2016

SURVEY OF U.S.
MARKETPLACE
LENDING

The world of marketplace lending is changing quicklyand

that includes its perception among institutional investors.
One year ago, Richards Kibbe & Orbe LLP and Wharton FinTech released the inaugural survey on this
emerging industry, which connects borrowers and lenders of capital directly through Internet-based
platforms, challenging the traditional bank lending model. We undertook the survey to answer questions
raised by institutional investors involvement in this still-maturing field. How well do institutional investors
know marketplace lending? What is their level of participation in it? How do they assess the risks and
rewards that lie ahead for the industry?
We now have two years of data on these and related questions. The answers from our polling of more
than 300 institutional investors have evolved significantly in just 12 months. Respondents expressed greater
optimism, different sources of concern and markedly less uncertainty about marketplace lending in 2016.
It is apparent that in the past year, institutional investors have developed a deeper understanding of the
industry.
Awareness of and optimism about marketplace lending, both substantial in 2015, reached new heights in
2016. That positive outlook may explain the surveys most dramatic findinga sharp uptick in the percentage
of respondents actually invested in the sector.
The emergence of regulatory risk as an area of concern surrounding marketplace lending offers another
big takeaway from this years survey. Yet, respondents claimed little knowledge of the industrys regulatory
framework. As institutional investors continue to sharpen their focus on marketplace lending over the next
year, this is an area that will likely receive special attention.

Analysis & Insight

Despite a slowdown in securitization rates and warnings of contraction in marketplace lending, survey
responses from institutional investors show increasing investment in and optimism about the sector.
While there is no clear explanation for this disparity in perception, it may be that the sectors explosive
growth in 2014-15 generated expectations that are not sustainable for any industry. Continued growth
at a slower rate may be generating concerns among observers that are not shared by actual investors.

KEY FINDINGS
Respondents

Awareness of & Interest in

Marketplace Lending

Who Took Part in the Survey

Investment Professional

19%

24%

Other C-Suite Position

Other Legal/Compliance

3%
3%

Portfolio Manager

17%

Level of Familiarity

General Counsel

9%
12%

Although still a nascent industry, marketplace

lending is familiar to a large and growing
percentage of respondents. 82% characterized
themselves as somewhat or very familiar with
marketplace lending, up from 75% last year.

Chief Compliance Officer

13%

Investor Relations
Other

37%

45%

Very Familiar
Somewhat Familiar
Just a Little Familiar

Approximately 15% of those who responded work

at funds with $10 billion or more in assets under
management, and 36% work at funds with more
than $1 billion in AUM. 47% work at funds with less
than $200 million in AUM.
The dominant investment strategies used by the
respondents firms were credit, multi-strategy and
event-driven/special situations. (Respondents could
select multiple responses.)
Investment Strategy Type
Credit

32%

Multi-Strategy

21%

Event-Driven

19%

Value

15%

Distressed
Private Equity

13%
9%

Long/Short

8%

Venture Capital

8%

Among respondents whose funds invest in whole

loans or borrower payment dependent notes
through a marketplace lending platform, most (73%)
have less than 10% of their portfolios invested in
such assets, while 15% have more than 90% of their
portfolios invested in such assets.

Not at All Familiar

13%
5%
Optimism about the industrys future is also
growing: more than 80% indicated high or medium
levels of optimism for continued growth of
marketplace lending, compared to 71% last year.
Perhaps the strongest evidence of optimism is that
50% of respondents have capital allocated to the
marketplace lending space. In 2015, only 29% of
respondents were invested in this industry.
The types of loans in which investors showed the
greatest current interest in 2016 were consumer
(unsecured) (52%), small business (46%) and real
estate (37%). Additionally, interest increased in all
loan categories surveyed in 2015 among investors
interested in purchasing whole loans or notes from
marketplace lending platforms.
Most Targeted Loan Types
52%

Consumer (Unsecured)
Small Business

46%

Real Estate
Education/Student Debt
Auto

85%

Merchant Cash Advance

37%
24%
17%
15%

12%

 Respondents indicated significant levels of current

investment and interest across a broad range of
investment possibilities in the marketplace lending
space:
Purchase of whole loans via
negotiated arrangement with
platform

15%
13%

Purchase of borrower payment

dependent notes from
platform

10%
10%

Purchase of whole loans using

active loan selection via API
with platform

10%
5%

Equity investment in privately

held platform

19%
12%

Direct lending to
platform

18%
12%

Stock investment in publicly

traded platform

10%
10%

Investment in securitization of
loans from platform

8%
12%

Co-investment alongside
platform

5%
13%

RISK FACTORS & REGULATORY CONCERNS

Presented with risk factors associated with
marketplace lending, respondents expressed
the greatest concern over market-wide credit
events, with 85% of respondents somewhat or very
concerned. The greatest source of concern in 2015,
the threat of adverse selection/borrower quality,
remained third this year and had the highest level
(38%) of respondents who were very concerned. The
risk factor that placed last in 2015, regulatory risk/
uncertainty, leaped to second in 2016.

When asked what would lessen their concerns about

investing in marketplace lending, respondents said
the following would have a very significant impact:
Solution to Concern

Percentage of
Respondents

Greater transparency and

disclosure in terms of credit and
interest rate risk

47%

Increased standardization of data

and performance reporting

39%

Liquid secondary trading market

39%

72% of respondents believe the consolidation of

marketplace lending platforms is somewhat (40%) or
very (32%) likely.

Enhanced regulatory clarity from

securities, banking and consumer
finance regulators

33%

Among those who have invested through

marketplace lending platforms, 42% have used a
major platform (Lending Club, Prosper, OnDeck,
SoFi), while 58% have used other established
or start-up platforms. Nearly half (48%) of these
respondents manage their portfolios through the
originating platform.

Mature securitization market

33%

Platforms taking steps to improve

collection mechanisms in case of
defaulting borrowers

29%

Platforms providing provision fund

for bad debts

27%

Current
Investment

Interested in
Near Future

Analysis & Insight

47% of respondents identified real estate loans as the best future investment opportunity. This may reflect a desire
for loans secured by hard assets that lenders expect will better weather an economic downturn. It may also signal
an interest in the widening access to the nearly $17 trillion real estate market provided by large platforms like SoFi
expanding into the home mortgage space, which comprises the bulk of real estate lending.

 Among general counsels, chief compliance officers,

C-suite professionals and other legal/compliance
professionals, more than 40% said they are not
at all (9%) or just a little bit (32%) familiar with the
regulatory framework for marketplace lending.
When asked about specific regulatory actions, they
expressed significant but also broad and unfocused
anxiety across a wide range of government activity.
Analysis & Insight
It is surprising that so many respondents indicated
some concern with securities laws, investment
adviser regulations and broker-dealer regulations,
which, while burdensome, can be navigated
by making the required regulatory filings. Less
surprising is the greater concern among some legal
and compliance personnel about possible new
federal and state regulatory challenges, including the
new complications raised by the Madden decision.
Very
Concerned

Somewhat
Concerned

WHATS NEXT?
We expect that platforms will continue to
explore more niche markets in an effort to avoid
competition from established players in the
consumer, small business, real estate and student
loan spaces.
We foresee significant platform consolidation in
the coming year as major platforms build out their
suite of offerings and smaller platforms face greater
competitive pressures.
We anticipate greater integration of platforms with
banks to address the concerns both platforms and
banks have about increased regulatory oversight of
the sector. Platforms will want to address Madden
and true lender risk, while banks will want to
reassure their regulators that they are focused on
the credit risk involved with loans they purchase
from, or originate on behalf of, online lending
platforms.
We believe that there will also be significant
regulatory developments over the next year, though
the general direction of those developments at the
federal level will hinge on the upcoming election.

Potential federal banking

regulatory actions
Potential state regulatory
activities
FDIC guidance on bank
purchases of marketplace
loans

We expect that there will be greater interest among

investors in secured consumer loans, such as home
mortgage loans or refinanced auto loans. Given
the heightened concern about market-wide credit
events, and the continuing concern about borrower
quality, investors may want to invest in consumer
loans secured by collateral, which will help investors
recover some portion of their losses resulting from
any loan defaults.

SECs pending ABS rules

Potential CFPB oversight of
platforms
Madden v. Midland
decision
Planned congressional
oversight hearings
SEC reinterpretation of
securities laws or
regulations
25%

50%

75%

100%

About Richards Kibbe & Orbe LLP

About Wharton FinTech

RK&O represents clients in new and disruptive financial

markets. We are at the forefront of the opportunities and
challenges facing marketplace lending platforms and
institutional investors entering this space. Our lawyers
draw upon more than 25 years of experience in alternative
investment strategies and secondary market trading. RK&O
is based in the key financial and regulatory centers of New
York, Washington, D.C. and London. For more information,
visit www.rkollp.com.

Wharton FinTech is the first student-led FinTech initiative

and is dedicated to connecting innovators, academics and
investors with the ideas and companies that are reinventing
global financial services. We are committed to education,
career development and idea promotion by connecting
innovative, established, disruptive and proven FinTech
enterprises with students and industry professionals. For
more information, visit www.whartonfintech.org.