Why The Big Money Is Going To Europe

Nov 14 2014 | 7:03am ET

By Bo Brustkern -- This Monday, Peter Renton – the man synonymous with peer-to-peer lending – and his merry crew from the LendIt Conference will host LendIt Europe, a one-day, all-you-can-digest smorgasbord of p2p lending. Over 400 delegates will attend the nearly-sold-out venue at 155 Bishopsgate in London’s Liverpool Station neighborhood. Mixing shoulder to shoulder with the C-level leaders of over 50 European online lending platforms will be a growing number of forward thinking hedge fund managers, family office CIOs and institutional investors. Which begs the question: if p2p was built for the individual investor, why is the big money heading to London on Monday?

European Innovation at Its Best

The sovereign nations of Europe are a treasure of diversity; the different systems of government, legislatures, regulatory regimes, case law, capital markets, not to mention cultures, create a highly diverse set of consumer and small business needs across Europe. The elements specific to the UK, France, Denmark, Germany, and others have created more innovations on the European continent than we see anywhere else in the world, resulting in a massively diversified portfolio of investment opportunities like a Swedish smorgasbord.  Please pass the gravlax.

The Government is Supportive

As a patriotic Yankee and avowed free-markets capitalist, I’m astonished and elated by European governments’ willingness to back the p2p industry, most notably the forward-thinking government of the United Kingdom. Over 100 million GBP has been pledged to UK borrowers through the British Business Bank. This capital will be deployed to UK borrowers through online platforms such as Funding Circle UK, MarketInvoice, and Zopa. Not only does this raise the profile of online alternatives to traditional bank lending, but it adds materially to the credibility of the industry as whole.   We in the States are delighted to see such a thoughtful action by the UK government, and we are hopeful to replicate it.

Stable Payments = More Leverageable Assets

Many of the leading p2p lending platforms have an incredibly low default rate, particularly when compared to their US equivalents.  With a diversified portfolio of high-quality consumer borrowers, portfolios behave like high quality corporate bond funds without the price volatility of the public bond markets.  The cash flows are very stable, and the defaults have been very low to date. By adding leverage to European p2p cash flows, savvy institutions are more than able to make up for the lower yields one typically finds on European shores. 

Allocation

Many of the European platforms – particularly those in the UK – were built expressly for individual investors. To date, little institutional money has been put to work on these platforms. So, despite the fact that Zopa in the UK were founded two years prior to Lending Club and Prosper in the US, the ratio of institutional-to-individual investors in the UK is surprisingly low when compared to US counterparts. The platforms are eager for institutions to come on board. While in the US the leading platforms bemoan a “retail problem” where institutions are crowding out their valuable individual investors, the institutions of the UK have the opposite issue, and are actively marketing for institutional support.  With many well-known institutions coming to LendIt Europe, we expect a big change to ensue for European lending platforms in the very near future.

Economic Diversification

One of the great benefits of p2p investing is that consumer loan portfolios are generally uncorrelated with global equity markets. For institutional investors looking to diversify yet further, tapping into the economies of major European sovereign nations is a big plus. This is yet another reason that institutional investors from all across Europe, Asia, the Middle East and the Americas are coming to LendIt Europe on Monday. 

Bo BrustkernBo Brustkern is a financial wizard and p2p enthusiast with a passion for helping startups and small businesses. He is founder of Arcstone Valuation and co-Founder of Lend Academy Holdings. Father of four, husband of one, he happily resides in the boomtown of Denver, Colorado.


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