The Characteristics of Capital in the Marketplace Lending World

Copyright © Canaan Partners 2016, All rights reserved.

The Characteristics of Capital in the Marketplace Lending World

• Dan Ciporin


Marketplace Lending: Historical Landscape

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

2005Zopa incorporated in UK as first P2P

marketplace

2008Lending Club receives SEC

registration

2008-2012Retail/HNW

individual capital focus

2011Arcadia/Eaglewood the first dedicated

platform funds

2012-2016Institutional capital floodgates open: structured credit funds,

securitization market

TODAY the cycle

starts to turn?


MPL Funding Is Now Largely Institutional Hedge Fund Based

2008 2009 2010 2011 2012 2013 2014 2015$0

$2,000,000,000

$4,000,000,000

$6,000,000,000

$8,000,000,000

$10,000,000,000

$12,000,000,000 $12

$10

$8

$6

$4

$2

$0

FractionalLoans

WholeLoans

$ $ $ $

Retail-driven Growth

Institutional-driven Growth

U.S. Annual Origination Volume by Loan Type ($ Billions)

Source: Orchard


Institutional Bias Is Actually Much Stronger

Series1

500+originators

<10originators

Retail + Institutional

Institutional Only


When the Cycle Turns, What Was Once Strength Becomes Weakness

J F M A M J J A S O N D J F M$0

$5

$10

$15

$20

$25

$30

Source: Asset Backed Alert

US ABS IssuanceVolume in Past 15 Months ($ Billions)


As Clearly Evidenced in Recent MPL Securitizations

CHAI 2015-PM1; 8/5/2015

CHAI 2015-PM2; 10/23/2015

CHAI 2015-PM3; 12/18/2015

CHAI 2016-PM1; 3/26/2016

100

200

300

400

500

600

Source: Bloomberg, PeerIQ Research

Weighted Average Spread (bps)


A Lesson Legacy Players Have Learned

2007 2008 2009 2010 2011 2012 2013 2014 2015$0

$40

$80

$120

$160

$200

Debt Deposits

$ Billions

2007 2008 2009 2010 2011 2012 2013 2014 2015$0

$20

$40

$60

$80

$100

Debt DepositsSource: SEC filings


Including Even the Most “Institutional” of Players


Reliance on One Capital Source Is Foolhardy, Especially When It Is an Intermediate Source

$34TRetail

$37TInstitutional

$$ $

$ $$$$

$$

$ $$ $

HEDGE FUNDS

Wire HousesRIAs

Broker/DealersSelf-directed Investors

Bank Deposits

2015 Marketplace Lending

RETAIL

BanksPension Funds

Insurance CompaniesFoundations/EndowmentsSovereign Funds/Others

INSTITUTIONAL

$ $

$ $$

$ $

Source: Cerulli Associates & US Treasury


Wire HousesRIAs

Broker/DealersSelf-directed Investors

Bank Deposits

BanksPension Funds

Insurance CompaniesFoundations/EndowmentsSovereign Funds/Others$

$ $$

$$$$

$$

$ $$ $

$ $DIRECTINVESTMENT

$$$$

$$

$

$

$

$

$$$

$$ $

Which DIRECT Capital Sources Fuel Future Growth?

$34TRetail

$37TInstitutional

RETAIL INSTITUTIONAL

2015 Marketplace Lending Source: Cerulli Associates & US Treasury


Institutional Capital is Efficient

2009 2010 2011 2012 2013 2014 2015

Retail Institutional

Time to Scale Retail > Time to Scale Institutional

Year 1 Year 7Year 2 Year 3 Year 4 Year 5 Year 6

Source: Canaan Partners analysis


Great Recession Bull Market

1/1/06 1/1/07 1/1/08 1/1/09 1/1/10 1/1/11 1/1/12

-30%

-20%

-10%

0%

10%

20%

30%

FDIC Deposit Growth HF Net Flows % of AUM

However Institutional Capital Is Fickle

Source: FDIC & SS&C GlobeOp Capital


Retail Capital is Sticky and Enormous

Source: Phoenix Global Wealth Monitor (2015)

120M US Households

1M5M

23M

85M

7M

$100K - $500K

$1M - $5M

$5M+

<$100K

$500K - $1M

0.8%

5%

19%

70%

6%

$20T:Presumed Accredited Investors

$15T:Presumed Non-Accredited Investors

$34T in Investable Assets

$8T

$6T

$12T

$5T

$4T

24%

18%

14%

34%

10%


Retail Direct

1 year payback

Institutional

4 month payback

However Retail Has Higher Costs

Source: Canaan Partners analysis


Capital Diversification Is the Answer – in Different “Flavors” of Volatility and Cost

Cos

t “Retail Investors”

Self-Directed Investors

“Opportunistic Investors”

Financial Advisory Channels

Lower

Higher

“Asset allocation investors”

Hedge Funds

Institutions

Volatility HigherLower


New Diversified Capital World Winners

BrandRegulatory Embracers

Credit History

Technology and Product

Secondary Market

$


Liquid Secondary Market

Secondary Market Key to Every Mature Market

Equities

FX

Derivatives

Bonds

ABS

Commodities

Secondary Market

$




Credit History


Secondary Market

$



RETAIL INSTITUTIONAL

UI / UXRIA & Custodian Integration

Principal Protection

Regulatory RequirementsData Analytics

Order Execution InfrastructureReporting / Portfolio Management Tools


Integration With RIA Workflow

Marketplace Lenders Must Build it on Their Own Or Integrate with RIA TechnologySource: Lend Academy

Independent RIA Daily Workflow

CUSTODIANPORTFOLIO

MANAGEMENT SYSTEM

TURNKEY ASSET MANAGEMENT

PLATFORM

ENABLINGSERVICE

PROVIDERSOR

RIA

MarketplaceLender




Credit History


Secondary Market

$


Embrace The Regulator




Credit History


Secondary Market

$


Brands Represent Trust


GAFA MPL

FINTECHBANKING

Co-opetition, Competition – and Acquisition?


The Evolution of the Capital Base Is Clear

Total MPL Capital Base

Introduction Emergence Maturity ScaleIndividuals

Small institutions Individuals

Small institutions Hedge funds

IndividualsSmall institutions

Hedge fundsBanks

Closed end funds

IndividualsSmall institutions

Hedge fundsBanks

Closed end funds Mutual funds

ETFsInsurance companies

Pension funds


Will bridge between both institutional and

retail capital

Will leverage brand, history, technology,

regulatory comfort and secondary liquidity

Winners


Marketplace Lending: A New Asset Class For All Capital Needs

Will create a new asset class across all capital sectors

$

The Characteristics of Capital in the Marketplace Lending World

Investor Relations

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