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Hedge Fund Industry Thinks Institutional Investors Are Beginning to Gain Negotiating Leverage With Popular P2P Platforms

ByBritt Tunick

March, 2016 – The 2008 credit crisis that resulted from banks’ overly lenient lending practices has caused the pendulum to swing the other way, with banks having since increased their lending requirements so dramatically that many people can no longer obtain traditional mortgages or loans. As a result, a rising number of borrowers have turned to peer to peer lending platforms (P2P), such as Lending Club, which has led to explosive growth within the P2P lending market. Not only has P2P lending become extremely popular among borrowers, but P2P loans and the platforms that make them have become equally popular among institutional and alternative investors. Now that the P2P lending industry has originated tens of billions in loans, and given how rapidly the P2P lending platforms continue to grow, members of The New York Hedge Fund Roundtable believe that P2P lending platforms will increasingly rely on larger hedge funds to fund their expansion. The negotiating leverage is swinging back in favor of the institutional investors.

To see how the alternative investment management industry views the increasing popularity of P2P lending, the Roundtable recently surveyed its membership about the topic.

How large institutions access P2P lending was the topic of the Roundtable’s most recent monthly gathering, where a panel of P2P industry participants and hedge fund managers weighed in on the growing popularity of the industry and where they believe it is heading. “Investing in peer to peer loans not only means the promise of high risk-adjusted returns, such private debt investments also provide less correlated risk relative to more traditional fixed income portfolios,” said Timothy P. Selby, President of the New York Hedge Fund Roundtable. “But while it is clear that P2P lending isn’t going away, and that institutional investors cannot afford to ignore P2P lending platforms, the alternative investment community will need to keep a close watch on the quality of loans made within this sector.”

New York Hedge Fund Roundtable members had the opportunity to weigh in on P2P lending at the Roundtable’s most recent event, as well as through an online electronic poll.

*Of the respondents to this survey, 24% were fund managers; 9% were allocators; 9% were risk management or trading; 46% were service providers; and 12% were other industry participants.

Following are some of the key findings of that survey:

  • Only 17% of respondents said their firms have invested in P2P loans or P2P lending platforms; 81% said they have yet to invest in the sector at all; and 2% of respondents indicated that they are interested in the sector, but are staying on the sideline a bit longer to see how the alternative investments already made in P2P deals fare.
  • When asked if P2P lending will remain limited to a small portion of the alternative investment community, 63% of respondents said that the rapid growth of the sector will make it necessary for alternative investors to embrace P2P platforms if they want to diversify their investments within the financial and banking sectors; 20% think that while the P2P sector is currently more appealing than traditional banks, once interest rates really move back up institutional money will shift back to more tried and true investments in the major banks; and 17% think that P2P lending will never be more than a small niche strategy for the investment community.
  • Asked which portion of the P2P market is most attractive with the greatest growth potential for the near future, 43% of respondents think that investments in the platforms making P2P loans are the way to go because that avoids exposure to any loans that wind up defaulting; 31% think that securitized bundles of P2P loans offer the biggest bank for the buck; and 26% think that the best bet is taking direct positions in some of the larger P2P loans made to small businesses.
  • When asked whether institutional investors will likely embrace more securitized bonds backed by P2P loans or shy away from them because of fears of a repeat of the mortgage crisis, 78% of respondents said history has proven that investors have incredibly short memories and that if securitizations backed by P2P loans offer attractive returns investors will likely dive in; while 22% think that there isn’t room for more than a handful of these deals and that, with losses from the mortgage crisis still so fresh in investors’ minds, most investors will keep any investments in these deals to a minimum.
  • Asked whether rising interest in P2P lending among institutional and alternative investors will lead to an imbalance between supply and demand, 61% of respondents think that if demand among institutional investors continues rising it will not be long before P2P lending platforms are forced to loosen their lending requirements and offer loans to riskier borrowers, exposing them to the potential for a scenario similar to the one that led to the credit crisis; 39% of respondents think that the regulations banks must contend with have become so cumbersome that there will be no shortage anytime soon of attractive, low-risk borrowers unable to get loans through traditional channels.
  • Looking 10 years into the future, respondents were asked which business they believe best represents the future of banking. 21% of respondents chose Lending Club; 11% picked Capital One; 6% selected Facebook; and 62% think the future of banking will consist of elements of all three of the above businesses.

February’s “bonus” question: Following the recent death of Justice Antonin Scalia there has been a ton of speculation about who will be nominated to replace him on the Supreme Court. Roundtable members were asked to weigh in on what they believe the most likely outcome will be for the newly vacated seat on the highest court in the land. 41% of respondents believe that President Obama will only be able to fill that seat before leaving office if he can to come up with an extremely conservative candidate able to please both parties; 30% think President Obama will nominate a Democrat for the vacant seat and will more than likely be successful at filling that seat before he leaves office; and 29% think that Republicans are going to do everything in their power to veto any candidates President Obama comes up with, regardless of how qualified they are, in order to drag the process out long enough for the next president to fill the post –in hopes that the new president will be a Republican.

 

About The New York Hedge Fund Roundtable:

The New York Hedge Fund Roundtable is a non-profit organization focused on promoting ethics and best practices within the alternative investment industry. The membership consists of investors, fund managers and other industry professionals who regularly meet to discuss current issues within the industry and connect with peers. Monthly events center around thought-provoking speakers and panels designed to keep members apprised of timely and important issues within the alternative investment industry. The Roundtable’s goal is to provide a forum for thought leadership, where industry professional have the opportunity to enhance their knowledge and skills and to network with other individuals committed to advancing the industry with the highest ethical standards. For additional information about the Roundtable, visit: http://www.nyhfr.org

 

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