When DigFin last year reported on a Boston-based funds startup that was keen to sell U.S. loans to Asian investors, the hot trend was unsecured personal loans.
The company, Intelligent Lending Advisor, achieved what it had told DigFin it would do: it’s set up a Dublin-based fund that it now markets. Furthermore, Swiss-based asset manager Woodman Group took a stake in ILA earlier this year, as part of its strategy of amassing a series of boutique investment firms.
What’s changed is the underlying portfolio – which highlights other trends going on in U.S. peer-to-peer networks.
ILA developed algorithms to invest in loans sourced from electronic markets like Lending Club and Prosper. Tom Grant, ILA’s managing partner, says unsecured consumer loans have lost their attractiveness. Spreads have fallen, yields are low, and default rates are inching up. Employment in the U.S. has been healthy but consumer loans are vulnerable to a change in direction.
Platforms are also evolving: Lending Club has been the subject of regulatory scrutiny since it was threatened in 2016 with investigations over poor data integrity and review processes. The business survived but costs have risen, for compliance and also for attracting lenders.
“More P2Ps are moving to more institutional business and into securitization,” Grant said, while new entrants have emerged such as Upgrade, intensifying competition. The sector overall remains robust and growing, but because it’s embracing new assets.
Grant says his algos prefer small-business loans and lending related to real estate, and are trending away from credit-card or other consumer loans.
“A lot of money is coming into the P2P space from these segments because banks are either not lending to them, or the businesses are too small to meet banks’ minimum lending thresholds,” he said. “P2P is supporting the factoring market.”
Some of these loans are secured, others not, but Grant says these segments offer better yields than consumer loans.
ILA is not investing in other emerging areas in P2P, such as car loans or loans to clean-energy companies, where the yields don’t yet compensate for the risk, Grant says.