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Institutional investors taking leap into the crowd

Institutional investors are turning their favorable attitudes about the marketplace lending industry into action, increasing their investment in the sector over the past year, according to a new report by Richards Kibbe & Orbe LLP and Wharton FinTech.

Photo by 401(k) 2012/ Flickr
Photo by 401(k) 2012/ Flickr

Their 2016 Survey of U.S. Marketplace Lending finds that half of all institutional investors surveyed have made some form of investment in marketplace lending, up from less than 30 percent just one year ago.

The second annual survey illustrates solidifying confidence among investment funds in the disruptive industry of marketplace lending, or crowdfunding, which challenges the traditional bank lending model by connecting borrowers and lenders directly over Internet-based platforms.

The survey of more than 300 institutional investors also reveals that optimism about marketplace lending continues to grow among institutional investors, running counter to the widespread predictions by other observers of an industry contraction.

More than 80 percent of respondents expressed high or moderate levels of optimism for marketplace lending’s future, up from 71 percent last year.

Other key findings include:

  • A substantial majority of respondents (72 percent) believe that consolidation of the marketplace lending industry is somewhat or very likely.
  • Among respondents who invest in whole loans or borrower payment dependent notes through marketplace lending platforms, consumer (unsecured), small business and real estate loans are the most popular investments.
  • While respondents identified borrower quality as the greatest risk to marketplace lending in 2015, that risk factor fell to third this year, behind two external forces: market-wide credit risks and regulatory risk.
  • Despite the increased concern over potential regulatory developments, more than 40 percent of legal/ compliance professionals said they were not at all (nine percent) or just a little (32 percent) familiar with the industry’s regulatory framework.

“Last year, it was clear that institutional investors saw the promise of marketplace lending. This year, they stepped off the sidelines and into the action,” Richards Kibbe & Orbe partner Jahan Sharifi said.

“Institutional investors are right to identify potential regulatory developments as a key factor in the industry’s continued growth, which means they will want to arm themselves with better knowledge about the evolving regulatory framework,” added Scott Budlong, also a partner at the firm.

“Our second survey gives us a chance to compare data with last year’s baseline,” said Steve Weiner, co-founder of Wharton FinTech.

“We predicted that the views and actions of institutional investors toward this nascent industry would change rapidly, and this year’s results bear that out.”

Wharton FinTech President Uday Seth added: “The unchecked optimism toward this industry, combined with the fact that it is still maturing, makes it an interesting one to watch, particularly for institutional investors that sense opportunity.”

 

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