Alt Lending Maturation – Funding Circle shows the way

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Quite a bit of news in the alternative lending platform ecosystem, notably with Funding Circle announcing it has floated an investment trust vehicle on the LSE yesterday, see here.

Alternative lending platforms have matured quite a bit from a funding source point of view since the beginning of p2p lending. To recap the evolution these platforms started with 1) pure peer to peer lending: where individual investors lend to individual borrowers, to 2) p2p model where individuals could either invest in fractional loans or in whole loans, to 3) institutional investors crowding out peer investors and purchasing whole loans, thereby making the p2p lending term obsolete, to 4) institutional liquidity providers providing warehouse facilities to boost growth, to 5) banks “lending” their balance sheet to further boost growth, to 6) small sized securitization deals (OnDeck and JP Morgan is a perfect example) to 7) the Funding Circle publicly traded vehicle… and every imaginable intermediary step and funding solution.

As data sets, historical performance and higher levels of comfort slowly build up, I expect further mature securitization solutions and publicly traded vehicles to emerge. It is one thing for the sources of funding to mature for consumer-paper driven alternative lending platforms. After all the market has always been broader and deeper for consumer credit. It is quite another thing for this to happen on SME paper. SME lending is much more complex endeavor where credit underwriting has always been more of an art than a science.

As such, Funding Circle’s ability to go to market with what is essentially an income fund for the SME asset class is a major coup and signals a potential higher level of expansion, not only for them but for all alternative lending firms focused on SME. (Prosper did go to market with a mini securitization deal with Citigroup, but to my knowledge that was consumer paper):

– A publicly traded vehicle may lend further credibility to the SME asset class what with the high hurdles and requirements for listing on an exchange – think auditing, compliance, governance…

– A publicly traded vehicle may bring new classes of investors to the fore such as mass market investors who may be attracted to the low entry ticket – a share price will always seem easier to purchase than a whole loan or even a fractional loan.

– A publicly traded vehicle certainly makes it faster and easier for investors to get a balanced and diversified exposure compared to purchasing whole loans or fractional loans.

– A publicly traded vehicle is a stable and permanent source of funding for an alternative lending platform. I bet this point is not lost on Funding Circle as resilience of funding sources especially in the event interest rates rise will be a major competitive advantage.

– I expect that for the UK, Funding Circle’s publicly traded vehicle will be offered to ISA holders, which most probably means a tax free way to get exposure to SME lending.

– Assuming the Funding Circle’s vehicle can lend to both US and UK SME’s, that will further optimize investors diversification.

– I expect the logical next step to be for Funding Circle to replicate this strategy in the US, barring any local impediments.

All in all a very positive and significant development, especially as, the world over, access to funding remains a major issue for SMEs which means latent demand is still quite high. It might be my myopic US focused view, but I always expected alternative lending platforms to remain heavily  dependent on institutional investors and institutional driven securitization. I might be proven wrong with this move.




Pascal Bouvier

Life and work experiences have given Pascal an unmatched vantage point, seeing things as both venture capitalist and aspiring entrepreneur. He currently is a Venture Partner with Santander Innoventures – Santander Group’s Global Fintech fund.

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