Emerging trends in marketplace lending, venture perspectives, and how the EU is learning from the US

1. 1
www.frontline.vc
Marketplace Lending in Europe
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Lending emerges on the internet

2. 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%

3. Continental and Eastern Europe are growing even faster
3
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%

4. Attractive yields vs traditional assets
Despite negative headlines, market fundamentals healthy
4
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

5. “Entering a golden age in our
industry” - Samir Desai
Some winners have emerged, penetration remains low
5
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

6. 6
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

7. Debt yields attractive relative to other asset classes
7
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%

8. 8
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

9. 9
Venture perspectives

10. Who is funding marketplace lenders globally?
10
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 USD
QED
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

11. Global VC marketplace lending investment peaked in 2015
11

12. “Profitable”
12
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

13. 13
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

14. 14
Lessons from America

15. 15
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

16. 16
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

17. 17
Lending Clubs advantage is lower capital requirements
Tangible equity as a % of receivables
The future of finance, rise of the new shadow bank. Goldman Sachs Research

18. 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
18
• The total outstanding consumer debt is $3.4t
1
in the USA vs
€16b
2
in Ireland, and £183b in the UK
3
• 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 respectively
4
1
Consumer Creidt & Payment Statistics, Philadelphia Federal Reserve, 2
Irish Central Bank, Household Credit Report 2H 2015. 3
The Money
Charity, UK Lending Statistcs 4
New York Fed: Quarterly Report on Household Debt and Credit. Consumer debt is ex-mortgages
Lending Club Reported
Loan Purpose

19. 19
Emerging players

20. 20
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

21. 21
Infrastructure, data, investment and connectivity players
USA Europe
Data
Connect
Invest ?

22. 22
Takeways

23. • 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
23
Conclusions

24. 24
Thomas Olszewski
@TROlszewski
thomas@frontline.vc