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Marketplace loans rising in investors’ estimation

flying dollar bills in stack, the concept of success

Investments in marketplace or peer-to-peer loans is attracting the attention of asset owners and money managers as the securitization of those loans — and their assessment by ratings agency — grows, according to a Greenwich Associates report issued Tuesday.

"The marketplace lending model is evolving into a new phase, as institutional investors are increasingly allocating capital to these products in search of higher yield and diversification," Richard Johnson, Greenwich vice president, market structure and technology, wrote in the report, "Marketplace Lending Finds a Place in Institutional Portfolios."

Firms like Lending Club, SoFi and Prosper — the top three marketplace lenders, with a combined $68 billion in loans originated since 2006 — have created a third type of lending, along with loans funded by bank deposits or investment capital from loan originators, Mr. Johnson wrote.

The report contrasts marketplace loans as investments, with a trailing three-year total net return of 5% and just more than a year duration as of Dec. 31, vs. the 4% return of U.S. corporate investment-grade bonds for the same period with a 7.75-year duration. "Having a short duration with higher returns is a unique property of marketplace loans," according to the report, which was sponsored by Lending Club.

Securitization "has the potential of being done in a much bigger way," Mr. Johnson said in an interview. "It's a very new space. Now these loans are being packaged as whole-loan portfolios and securitizations that are attracting investors."

Marketplace loan investing is only "a small subset" of the overall fixed-income market, Mr. Johnson said in the interview. For example, the total issuance since the first marketplace loan securitization in September 2013 is $28.2 billion, while two-year U.S. Treasury notes sold for a total of $28 billion in one auction in February, he said.

In the report, a survey of 74 institutional investors — 52 money managers, 17 pension funds and sovereign wealth funds, and five consultants — showed a total of 21 invested in marketplace loans. Of those, 67% invested for high-yield reasons; 48% for diversification of their fixed-income portfolio; 43% to get access to consumer or small-business credit strategies; and 33% because of perceived low volatility of returns. (Respondents could select more than one answer in the survey.)

Among the 53% who did not invest in marketplace loans, 70% said they have no interest in the asset class but the remainder were either watching or conducting due diligence on the class.

Most surveyed investors in marketplace loans view them as securitized products, at 67%, while 33% see them as high-yield fixed income. And most current investors are happy with the investment: 57% are planning to increase their allocations while 33% plan to maintain their current allocation level.

Mr. Johnson wrote that marketplace loans have similar characteristics to short-maturity and high-yield bonds, but when packaged into a securitized portfolio, they look like structured products such as asset-backed securities, collateralized loan obligations and notes on credit-card receivables. Marketplace lenders "are looking to boost growth through securitization — packaging hundreds of smaller loans into fixed-income instruments that more naturally fit into institutional investors' portfolios," Mr. Johnson wrote.

However, that message apparently has not made it to many institutions. Among those surveyed that are currently not investing in marketplace loans, 34% said they would invest in the loans if they were more securitized and rated by ratings agency, while another 34% said they would if more advanced reporting and analytics of the asset class were available.

However, Mr. Jonson said in the interview, those impressions on the availability of ratings will change. "Those securitizations are now being reviewed by ratings agencies," he said. "Every securitization issued since the second quarter (2017) has been rated. That checks one box for those who'd like to invest in them but are hesitant."

The survey was conducted from August to October 2017.