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Last week representatives from VanEck attended the LendIt USA Conference in San Francisco, the largest gathering of industry thought leaders in the online lending community, including leading platforms, investors, and service providers. We heard from many participants a mix of good and challenging news, and came away from the event feeling that fundamentals remain solid. As evidenced by the event's strong turnout, the industry continues to grow and attract capital and interest.
I have just returned to NYC from San Francisco, where I attended the LendIt USA 2016 Conference. Having been lucky enough to see the Broadway hit "Hamilton" recently, I thought on the plane flight back east that our "$10 founding father" would have been mesmerized by, proud of, and likely taking some credit for the whirlwind of financial services innovation on display at LendIt.
As an investor in and advisor to several FinTech companies operating in the online lending ecosystem, I thought it might be useful to share a few of my "learnings" from this annual FinTech confab. I not only had the opportunity to speak on the Fund Manager Insights panel (thank you, Peter Renton and Jason Jones for the opportunity), but I also had the chance to listen to and meet with many industry experts, FinTech CEOs and executives, venture capitalists (VCs), investment bankers, and investors in marketplace loans.
While this blog post is assuredly not a data-driven synopsis of the event, it is important to start with one of the most salient event factoids: over 4,000 participants from over 20 countries attended #LenditUSA 2016, an increase of over 60% from the prior year. I believe that fact tells us much about this industry, which I believe continues to grow and evolve.
I believe this bit of pith from one lending platform CEO summed up the general tone of the conference: "The hype-to-reality ratio is lower this year and more in line with where it should be."
Certainly, industry growth trends remain: new companies, new lending niches, internationalization of the business, and more origination by the established players. However, there is also a sense that this industry has serious issues with which to contend. Many of these were eloquently raised and discussed in Ron Suber's outstanding keynote address: troubled securitizations, rating agency downgrades, regulatory and legal (Madden v. Midland Funding) uncertainty, fraud headlines, lower public and private valuations, and meaningful competition from other alternative and high yield investments that seemingly and suddenly became more compelling relative to marketplace loans in the recent volatile markets. These issues have contributed to a sense that even though the industry trend is still clearly positive, it will not be a straight line. To most industry insiders, this seems healthy in the long run, provided the uncertainties noted above can be addressed.
Broader, deeper, more stable, and more diversified sources of funding are needed for the industry to scale and continue to grow at the rates of the last two years. Opening investor access to the category is one solution. Lending funds, transitional capital, and VC are all potential parts of the equation. Ultimately, I believe, pension funds, endowments, foundations, insurance companies, and other deep pools of long-term capital need to be tapped.
But to win over these large, sophisticated investors, a major amount of Suber's "EAU" (Education, Awareness and Understanding) needs to take place. This will take time and, most importantly, solid loan performance through this current environment as well as through a truly weak credit cycle. The point is that the marketplace lending industry has to begin the long, often arduous process of talking to and creating funding partnerships with these institutions. Securitizations can certainly also be a part of the solution but as a recent securitization of loans shows, poorly executed deals can actually damage investor demand for loans and raise questions about pricing and credit quality. The best financial institutions have typically diversified their funding sources and the same is proving true with respect to online loan originators.
Borrower niches continue to be exploited. At LendIt I learned about real estate (commercial, residential, and "fix and flip"), automobile (prime and sub-prime), purchase finance at the point of sale (and online point of sale), and many different approaches to and types of small business loans. I think we will continue to see more and more niches attacked by entrepreneurs seeking to use the efficiencies gained from originating and underwriting loans using technology to undercut more traditional methods of credit extension. Whether these niche online lenders will be able to stand on their own as independent companies or will be consolidated into larger players remains to be seen. But these differentiated types of loans — some secured and some unsecured — offer investors a range of choices and I think this will be increasingly important to investors over time.
So congratulations to the organizers of LendIt 2016. Judging from the fact that it was announced that LendIt 2017 will be at the Javits Center in New York City (not what I would call an intimate venue!), a general optimism still pervades the industry. And given that optimism, I just want to know if the conference organizers are offering next year's LendIt participants tickets to Hamilton.
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Bill Ullman is a Director of Van Eck Associates Corporation and is a Senior Advisor to Orchard Platform, Mirador Financial, Drive Sally, Vetr, Star Mountain Capital and Paymentworks.
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Online-sourced loans are subject to certain investment risks, including interest rate risk. When interest rates rise, the market value of a loan will generally fall. This risk may be particularly acute because market interest rates are currently at historically low levels. There is currently no active secondary trading market for platform loans. Online loans are also subject to credit risk, which can result in loss of the entire principal. Online loans may be unsecured and have speculative characteristics and therefore may be high risk.
Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, expressed or implied is made regarding future performance.
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