RiverNorth's Perspective On The Marketplace Lending (MPL) Asset Class

Portfolio Specialist Allen Webb talks to Portfolio Manager Philip Bartow about RiverNorth's take on the marketplace lending (MPL) space.

• Downloadable video file - Use this option if you have trouble viewing the embedded YouTube video above or if you would like to save the video to your desktop.

[BEGIN VIDEO TRANSCRIPT]

ALLEN: Today, I'm joined by Philip Bartow. Philip joined RiverNorth in 2015 as head of marketplace lending activities. Welcome today, Philip.

PHILIP: Thanks, Alan.

ALLEN: Philip, terms like financial technology, peer-to-peer lending and marketplace lending seem to be ever increasing in the financial press. Can you talk to us a little bit about what the definition is of marketplace lending?

PHILIP: Marketplace lending is defined as an industry of online-based companies that offer credit to a variety of different segments in the credit landscape, specifically, unsecured consumer loans, student loans, small business loans, as well as specialty finance segments.

ALLEN: Philip, can you give us a sense of the history of marketplace lending. Is this something that is new, or is this something that's been around for some time but is just now becoming popular?

PHILIP: It's something that's been around since 2007. It really started gaining a decent amount of size in 2010. There's been a lot of growth in both originations, as well as the amount of originators, pretty dramatically since 2010. We count originations, in 2015, to be around 20 billion. So, the size of the market has grown quite appreciably.

ALLEN: Why, in 2007, was that a catalyst for the growth in marketplace lending?

PHILIP: I think there are two factions there. I think, first and foremost, people in the United States have gained a lot more comfort in transacting financial services transactions online. I think if you think about brokerage, as well as payments, then lending tends to be a sort of natural expansion of that trend. At the same time, following the financial crisis of 2008 - 2009, there were a lot of changes in the banking landscape, specifically a lot fewer, smaller regional banks that used to offer credit to a lot of folks, so I think the intersection of those two effects is what led to a lot of the growth of marketplace lending.

ALLEN: If I hear you correctly, you've sort of taken two things... one is the public's comfort with online transactions, whether it be banking, brokerage, paying bills or whatever the case may be, and then joined by the fact that banks have gotten out of the small lending business so that it's created this platform for borrowers and lenders to meet up on the internet, if you will.

PHILIP: Yeah, I think that's right. I think there are more regulatory burdens on banking institutions today, so, I think that's right. If you think about people being more comfortable with using the internet and online-based portals for financial service technology or financial service transactions, I think that's right.

ALLEN: So is it fair to say that these loans themselves have been around for a very long time, but just the way that borrowers and lenders are getting together is the newness of marketplace lending?

PHILIP: I would agree with that. I think the underwriting process is quite traditional. Whether it be credit characteristics or credit scores that are used in order to evaluate borrowers... that's quite traditional. When you think about when a loan gets originated, the underwriting process is quite traditional. I think where you see the advent of technology to increase the efficiency of the marketplace lenders is in their operational limits - their ability to underwrite, close the loan, get that loan across to the lender who funded that loan in very quick periods of time, as well as tracking each loan in real time, so you have a lot of real-time data on each loan... I think that's what is new or different here.

ALLEN: Let's talk about that for a second. In your opinion, what are the benefits of marketplace lending, both to the borrower and the lender?

PHILIP: From the borrower perspective, a lot of these loans are either on the small business landscape of folks that can't get loans from banks because they're just below the threshold. From an unsecured consumer perspective, a lot of these folks do have credit cards. Credit card interest rates are quite high. Credit cards don't do a great job of pricing differences in credit. I think you're seeing a lot of folks in that credit card pool taking out marketplace lending loans because they can get better pricing because they're better credits.

ALLEN: Philip, turning to the investment side of the equation, what are some of the attributes of marketplace lending loans that might be interesting to an investor?

PHILIP: From an investment perspective, there are a few things that we find interesting. First and foremost, the loans are fully amortizing. They pay principal and interest each month. That’s really important because it makes for short duration loans. In an environment where folks don't want to take a lot of interest rate risk, I think it's very beneficial to investors to invest in an asset class that's essentially self-liquidating or paying you back every month. That equates to it ending up being a short duration loan. That's very attractive, as well as higher coupons in the space. So, when we think about coupons versus other assets in the fixed income landscape of coupons in marketplace lending, they tend to be higher.

ALLEN: Is marketplace lending competing with things like high yield credit or bank loans from a capital allocations standpoint? Is that where this fits into an asset allocation bucket?

PHILIP: It's a good question. Certainly, folks look at the way the cash flows are structured. It very much feels like a debt instrument or a fixed-income instrument, but the underlying credit is different than corporate credit. It's mostly consumer credit in the unsecured consumer landscape and small business loans in the small business landscape. It's similar in structure, but from an underlying risk perspective, there are some important differences.

ALLEN: Talk about that for a second. For high yield and bank loan investors, they watch things like defaults, company funded middles and the health of the company to repay debt. What type of metrics are people looking at from a marketplace lending loan standpoint to evaluate the health or unhealthiness of the sector?

PHILIP: I think it gets to consumer fundamentals. I think the biggest on that's most important is the unemployment rate. I think we spend a lot of time looking at prices, inflation, what our expectations are around continued employment trends, as well as home prices. People have a lot of net worth tied up in their home. So, when you're underwriting their balance sheet, you have to look at what the value of the equity in their house might be. We look at long-term trends, as opposed to each day when the market is gyrating around the S&P 500 or high yield indexes are moving around day in and day out. We take more of a longer view. We look at credit fundamentals for the consumer.

ALLEN: How do you actually invest in marketplace loans? It seems somewhat inefficient to log on to one of the marketplace lending portals and just invest a significant amount of capital through your online account. How do you actually access this asset class?

PHILIP: That's certainly been the way. When we think about evolution in the space, there have been a lot of people who have gone directly to log on and done that. There are also a lot of institutional investors, hedge funds and private equity style investors that go directly to the platforms that agree to buy loans on what's known as a forward flow agreement. That seems to be a more popular way to do it. I think that you'll see more interesting vehicles come along, whether they be '40 act structures or other publicly traded vehicles for gaining access to this product because there's not a perfect way to access it today.

[END VIDEO TRANSCRIPT]

Video recorded 3.2.2016.

Produced by RiverNorth Capital Management, LLC ("RiverNorth" "we" or "us").

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This information is provided for informational purposes only and should not be considered tax, legal, or investment advice. References to specific securities, asset classes, and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Opinions referenced are as of the day recorded and are subject to change due to changes in the market, economic conditions, or changes in the legal and/or regulatory environment and may not necessarily come to pass.

Past performance is not a guarantee of future results. Diversification does not ensure a profit or guarantee against loss.

Investing involves risk. Principal loss is possible.

Definitions

Marketplace lending is the practice of matching borrowers and lenders through online platforms.

Amortization is the paying off of debt with a fixed repayment schedule in regular installments over a period of time.

Duration is a measure of the sensitivity of the price of a fixed income investment to a change in interest rates. Duration is expressed as a number of years.

Coupon is the annual interest rate paid on a bond/loan.

Default is the failure to promptly pay interest or principal when due.

S&P 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy based on the changing aggregate market value of these 500 stocks. The S&P 500 is an index only and cannot be invested in directly.

A forward flow is an agreement between a debt buyer and debt seller to transact a fixed amount of debt over a fixed period of time for a predetermined price.