There was a fascinating article today on American Banker that I feel compelled to share with everyone right away. It speaks to a change that is happening in peer to peer lending right now. A change that some may think gets at the very core of what peer to peer lending is all about.
Institution to Peer Lending
I am talking about an evolution away from a pure “peer to peer” space where money changes hands between individual investors and individual borrowers. It is slowly evolving to a space where a mix of individual investors and large institutional investors lend money to individual borrowers. Yes, institutional investors such as pension funds, hedge funds, and asset managers are investing large sums of money now in peer to peer lending.
Here are two quotes from the article that make it clear what the CEOs of Prosper and Lending Club think about this change.
Prosper is being proactive in luring big-money investors to its site, evidenced by its hiring in mid-March of James Alexander, who has 15 years of institutional sales experience…Institutional investors contribute only about 5% of funding volume on the site. Chris Larsen, co-founder and chief executive of Prosper, said he hopes to increase that percentage to as much as 40%.
Lending Club is further along the curve of attracting institutional investors as evidenced by this quote from the article:
About a third of the roughly $16 million of loans funded on Lending Club’s platform this month will come from institutional investors. Laplanche (CEO of Lending Club) said he would be comfortable having as much as half of its funds come from institutional investors.
My Take On Institutional Investing
Whether you like it or not it is clear that in the future institutional investors will play a mach larger role in peer to peer lending. I believe it is a good thing. Actually, I will go further than that. I would say if this wasn’t happening it would be a bad sign for peer to peer lending. You can’t publicize average returns of 10% and not expect the big money players to come to the table.
I also think this is a good thing for smart individual investors. Every one of these institutional investors will have automated plans. It is likely they will have very broad criteria as to which loans they invest in because they will need to put so much money to work. The individual investor who is investing (and reinvesting) smaller sums will be able to have a much tighter investment criteria. And we can also make subjective decisions based on borrower feedback, something that these large investors will not do.
Peer to peer investors who really like the personal aspect of investing in individuals can continue to do so. But they should keep this in mind. Peer to peer lending is first and foremost an investment vehicle (from the investor perspective anyway). Like other investment vehicles it will succeed or fail based on the returns it provides for all investors.
What do you think? Do you like this change? Let me know in the comments.