So the industry turned instead to the wholesale markets. Hedge funds and investment banks have proved a much easier sell. Not surprising, perhaps, when average rates on a Lending Club loan are between 7.5 per cent and 25 per cent and bond fund returns are closer to 2 per cent. Institutions now make up about four-fifths of many US operators’ funding. That allows some of the largest marketplace lenders to grow at more than 100 per cent a year. But it also makes them look a lot less like financial innovators — and more like finance companies of yore.
The FT piece by Jonathan Ford is interesting throughout, for instance he emphasizes that new business in these markets is drummed up only slowly and the sector depends on origination fees of one kind or another. One possible outcome is that these online lenders will be bought out by banks. Yet:
The snag is that banks trade on just 10 to 12 times earnings. Even after recent share price falls, that is far below the valuations that listed marketplace lenders enjoy.
Stay tuned, but the great stagnation for finance is in my view likely to continue…