After Decade-High $7.2 Billion Invested in Online Lending Platforms in 2015, Industry Sees Downturn; What’s Next?
PitchBook releases its 2016 Analyst Report: Online Lending
SEATTLE — July 29, 2016 — Online lending has attracted $12.6 billion in capital across 463 completed deals since 2011, according to recent analysis conducted by PitchBook Data, Inc. Investment in the space peaked in 2015, amounting to more than $5.2 billion invested across 132 completed deals. However, following the 2015 peak, 2016 has seen only $2.2 billion invested across 65 deals, a 44% slowdown from the second half of last year in terms of capital invested. Amid widespread layoffs and dramatically slowed growth for some leaders in the space, this decided slowdown appears to be symptomatic of increasing investor scrutiny.
Massive influx of non-traditional lenders in the space
The application of technological, financial and regulatory expertise on the online lending space have prompted diverse investment sources - including traditional venture capital, private equity firms, hedge funds, mutual funds, corporate VC arms and financial services executives-cum-angel investors. In an illustration of this diversity, the investors behind SoFi’s $1 billion Series F round in August 2015 included Japanese telecom conglomerate SoftBank, hedge fund Third Point, mutual funds Wellington Management and The Hartford, private market secondary investment platform SharesPost, Chinese social network RenRen and a number of traditional venture capital firms.
“Investors in online lending have a unique set of incentives,” said PitchBook analyst Evan Morris. “These institutional investors aren’t just backing the companies, but they have direct exposure to the loans themselves. Interestingly, this situation is bringing to the forefront a major pain point, which we believe represents the opportunity for massive growth in online lending in the coming years: the secondary loan market.”
Innovation in the secondary loan market
The recent freeze in online lending comes as investors take pause while the industry attempts to standardize risk metrics across alternative lenders. Currently, the additional complexity of marketplace loans compared to other fixed income assets has stunted the growth of a secondary loan market to provide the transparency and liquidity necessary to incentivize investment in the space.
PitchBook predicts that the next phase of massive growth in online lending will come from innovation in the secondary loan market. Startups like dv01, Orchard, PeerIQ, MonJa and Blackmoon have stepped in to provide the tools necessary to accurately price these loans in the secondary market. These services range from analytics and reporting to trading algorithms that provide transparency into the individual loans themselves.
As investment dries up, layoffs lay ahead for online lending platforms in the near term
In the meantime, as the industry has matured and fundraising has fallen precipitously, other online platforms are desperately seeking capital. Combined with the strong preference for online lending platforms to strike long-term partnerships with debt and equity investors rather than one-off transactional agreements, this leads to investors commanding outsized power in the online lending ecosystem than in other tech sectors.
PitchBook predicts that this uneven dynamic will lead to platforms dropping their lending standards, cutting costs and accepting down-rounds as the increased regulatory scrutiny of the industry comes with higher compliance costs. This, in turn, will lead to underperformance that cuts into the equity of lenders’ balance sheets and reduces investor demand for loans sourced by distressed marketplace lenders. This will perpetuate the substantial layoffs already seen at high profile lenders like Avant, Lending Club, CommonBond and Prosper.
Additional findings in this report include:
- Top companies and investors
- Deal flow & capital invested by year, quarter
- The inception of online lending
- Major business models, market opportunity and total addressable market
- Market applications and segments
- Equity investment by region
- Active and new investor growth
- Institutional involvement & risk management
Download the full report here [LINK].
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Stephanie Cook & Abbie Havern
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