Marshall Wace's Eaglewood deal likely to lead to increased hedge fund interest in P2P
The decision by Marshall Wace, the £18 billion UK hedge fund, to buy 90% of Eaglewood Capital Management, a New York asset manager that invests in peer-to-peer (P2P) loans, is likely to herald a surge in fund manager interest in the P2P space.
Marshall Wace itself entered the P2P market in 2013 when it purchased Exchange Associates from investment bank Liberum Capital. Marshall Wace has said it will merge this business with Eaglewood to create MW Eaglewood.
“The Marshall Wace deal is just the beginning and I anticipate a growing swathe of hedge fund managers, family offices and other institutional investors buying into or launching P2P businesses, and acting as lenders thereby generating a nice monthly fee around the mid-teens. There is a huge opportunity in this area and P2P lending is a rapidly growing business,” said Ron Suber, president at Prosper, a San-Francisco-based P2P lender, which recently received $25 million in additional funding from Blackrock.
P2P lending has grown in recent years as banks increasingly curb their own lending. Figures show that Lending Club and Prosper, which comprise 98% of the US P2P lending market, issued $2.4 billion in loans in 2013, up from $871 million in 2012. "The reality is that numerous banks are often not interested in providing loans under $35,000 and are introducing these borrowers to the P2P platforms. In turn, many banks are buying loans from the P2P platforms and holding them as assets on their balance sheets."
These web-based platforms connect borrowers with lenders, and unlike banks are not burdened by the internal infrastructure, heightened regulation and bureaucracy. This enables them to charge slightly lower interest rates to the borrower and share the spread with lenders. “Unlike going to a bank where a customer would ask for a loan and wait 30 days for it to be processed, not to mention being saddled with loads of paperwork, P2P eliminates that entirely,” said Suber.
Some question whether P2P businesses lend responsibly. “We also conduct thorough due diligence on our borrowers and we turn down around 85% of applications. We expect applicants to have a credit score of 640 and the average is 705, so we are in no way exposed to anything like sub-prime,” added Suber.
While these entities have grown in stature, there are challenges. It is expected regulation will come into play insisting P2P lenders ring-fence un-lent funds gathered for savers and for external providers to manage outstanding loans if there is cessation of trading. Furthermore, unlike retail deposits at banks, funds held by P2P lenders are not backed by state guarantee.