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Marketplace Lending in Europe

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Lending emerges on the internet

European alternative finance continues to grow rapidly

2Sustaining Momentum - Cambridge University

EU Online Alternative Lending Vol 2013-2015 € Online Alternative Lending Volume by Country 2015 €

The UK accounts for 81% of volume

92%

151%

Continental and Eastern Europe are growing even faster

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Online finance by Country and Region ex-UK 2015 Online Finance Market Vol in Continental & Eastern EU 2013-15

Sustaining Momentum - Cambridge University

Growing at 2x EU averages

191%

167%

Attractive yields vs traditional assets

Despite negative headlines, market fundamentals healthy

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Banks pull away from SME lending

Successful securitizations Continuing growth

2015 Volume Growth

Global 264%UK 71%

China 319%Japan 188%France 90%USA 213%

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

“Entering a golden age in our industry” - Samir Desai

Some winners have emerged, penetration remains low

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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”

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

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Will banks and credit card companies get their act together?

“What about Goldman’s announcement to enter the space? I hear they have 100 people working on this product” - Peter Renton

“Numerous delays…startups are in a better position to ship”

“Cost of capital advantage for Goldman, can reduce funding

time, better terms for borrowers”

“…not a mature area, everything changes every 6 months…small piece of the revenue pie, not a

priority (for Goldman)”

Incumbents launch new products

New entrants express doubt banks will be able to compete

Debt yields attractive relative to other asset classes

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

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

“…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

S&P 500 = 6%P2P Yield = 5.5% EU High Yield = 3% EU Benchmark = .75%

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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% • Lender returns were still on

average positive • Price the assets so customers

don’t lose money in a downturn • Technology needs to be such

that it can easily be changed

• Having long term sticky money is the best insurance

• Liquidation of companies in the UK lowest in 30 years

• The worst its ever been is twice as bad as what it is now

• Not a fan of provision funds: unclear/ complicated “partial protection”

• There is a secondary market for FC loans

• Market Invoice specialises in short term 45-60 day notes

• No need for secondary market when loan duration is shorter

• FC losses occur in the 2nd year, by then MI customers have renewed 6+ times

• Purely financial asset, easier to liquidate

• MI believes provision funds do not provide sufficient protection

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Venture perspectives

Who is funding marketplace lenders globally?

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Lending Club

Kabbage

Square

Assetz

Avant

OnDeck

GreenSky

Prosper

CommonBond

Funding Circle

Biz2Credit

QuarterSpot

Harmoney

Ppdai

Fundation

auxmoney

WeLab

Weidai

LendUp

0 350 700 1050 1400

Total funds raised $m USDQED

Sequoia

Ribbit

Canaan

Thomvest

Foundation

Index

First Rond

USV

Victory Park

KPCB

Baseline

Accel

Renren

Nyca

Kima

500 Startups

Accion

DCM

0 4.5 9 13.5 18

Investor Deal Count

Pitchbook Data

Global VC marketplace lending investment peaked in 2015

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“Profitable”

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Signs of maturing industry, still no major European exits

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

“..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”

Large European players financial sound One small acquisition

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Venture capital and equity fundraising perspectives

“The bar has doubled (for equity fundraising)”

“Seeing more people take the collaborative approach as they

have struggled to raise (funding)”

No “proof” that models are sustainable, jury still out on quality

of underwriting

- Growth Equity Investor

“Venture funding has largely left the pie”

Specialty finance and vertical players look more attractive in a

market where many new entrants look similar

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Lessons from America

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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

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Incumbents and Lending Club have similar origination costs

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

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

Card services GCB Dom. Cards Cons. banking USCS

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Lending Clubs advantage is lower capital requirementsTangible equity as a % of receivables

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

Recurring nature of B2B loans is more attractive than consumer loans. If consumers are coming back, its because they are in trouble.

Consumer lending in EU is small compared to USA

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• The total outstanding consumer debt is $3.4t1 in the USA vs €16b2 in Ireland, and £183b in the UK3

• 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 account for $1.2t, $1.0t, and $714b respectively4

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

Lending Club Reported Loan Purpose

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Emerging players

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Borderless alternative online lenders emerging

US based Bitcoin marketplace lender, $17m loans originated

Consumer loans to individuals in Russia, Poland, Mexico and Spain

Latvia, Estonia, Lithuania and Georgia. €73m in loans transacted

through the Mintos Platform

Mexico, Brazil, HK, India, Japan Singapore, South Korea, and

Australia+. €69m loans originated

Latvia, Poland, Czech Republic, Georgia, Slovakia

Latvia, Czech Republic, Poland, Russia, Georgia, Denmark and

Mexico. €330m loans originated

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Infrastructure, data, investment and connectivity players

USA Europe

Data

Connect

Invest ?

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Takeways

• 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

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Conclusions

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Thomas Olszewski

@TROlszewski

thomas@frontline.vc