken a keen interest in the peer to peer lending industry in this country and recently broke the story about Lending Club’s IPO and their choice of underwriters. She was also the first person to cover the S&P rating of SoFi’s recent securitization.
In this podcast you will learn:
- Why Tracy finds the US peer to peer lending industry so interesting.
- Why the Financial Times is covering this industry so closely.
- What executives at the big banks think about peer to peer lending.
- Why the Wall Street investment banks are very interested in this industry.
- Details about the recent Camp Alphaville panel discussion with Renaud Laplanche, the CEO of Lending Club and others.
- How Tracy was able to break the story about the expected Lending Club valuation at their IPO.
- The significance of the recent SoFi securitization that was rated by Standard & Poors.
- Tracy’s thoughts on the Lending Club IPO and their valuation.
- What she has been hearing about Prosper.
- The challenge for up and coming players in the space right now.
- What Tracy thinks of the $1 trillion by 2025 prediction for this industry.
- How big banks might adopt peer to peer lending technology.
Below are some recent articles written by Tracy that we discussed on the podcast. You will need to register at FT.com to read these articles – free registration gives you eight articles a month. You can also find Tracy on Twitter.Click to Read Podcast Transcription (Full Text Version) Below
Peter Renton: Welcome the Lend Academy Podcast, session number 21. This is your host, Peter Renton, founder of Lend Academy.
Peter: So, today, we have someone quite a bit different on the show. You know, I’ve been writing about peer-to-peer lending now for almost four years and I do enjoy the writing piece and the research, but I’ve never considered myself to be a professional journalist. I don’t do deep investigative reporting or anything like that. I am much more of a cheerleader for the industry, an educator and someone who really shares their own personal experiences. So, anyway, what I thought I’d do today is get somebody who is a professional journalist on the show, someone who has been following the industry professionally for some time.
So I am pleased to welcome Tracy Alloway. She is the US Financial Correspondent for the Financial Times which is a London-based publication but has very much a global reach. If you‘ve been following this industry closely, you will have read several articles that Tracy has done about this industry. She’s broken several stories relating to Lending Club, SoFi and others so I really was thrilled to get her on the show to really talk about her perspective, how she does what she does and some of the interesting articles that she has written recently. Hope you enjoy the show.
Peter: Welcome to the podcast, Tracy.
Tracy Alloway: Thanks very much, glad to be here.
Peter: So why don’t you give the listeners a bit of background about yourself. A lot of people probably don’t know who you are so just tell us a little bit about your background.
Tracy Alloway: Sure. I’m the US Financial Correspondent for the Financial Times, currently based in New York, but I spent a lot of time in London for the past decade and I actually grew up in Tokyo. Always wanted to be a journalist and now I’m doing it.
Peter: Alright, alright. So when did you start to cover peer-to-peer lending as a journalist?
Tracy Alloway: Sure, I actually moved to New York about two years to cover the big US banks and believe it or not they were my entry point for the peer-to-peer industry. I was covering Morgan Stanley at the time when John Mack announced that he was joining the board of Lending Club. Of course, I have heard about peer-to-peer lending before that, but the fact that John Mack was joining this quite fast growing company piqued my interest and I decided I would take a deeper dive into the sector after that.
Peter: Obviously, the Financial Times has been covering the UK peer-to-peer lending scene for a long time so I presume……did you come across peer-to-peer lending when you were in the UK?
Tracy Alloway: I did a little bit. When I was in the UK, I covered capital markets for the paper and before that I was on FT Alphaville which was our financial markets blog and Alphaville has the reputation for being very avant-garde in discussing new and interesting ideas in the financial sector. So I think I’ve probably written about it while I was on Alphaville, sort of on the fringes when we were talking about possible technology disruptors. But the first time I really got into it was definitely when I moved to New York and I just found the US side of it very, very interesting and, of course, the US peer-to-peer lenders are the largest in the world.
Peter: So what is it about the peer-to-peer lenders here that you find interesting?
Tracy Alloway: I find your story very interesting. It’s something that happened after the financial crisis. Originally, it was about people sort of clubbing together to make loans to each other in a more efficient way, it was about using new technology to do it in a more efficient way. It just had all these really, really relevant “financial crisis themes.” I think as the years have gone by, it has just become more interesting, especially now that you have the banks themselves and Wall Street traders and investors and bankers getting more involved in that space. It’s just the story that kind of keeps on giving.
Peter: Yup, yup and it seems like it’s only getting more so. One thing, before I decided to interview you, I looked at FT.com which is your website, the Financial Times website, and I would have imagined you would say your equivalent or your big competition in this country is the Wall Street Journal, also obviously the leading financial publication here. You searched the term “lending club” on both those two sites, you get roughly the same number of relevant articles which I was really surprised because the FT is an English publication and obviously focusing more on that country than any other, I imagine, so why do you think the FT has taken such an interest in peer-to-peer lending and particularly in Lending Club?
Tracy Alloway: Well, I Iike to think that the FT punches above its weight on a lot of financial topics. We are a British-based newspaper, but I think we’re unique in having a global outlook so if we’re covering the peer-to-peer industry, you’re can rest assured that we’re going to be covering the peer-to-peer industry outside of the UK as well. The US, obviously, has some of the largest peer-to-peer lenders and amongst those is Lending Club. Naturally, we gravitate a lot towards Lending Club. We also cover peer-to-peer on mainland Europe, we also cover peer-to-peer in China which is an entirely different sector than what it is in the UK and the US. So, I think, what makes the FT’s coverage a bit unusual is we’re able to draw that sort of cross border comparison from the industry.
Peter: Right, right, that makes sense, that makes sense. So you cover the big banks still and obviously you’re writing about far more than just peer-to-peer lending. So you’re talking to these executives at the big banks on a regular basis, I imagine. Does the topic of peer-to-peer lending come up and if so, what is their opinion?
Tracy Alloway: Yeah, it’s a tough one. To be honest, I don’t think it’s entirely on their radar yet or it’s certainly not big enough for them to sort of come up with a public response to it yet. One of my favorite stories that we’ve done involving peer-to-peer was actually about the memo that Wells Fargo circulated.
Peter: Yup, yup, yup
Tracy Alloway: The bank banned their employees from investing in peer-to-peer loans citing conflicts of interest. That one was kind of unusual. Of course, it was a private memo, it all happened behind the scene. You ask a major CEO of a very large bank what they think of peer-to-peer lending…I don’t think they’ve got their heard just around it just year and I don’t think they would give a very good answer about what they’re doing in response or what they think it is or what possible competitive threat it might eventually pose to them.
Peter: Interesting, interesting. Well, that Wells Fargo article, you actually caused them to change tack on that – they have since rescinded that ban which is good news, I think, for everybody. Well Fargo is obviously well aware of it. Now you’ve got people at Morgan Stanley well aware of it. What you’re saying is that it’s still so small and it is really small. The reality is that these banks are some of the largest companies in this country and what you’re saying is they’re not concerned at all right now.
Tracy Alloway: Well, I think what I’m saying is if they are concerned, they’re certainly not sharing those concerns publicly. Banks and peer-to-peer lending is a bit of a nuanced story because I think the retail sort of consumer-focused banks don’t know quite what to make of it just yet, certainly the larger ones don’t. Some of the more Wall Street trading and investment oriented banks are very interested in this sector. They see the opportunity to securitize peer-to-peer loans, they see the opportunity of get IPO fees, they see all sorts of capital market potential from this sector. No one’s really digesting or at least no one publicly appears to be digesting the competitive threat posed by peer-to-peer lending just on the consumer lending front.
Peter: That makes sense, that makes sense to me. I haven’t seen much that will indicate anything different there. So I want to switch gears and just talk about Camp Alphaville which I know you went back to London for and you had some quite esteemed people on a panel about peer-to-peer lending. I know you had Renaud Laplanche, the CEO of Lending Club, who was just on the previous show here on the Lend Academy podcast, I believe Cormac Leech as well from Liberum was in there, can you tell us a bit about that panel. I’ve read virtually nothing about it so I’d love to get some insights.
Tracy Alloway: Sure I can point you in the right direction to read something about it, but in the meantime, I mentioned Alphaville before. Alphaville is really our cutting edge financial markets blog. It’s where we discuss a lot of up and coming ideas in the financial space and Alphaville had the brilliant idea to hold a very unusual conference in London to discuss some really interesting concepts. One of those concepts that we wanted to discuss was disruptive technology and banking. So obviously, we had to get some of the peer-to-peer guys in. We also had some people that were looking to do interesting things in terms of disruptive technology on the more investment banking side. But, I think, what we found through the conversation was that everyone kind of agrees that platform-based technology has the potential to pose a competitive threat to the banks. I guess the big question now, as we alluded to earlier, the banks’ response to that. Do they go head-to-head with it or do they maybe co-opt some of the technology themselves and start working a bit more with the peer-to-peer lenders as well. We’ve seen a little bit of that on the edges with some of the announcements from Lending Club.
Peter: Right, right, okay, I would like to obviously get a link to any story and I’ll put those in the show notes on lendacademy.com with this podcast so people can read more about it. That would be great. I wanted to talk about the story that you broke just a short time ago, I think it was a bit over a month ago, about the Lending Club, what the expected valuation is, who the underwriters are going to be. I know you won’t give away your sources for that story, but how were you able to get such information and be able to share it publicly. And also, was Lending Club a little frustrated with you about that because there’s no press release going out.
Tracy Alloway: Yeah, well, that was kind of a funny story because, of course, we broke that news the week before, I think the Friday before Camp Alphaville was held.
Peter: (laughs) Nice timing.
Tracy Alloway: Yeah and so we had a few people, some conspiracy-minded people who said that we had clearly been in collusion with Lending Club during that announcement and generating publicity for Alphaville ahead of it. I assure you that was not the case. Everyone has known for a long time that the Lending Club IPO is coming, we’ve been working on that story for a very, very long time. Obviously, I can’t give away any sources, but we are deeply sourced both within the peer-to-peer industry and on Wall Street.
Peter: Right. So, obviously, Renaud wasn’t so annoyed with you that he canceled his appearance on Camp Alphaville, but I meant like he said they had no comment on the story. Was that what you expected? Were you hoping to get a bit more meat from them or how’s that story going to play out did you expect?
Tracy Alloway: Well, it’s always great when the company comments publicly on the story, but we have to deal with what we’re given and we’re confident in our sources and we’re confident in that story. We’ll see when the IPO comes about.
Peter: Yeah, okay. I’m going to ask you a question about that in a little bit.
Tracy Alloway: Of course.
Peter: First, I want to talk about SoFi because you also broke this story before anybody else I believe. The SoFi securitization was their second securitization, it was covered pretty extensively, but this is the first one, though, that was rated by S&P, one the major rating agencies. The first one was rated by….I think it was rated by DBRS. My question is what is the significance of SoFi getting a rating from S&P and is that much of a bigger deal than getting it from DBRS?
Tracy Alloway: Yeah, this was an important story as you point out. I think it’s fairly safe to say that getting a rating from S&P is possibly more important than from DBRS. The fact is that there are a lot of very large money managers and insurers and pension funds who can only buy securities that have been rated by one of the top three credit rating agencies. S&P is one of those, DBRS is not.
Tracy Alloway: So the fact that they got this designation from S&P really opens up a whole new range of investors who can buy peer-to-peer loans. The other thing it does, I guess some people would argue is that it legitimizes the sector a little bit. The unusual thing about the S&P rating was that, I think, about two or three weeks before, S&P had published a research piece in which they said it was too early to start evaluating peer-to-peer securitizations. When this story came out, a lot of people were really surprised. One of the major questions I had was how S&P has been able to overcome its discomfort in rating peer-to-peer loans. I guess the fact that SoFi specializes in student loans helped a little bit. Student loans are generally considered safer than consumer loans, however, I’ve also heard that the methodology that S&P used for rating the bond can also be extrapolated to consumer loans. So quite a few people think this also opens up the door for consumer loans-based securitization of peer-to-peer loans, so we’ll see what happens. The rating agencies are always sort of an interesting story and it’s always extra interesting when they’re evaluating new types of securities.
Peter: Right, right, because the thing about the SoFi securitization…I mean, these are really super prime borrowers in a lot of ways. There was a story just today, CNN Money had a story about SoFi, it’s like Wall Street funding rich kids of their student loans. So it’s really the creme de la creme of the student loan population. I guess you can possibly extrapolate it out to maybe with Lending Club where there has been a securitization, Eaglewood has done one as I am sure you know, but you’re thinking that S&P, maybe if they took a tranche of Lending Club, maybe like A and B rated tranche, do you think that’s something that might make it into an S&P-rated securitization?
Tracy Alloway: I think there is a lot of pressure on the rating agencies to look at consumer loan peer-to-peer securitizations. We’ll have to see what happens and whether they think they can encompass some previously unknown risks involved in the securitization. No one really knows how these bonds are going to react in a cycle where interest rates are going up. Generally, rating agencies are very wary of evaluating those sort of unknown situations, but I can tell you the big story we get is when S&P or Moody’s or Fitch decide to give a rating to a Lending Club securitization or a Prosper securitization for that matter.
Peter: Right, so have you heard anything on that note?
Tracy Alloway: I have not, but you can rest assured that when I do, I will be writing a story. (laughs)
Peter: (laughs) Right, we won’t have to wait long after you’ve heard….okay. That would be interesting, I think. Lending Club is going to be in the news a lot. I imagine it would be soon at some point anyway with the IPO. As I said I had Renaud on last time and I didn’t even ask him when he thought the Lending Club IPO was going to happen because I knew he wouldn’t tell me, but I’m just curious about your thoughts. You’ve been covering this company pretty closely now and you broke the story about their underwriters and the expected valuation, so what are your thoughts on Lending Club’s IPO? Is it imminent, is it happening third quarter, fourth quarter, September? What are your thoughts?
Tracy Alloway: I think when we wrote that story last month, I think we said third quarter or thereabouts. Obviously there are a lot of moving parts and no one wants to IPO in an extremely volatile market and you never know after August or during August. Stocks tend to get weird sometimes. The other thing that’s happening is you have quite a busy IPO market at the moment which could be a good thing for Lending Club, lots of investor interest in tech-based IPOs. For instance, we have Alibaba coming up with one of the biggest IPOs ever. At the same time, though, if there’s a lot of interest in other IPOs Lending Club does risk a bit of investor saturation. I guess, maybe people get a little it weary of them. So the timing could move around quite a bit, but I would guess third quarter, maybe fourth quarter of the year.
Peter: Right, they could also do because Lending Club is a pretty small company ….I mean, I think it was at Twitter or one of the companies did, where you can just do a two-week lead time in your IPO. You can get all your ducks in a row and it’s called, I mean, it’s like a private IPO. I don’t know, I can’t remember all the details…
Tracy Alloway: You know confidential filing?
Peter: Yeah, yeah, I mean, I think there is because I think it was a JOBS Act thing or something recent where you can do an IPO if you’re a smaller company and Lending Club would fit into that category because its less than a billion dollars in sales or something like that.
Tracy Alloway: Right, so under the JOBS Act you can file confidentially for an IPO if you’re….I think it’s called emerging growth company or some acronym like that. However, I’ve been told by a few people that that might not be possible for Lending Club because of the way they sort of originate and distribute loans. They file everything as securities with the US Securities and Exchange Commission so I think for some reason when they IPO, they actually have to go through a public process. They can’t do it confidentially.
Peter: Interesting. Okay, haven’t heard that. That could quite likely be very true. So then what about the…..you reported about the $5 Billion valuation, do you think that’s reasonable? Do you think that’ s something that will go higher? The valuation is something that tends to get a lot of press. When you do comparables, particularly if you compare them to any kind of financial services firm, it’s astronomical, their valuation. If you compare with some of the tech companies that aren’t making money then it’s not that extreme. What do you think of that valuation?
Tracy Alloway: $5 Billion seems a little lofty to me, but as you say, there is a lot of interest in technology at the moment. There’s certainly a lot of interest in financial technology, there’s still a lot of money floating around the financial system and it needs to go somewhere so I could see a lot of people finding Lending Club a compelling story at the moment.
Peter: Yeah, well…..
Tracy Alloway: And also $5 Billion… isn’t that far from the last sort of valuation that we heard of which I think was $3.8 Billion?
Peter: Yeah, that’s right. I think it was April so, yeah, the longer they go and their valuation has been roughly tracking their total origination number. I mean, not exactly, and they’ve just gone over $5 Billion in total originations so I wouldn’t be surprised. I hope it’s a successful IPO and that will be fascinating to see how it all plays out. So let’s talk about Prosper, what have you been hearing about Prosper? Do you think they’re going to follow Lending Club’s footsteps? What have you been hearing?
Tracy Alloway: Yeah, Prosper is kind of an interesting story at the moment. They were in a bit of trouble, I think, less than two years ago. They hired a bunch of new executives, raised a bunch of new money, got kind of back on track and they’ve been growing….I think at roughly the same pace as Lending Club.
Peter: It’s actually faster, much faster than Lending Club.
Tracy Alloway: Growing fast, but from a smaller base. I don’t necessarily think that they want to IPO the company. I think they’re going to wait and watch and see what happens with Lending Club’s IPO. But even if Lending Club’s IPO goes very well, which I think everyone in the industry wants it to, I don’t really think Prosper is in the market. I don’t think they have the same strategy. I think maybe they’d be looking for a different type of future.
Peter: Right, right, okay. So what about Funding Circle. They’re obviously a UK company, the biggest in business lending space. I mean, do you follow Funding Circle being an FT correspondent or is this something that you leave to others?
Tracy Alloway: Sure, I generally leave it to others. I’ve met the guys from Funding Circle a couple of times when they were visiting in the US, but I don’t follow them very closely and I’m not as deeply sourced when it comes to Funding Circle. I generally leave that to my esteemed London-based colleagues.
Peter: Right and Funding Circle certainly gets a lot of press from your London colleagues there. What about other companies? Are you following any other…either some of the more established or some of the new players, is there anyone else on your radar that you’re watching closely?
Tracy Alloway: Yeah, there are one or two. I’m afraid I can’t really tell you because….do you want me to do the story about them and I’d rather not tell all my competitors what I’m looking at, but there are some interesting players. The difficulty in the space now, I think, is how up and comers kind of differentiate themselves from more established firms and also from firms that are just kind of jumping on the bandwagon and don’t necessarily have an interesting or different strategy. Peer-to-peer lending obviously has become a hot topic. I think quite a few people are piling in, we get a lot of pitches from peer-to-peers lenders and sometimes it’s tough to differentiate between people who have compelling stories and people who are just kind of in it because of the hot topic at the moment, but I think I found one or two newcomers who will be interesting in the future and I look forward to writing about them.
Peter: Okay, sure. You probably get pitched way more than I do. I get pitched two or three times a week from new start-ups or someone that’s peripherally…..like the real estate crowd funding space is just so incredibly hot. There seems to be a new one coming every week and much of them sort of make their way to my desk as well. So actually on that point……
Tracy Alloway: You probably have the same problems.
Peter: Right, right. I cover the ones that I think are interesting, the ones that are…..some of them are just this guy who has got an idea and he wanted to run it by me before he does any major work on it. They range from that all the way through to……we’ve raised a million dollars in seed capital and we’re serious. Those are the ones that are more likely to actually write about myself. So on real estate real quick, do you follow the space at all or is that really out of your area?
Tracy Alloway: I used to follow a bit of the crowd funding story back when the JOBS Act first came out, we found that kind of interesting. Also from a bank angle, we were interested in how the large banks were reacting to the JOBS Act. I don’t follow it that closely any more. I probably should, but we cover a lot of the crowd funding space out of our San Francisco office.
Peter: Right, right, fair enough. So before you go, I wanted to get some final thoughts on the overall industry. Obviously, you’ve been following it for a little while, you’ve probably seen the spiels from all the companies and the white paper that Charles Moldow from Foudation Capital put out which predicts $1 Trillion globally in this industry by 2025. So do you think that those numbers are being optimistic? Are they even pessimistic, I mean, where do you see this going? I mean, you’re covering the big banks, you’re covering this industry broadly so where do you see the peer-to-peer lending….the subset of this industry going and how big can it get?
Tracy Alloway: It’s kind of a difficult one. I think it’s hard to say whether that $1 Trillion projection is optimistic or pessimistic because I think what’s happening and what will happen as we continue is that the peer-to-peer industry will become more entwined with the banking system and Wall Street. I think there will be companies that do sort of pure peer-to-peer lending where they connect individuals directly to other individuals or where they connect investors directly to individuals who want loans, but I think what we might also see are some big banks who kind of adopt peer-to-peer underwriting technology to more efficiently originate their own loans. I think the space will become kind of muddled in the future. It’s difficult to make a hard line projection for peer-to-peer loans.
Peter: Right, that makes sense to me. That’s really what’s happening right now with Lending Club and all their banking deals, the Union Bank deal and there’s lots of smaller banks on their platform so that makes sense. So you’re going to continue to cover this industry closely, I presume, over the coming months and years, shall we say?
Tracy Alloway: Yeah, I am hoping to for sure. Like I said, I think it’s a story that keeps on giving so, hopefully, it will give me a few more interesting scoops in the future as well.
Peter: Right, well, I certainly look forward to reading those Tracy. Thank you very much for your time today.
Tracy Alloway: Thanks so much, Peter.
Peter: Okay, bye.
Okay, there you have it. So I encourage you all to read Tracy’s work that she has done. I’ll be linking to several pieces that she’s written recently in the blog post accompanying this podcast on lendacademy.com. The thing about the Financial Times, you do need to log-in to read the articles, but they do provide a free registration, you get up to eight article a month which should be enough for the casual reader and that should be able to get you all of Tracy’s recent writings. I really encourage you to sign up there. The Financial Times do a great job at covering this industry and has been a great source of knowledge for me and I know for many others. On that note, I will sign off and catch you next time. Thanks for listening. Bye.