What is Marketplace Lending?

On the final day of the Schwab IMPACT Conference in Chicago, Asset TV's Gillian Kemmerer talked marketplace lending with RiverNorth CIO Patrick Galley.

Date posted: 12.28.2017

GILLIAN KEMMERER: Welcome back to the final day of the Schwab IMPACT Conference here in Chicago. I am Gillian Kemmerer for Asset TV. I am joined by Patrick Galley. He's the Chief Investment Officer of RiverNorth. We're going to talk a little bit about marketplace lending. Patrick thanks for joining us.

PATRICK GALLEY: Thanks Gillian.

GILLIAN KEMMERER: Tell us a little bit about RiverNorth.

PATRICK GALLEY: Well, RiverNorth, we're a Chicago-based registered investment advisory firm. We were founded in 2000. But really in 2004 we changed the focus of the firm to opportunistically invest in closed-end funds. So we manage open-end funds, closed-end funds and hedge funds.

GILLIAN KEMMERER: OK, so because you're now closed-end fund specialists, tell us a little bit about why you're specifically interested in marketplace lending.

PATRICK GALLEY: Well, marketplace lending, it's about a 10-year-old asset class. A lot of people haven't heard about it, but really it's one of the oldest asset classes if you think about it. It's actually consumer credit. So credit card companies have had a monopoly on consumer credit for many, many years, decades in fact, and marketplace lending came about, about 10 years ago, using what we know as the internet, and the internet was simply a form where individuals, consumers could go and apply for credit, and so the marketplace lending platforms originate and then sell these loans typically to institutional investors. Formerly it was known as peer to peer investing, so individuals were buying loans from individuals that were getting the loans, and that has now become institutional, and we're one of the larger institutional investors in the marketplace lending space and that started about two years ago.

GILLIAN KEMMERER: And what are some of the attractive features specifically of this asset class and why you decided to open the fund?

PATRICK GALLEY: Well, low duration, high coupon, stability of the asset are some of the major features. That's I think very attractive for an uncertain fixed income environment. A lot of folks are afraid of interest rates rising. These are fixed rate coupons but fully amortising loans, so the duration of these loans are approximately 1.4 years, so very low duration. Now, that sounds a little bit too good to be true. There are losses. These are consumer loans. Probably one big misconception is that these are near-prime and sub-prime, but rather super-prime and prime borrowers, so these are high quality loans but there are going to be losses.

GILLIAN KEMMERER: Talk to me a little bit about your due diligence process in selecting the loans that you choose to invest in.

PATRICK GALLEY: Well, that's actually interesting, because it's more of a statistical process. Our due diligence is more upfront on the platforms themselves, so the underwriting process of the platforms. There are about 160 platforms out there. We're working with four of them today. So the due diligence process is all about the platforms and their underwriting process, and then we buy pro rata from those platforms. So we're not handpicking these loans. You can't go through and pick these loans. But rather you do your due diligence upfront on the platform itself, understand their underwriting process, understand their systems, and then you can take off from there.

GILLIAN KEMMERER: So, if you're an institutional investor that's heard this, they're interested in getting involved, why do you think this really suits the institutional space?

PATRICK GALLEY: Well, the institutional space, I think a lot of them are asset liability managers. So they have the liability side of the equation, a lot are shooting for a 7, 8% return. That's almost unachievable in today's fixed income market. So there's not a lot of retail money chasing the marketplace lending the loans. So you don't have the technical noise that you might have with other asset classes that we've seen. So low duration, high coupon, stability of the asset, I think it fits very well for institutional investors.

GILLIAN KEMMERER: Well, Patrick, thank you so much for taking the time to share a little bit on this market today and a little bit more about RiverNorth for those who are unfamiliar.

PATRICK GALLEY: Thanks Gillian.

GILLIAN KEMMERER: Thank you for tuning in. From Schwab IMPACT in Chicago, I'm Gillian Kemmerer.

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. The 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.

Definitions:

Duration is calculated by RiverNorth and 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.

Footnotes:

The Marketplace Lending asset class, as measured by the Orchard U.S. Consumer MPL Index, has historically had low duration, high coupons, and stability. With an inception date of January 1, 2014, the index tracks the performance of the aggregate amount of loans to consumers originated and funded on eligible US-based online lending platforms. As of September 30, 2017 the index's coupon was 16.2%, the duration was 1.3 years and the standard deviation, a measure of expected volatility, was 0.69%. One cannot invest directly in an index. Index performance is not indicative of Fund performance. To obtain Fund performance visit www.rivernorth.com.

As of September 30, 2017, the RiverNorth Marketplace Lending Corporation (RMPLX) portfolio had a duration of 1.38 years.

As of September 30, 2017 the weighted average FICO score of RMPLX was 709. The weighted average of all the FICO scores in the Fund. It is calculated by weighting the FICO score of each loan by its outstanding balance. The measure gives investors an idea of how creditworthy the Fund's underlying loans are overall. The lower the weighted average FICO score, the less creditworthy, and riskier the portfolio. Related: FICO score is a type of credit score created by the Fair Isaac Corporation. Lenders use borrowers' FICO scores along with other details on borrowers' credit reports to assess and determine whether to extend credit. Small business loans do not have FICO scores. FICO scores range from 300-850. Each lender has its own credit risk standards. Provided for informational purposes only, and subject to change, RiverNorth currently defines subprime as 300-580, near-prime as 580-640, prime as 640-740, and super-prime as 740-850.

Risk Summary:

Investing in the Shares involves certain risks that are described in the prospectus, including the following: The Fund's Shares will not be immediately listed on an exchange in the foreseeable future, if at all. It is not anticipated that a secondary market for the Shares will develop unless the Shares are listed on an exchange. Thus, an investment in the Fund is not suitable for investors who might need access to the money they invest for several years or longer. The Fund may decline to accept any subscription requests for any reason regardless of the order in which such subscription request was submitted to the Fund in a particular subscription period. If a borrower is unable to make its payments on a loan, the Fund may be greatly limited in its ability to recover any outstanding principal and interest under such loan, as (among other reasons) the Fund may not have direct recourse against the borrower or may otherwise be limited in its ability to directly enforce its rights under the loan, whether through the borrower or the platform through which such loan was originated, the loan may be unsecured or under-collateralized, and/or it may be impracticable to commence a legal proceeding against the defaulting borrower. The Marketplace Lending Instruments in which the Fund may invest will not typically be guaranteed or insured by any third-party and will not typically be backed by any governmental authority. Prospective borrowers supply a variety of information regarding the purpose of the loan, income, occupation and employment status (as applicable) to the lending platforms. As a general matter, platforms do not verify the majority of this information, which may be incomplete, inaccurate, false or misleading. Prospective borrowers may misrepresent any of the information they provide to the platforms, including their intentions for the use of the loan proceeds. Marketplace Lending Instruments are generally not rated by the nationally recognized statistical rating organizations (“NRSROs”). Such unrated instruments may be comparable in quality to securities falling into any of the ratings categories used by such NRSROs. Accordingly, certain of the Fund's unrated investments could constitute a highly risky and speculative investment, similar to an investment in “junk” bonds. The Marketplace Lending Instruments in which the Fund may invest may have varying degrees of credit risk and the Fund will not be restricted by any borrower credit criteria or credit risk limitation. There can be no assurance that payments due on underlying Marketplace Loans will be made. At any given time, the Fund's portfolio may be substantially illiquid and subject to increased credit and default risk. The Shares therefore should be purchased only by investors who could afford the loss of the entire amount of their investment. As a result of the foregoing and other risks described in this Prospectus, an investment in the Fund is considered to be highly speculative.

Past performance is not a guarantee of future results. The default history for marketplace lending is limited and future defaults may be higher than historical defaults.

RiverNorth Marketplace Lending Corporation is distributed by Quasar Distributors, LLC. RiverNorth Capital Management, LLC and Quasar Distributors, LLC are not affiliated.

The Fund's investment objectives, risks, charges and expenses must be considered carefully before investing. The Prospectus and most recent periodic reports contain this and other important information about the investment company, and may be obtained by visiting rivernorth.com/literature or by calling 844.569.4750. Read the Prospectus carefully before investing.

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