www.frontline.

vc

Marketplace Lending in Europe

Lending emerges on the internet

BROUGHT TO YOU BY:

European alternative finance continues to grow rapidly

EU Online Alternative Lending Vol 2013-2015

Online Alternative Lending Volume by Country 2015

The UK accounts for 81% of volume

92%

151%

Sustaining Momentum - Cambridge University

Continental and Eastern Europe are growing even faster

Online finance by Country and Region ex-UK 2015

Online Finance Market Vol in Continental & Eastern EU 2013-15

U
E
x

ng
i
w
o
Gr

2
t
a

s
e
g

av

a
r
e

167%

191%

Sustaining Momentum - Cambridge University

Despite negative headlines, market fundamentals healthy

Successful securitizations

Continuing growth
2015 Volume Growth
Global 264%
UK 71%
China 319%
Japan 188%
France 90%
USA 213%

Banks pull away from SME lending

Attractive yields vs traditional assets

http://blog.lendit.com/wp-content/uploads/2016/10/Samir-Desai-Fintech-Combining-the-Best-of-Both-Worlds.pdf

Some winners have emerged, penetration remains low

Funding Circle has 20k business borrowers, 1.5b in loans outstanding
Operates in the UK, US, Spain, Germany and the Netherlands
Their are 8 platforms of scale globally (originated 1b+, hold less than 5% of loans)
Liquidity concentrates in financial markets, creates network effects
Expanding internationally challenging

Entering a golden age in our

industry - Samir Desai

Banks are pulling away from SME lending, yields remain attractive
Will Funding Circle acquire more regional players? Will they win in Europe?

http://www.lendit.com/europe/2016/videos/samir-desai-best-both-worlds-eu16

Will banks and credit card companies get their act together?
Incumbents launch new products

What about Goldmans announcement to enter the space? I hear they have 100 people working on this product - Peter Renton

New entrants express doubt banks will be able to compete

Cost of capital advantage for
Goldman, can reduce funding
time, better terms for borrowers

not a mature area, everything

changes every 6 monthssmall
piece of the revenue pie, not a
priority (for Goldman)

Numerous delaysstartups are in

a better position to ship

Debt yields attractive relative to other asset classes

Annual return from UK P2P (LARI index) vs expected returns from other assets

never been a better time in the

last 4 years to switch out equities
and in to P2P Loans
never been a better time to sell
speculative EU high yield bonds
and switch that money into P2P
-

Cormac Leech, Victory Park

P2P Yield = 5.5%

EU High Yield = 3%

EU Benchmark = .75%

http://blog.lendit.com/wp-content/uploads/2016/10/Cormac-Leech-State-of-the-European-Marketplace-Lending-Industry.pdf

S&P 500 = 6%
7

Preparing for a downturn, 3 different approaches

Safeguard provision fund allows

for 10% defaults

Cut volume in 2008 by 40%

Defaults exceed 5% in 2008,

was expecting 2.8%

Liquidation of companies in the

The worst its ever been is twice

No need for secondary market

when loan duration is shorter

FC losses occur in the 2nd

year, by then MI customers

Not a fan of provision funds:

have renewed 6+ times

dont lose money in a downturn

protection

that it can easily be changed

as bad as what it is now

unclear/ complicated partial

Market Invoice specialises in

short term 45-60 day notes

UK lowest in 30 years

Price the assets so customers

Technology needs to be such

is the best insurance

Lender returns were still on

average positive

Having long term sticky money

There is a secondary market for

FC loans

Purely financial asset, easier to

liquidate

MI believes provision funds do

not provide sufficient protection

Venture perspectives

Who is funding marketplace lenders globally?

Total funds raised $m USD

Investor Deal Count

Lending Club

QED

Kabbage

Sequoia

Square

Ribbit

Assetz

Canaan

Avant

Thomvest

OnDeck

Foundation

GreenSky

Index

Prosper

First Rond

CommonBond

USV

Funding Circle

Victory Park

Biz2Credit

KPCB

QuarterSpot

Baseline

Harmoney

Accel

Ppdai

Renren

Fundation

Nyca

auxmoney

Kima

WeLab

500 Startups

Weidai

Accion

LendUp

DCM
0

Pitchbook Data

350

700

1050

1400

4.5

13.5

18

10

Global VC marketplace lending investment peaked in 2015

11

Signs of maturing industry, still no major European exits

Large European players financial sound

One small acquisition

Profitable

..we were profitable in September and

we'll be profitable moving forward

Our profit is negative, but

our EBITDA rate is 40%

Profitable in the early years, accelerated

burn to go after new markets

Peer-to-peer lender Zopa is now profitable a year ahead of schedule

12

Venture capital and equity fundraising perspectives

Venture funding has largely left
the pie

Seeing more people take the

collaborative approach as they
have struggled to raise (funding)

The bar has doubled (for equity

fundraising)

Specialty finance and vertical

players look more attractive in a
market where many new entrants
look similar

No proof that models are

sustainable, jury still out on quality
of underwriting

- Growth Equity Investor

13

Lessons from America

14

Alternative Lending in the USA

. While it took Prosper 8 years to reach the first $1bn loans issued via its P2P
lending platform, it took just six months to reach the second billion.
The future of finance, rise of the new shadow bank. Goldman Sachs Research

15

Incumbents and Lending Club have similar origination costs

Lending Clubs expenses as a % of receivables are in-line with peers

Card services

GCB

The future of finance, rise of the new shadow bank. Goldman Sachs Research

Dom. Cards

Cons. banking

USCS

16

Lending Clubs advantage is lower capital requirements

Tangible equity as a % of receivables

The future of finance, rise of the new shadow bank. Goldman Sachs Research

17

Consumer lending in EU is small compared to USA

1

The total outstanding consumer debt is $3.4t in the USA vs

2
3
16b in Ireland, and 183b in the UK

The average consumer debt per capita is 3,500 in Ireland,

$10,700 in the USA and 2,850 in the UK

In the USA, student debt, auto loans, and credit card debt
4
account for $1.2t, $1.0t, and $714b respectively

Lending Club Reported

Loan Purpose

Recurring nature of B2B loans is more attractive

than consumer loans. If consumers are coming
back, its because they are in trouble.

1Consumer

Creidt & Payment Statistics, Philadelphia Federal Reserve, 2Irish Central Bank, Household Credit Report 2H 2015. 3The Money
Charity, UK Lending Statistcs 4New York Fed: Quarterly Report on Household Debt and Credit. Consumer debt is ex-mortgages

18

Emerging players

19

Borderless alternative online lenders emerging

Mexico, Brazil, HK, India, Japan
Singapore, South Korea, and
Australia+. 69m loans originated

Consumer loans to individuals in

Russia, Poland, Mexico and Spain

Latvia, Czech Republic, Poland,

Russia, Georgia, Denmark and
Mexico. 330m loans originated

Latvia, Poland, Czech Republic,

Georgia, Slovakia

US based Bitcoin marketplace

lender, $17m loans originated

Latvia, Estonia, Lithuania and

Georgia. 73m in loans transacted
through the Mintos Platform

20

Infrastructure, data, investment and connectivity players

USA

Europe

Data

Invest

Connect

21

Takeways

22

Conclusions

Online alternative lending in Europe will likely continue to grow from current
penetration of <1%, to 10-30% of the total market

Some large players have been established, and it is not clear what the
competitive advantage of new entrants will be

As the market grows in Europe, there are opportunities for new companies to
build connectivity, data & analytics and investment tools

While there are regional barriers to entry, some companies have been
successful in building origination volumes in a multi-market approach

23

Thomas Olszewski
@TROlszewski
thomas@frontline.vc

24