The Characteristics of Capital in the Marketplace Lending World

Copyright © Canaan Partners 2016, All rights reserved.
The Characteristics of Capital
in the
Marketplace Lending World
Dan Ciporin

Marketplace Lending: Historical Landscape
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2005
Zopa incorporated
in UK as first P2P
marketplace
2008
Lending Club
receives SEC
registration
2008-2012
Retail/HNW
individual capital
focus
2011
Arcadia/Eaglewood
the first dedicated
platform funds
2012-2016
Institutional capital floodgates
open: structured credit funds,
securitization market
TODAY
the cycle
starts to turn?

MPL Funding Is Now Largely Institutional Hedge Fund Based
$0
$2,000,000,000
$4,000,000,000
$6,000,000,000
$8,000,000,000
$10,000,000,000
$12,000,000,000
2008 2009 2010 2011 2012 2013 2014 2015
$12
$10
$8
$6
$4
$2
$0
Fractional
Loans
Whole
Loans
$ $ $ $
Retail-driven Growth
Institutional-driven Growth
U.S. Annual Origination Volume by Loan Type ($ Billions)
Source: Orchard

Institutional Bias Is Actually Much Stronger
500+
originators
<10
originators
Retail + Institutional
Institutional Only

When the Cycle Turns,
What Was Once Strength Becomes Weakness
$0
$5
$10
$15
$20
$25
$30
J F M A M J J A S O N D J F M
Source: Asset Backed Alert
US ABS Issuance
Volume in Past 15 Months ($ Billions)

As Clearly Evidenced in Recent MPL Securitizations
100
200
300
400
500
600
CHAI 2015-PM1;
8/5/2015
CHAI 2015-PM2;
10/23/2015
CHAI 2015-PM3;
12/18/2015
CHAI 2016-PM1;
3/26/2016
Source: Bloomberg, PeerIQ Research
Weighted Average Spread (bps)

A Lesson Legacy Players Have Learned
$0
$40
$80
$120
$160
$200
2007 2008 2009 2010 2011 2012 2013 2014 2015
Debt Deposits
$ Billions
$0
$20
$40
$60
$80
$100
2007 2008 2009 2010 2011 2012 2013 2014 2015
Debt Deposits
Source: SEC filings

Including Even the Most “Institutional” of Players

Reliance on One Capital Source Is Foolhardy,
Especially When It Is an Intermediate Source
$34T
Retail
$37T
Institutional
$
$ $
$
$$$
$
$
$
$ $
$ $
HEDGE
FUNDS
Wire Houses
RIAs
Broker/Dealers
Self-directed Investors
Bank Deposits
2015 Marketplace Lending
RETAIL
Banks
Pension Funds
Insurance Companies
Foundations/Endowments
Sovereign Funds/Others
INSTITUTIONAL
$ $
$ $
$
$ $
Source: Cerulli Associates & US Treasury

Wire Houses
RIAs
Broker/Dealers
Self-directed Investors
Bank Deposits
Banks
Pension Funds
Insurance Companies
Foundations/Endowments
Sovereign Funds/Others
$
$ $
$
$$$
$
$
$
$ $
$ $
$ $DIRECT
INVESTMENT
$$
$$
$$
$
$
$
$
$
$
$
$$ $
Which DIRECT Capital Sources Fuel Future Growth?
$34T
Retail
$37T
Institutional
RETAIL INSTITUTIONAL
2015 Marketplace Lending
Source: Cerulli Associates & US Treasury

Institutional Capital is Efficient
2009 2010 2011 2012 2013 2014 2015
Retail Institutional
Time to Scale Retail >
Time to Scale Institutional
Year 1 Year 7Year 2 Year 3 Year 4 Year 5 Year 6
Source: Canaan Partners analysis

Great Recession Bull Market
-30%
-20%
-10%
0%
10%
20%
30%
1/1/06 1/1/07 1/1/08 1/1/09 1/1/10 1/1/11 1/1/12
FDIC Deposit Growth HF Net Flows % of AUM
However Institutional Capital Is Fickle
Source: FDIC & SS&C GlobeOp Capital

Retail Capital is Sticky and Enormous
Source: Phoenix Global Wealth Monitor (2015)
120M US Households
1M
5M
23M
85M
7M
$100K - $500K
$1M - $5M
$5M+
<$100K
$500K - $1M
0.8%
5%
19%
70%
6%
$20T:
Presumed
Accredited
Investors
$15T:
Presumed
Non-Accredited
Investors
$34T in Investable Assets
$8T
$6T
$12T
$5T
$4T
24%
18%
14%
34%
10%

Retail Direct
1 year payback
Institutional
4 month payback
However Retail Has Higher Costs
Source: Canaan Partners analysis

Capital Diversification Is the Answer – in Different “Flavors” of
Volatility and Cost
Cost
“Retail
Investors”
Self-
Directed
Investors
“Opportunistic
Investors”
Financial
Advisory
Channels
Lower
Higher
“Asset allocation
investors”
Hedge
Funds
Institutions
Volatility HigherLower

New Diversified Capital World Winners
Brand
Regulatory
Embracers
Credit
History
Technology and
Product
Secondary
Market
$

Liquid Secondary Market
Secondary Market Key to Every Mature Market
Equities
FX
Derivatives
Bonds
ABS
Commodities
Secondary
Market
$

Technology and Product
RETAIL INSTITUTIONAL
UI / UX
RIA & Custodian Integration
Principal Protection
Regulatory Requirements
Data Analytics
Order Execution Infrastructure
Reporting / Portfolio
Management Tools

Integration With RIA Workflow
Marketplace Lenders Must Build it on Their Own Or Integrate with RIA Technology
Source: Lend Academy
Independent RIA Daily Workflow
CUSTODIAN
PORTFOLIO
MANAGEMENT
SYSTEM
TURNKEY ASSET
MANAGEMENT
PLATFORM
ENABLING
SERVICE
PROVIDERS
OR
RIA
Marketplace
Lender

Embrace The Regulator

Brands Represent Trust

GAFA MPL
FINTECHBANKING
Co-opetition, Competition – and Acquisition?

The Evolution of the Capital Base Is Clear
Total MPL Capital Base
Introduction Emergence Maturity Scale
Individuals
Small institutions
Individuals
Small institutions
Hedge funds
Individuals
Small institutions
Hedge funds
Banks
Closed end funds
Individuals
Small institutions
Hedge funds
Banks
Closed end funds
Mutual funds
ETFs
Insurance companies
Pension funds

Will bridge between
both institutional and
retail capital
Will leverage brand,
history, technology,
regulatory comfort and
secondary liquidity
Winners

Marketplace Lending: A New Asset Class For All Capital Needs
Will create a new asset class across
all capital sectors
$

The Characteristics of Capital in the Marketplace Lending World

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