What is Marketplace Lending?

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  • 03 mins 33 secs
Marketplace Lending (MPL) connects borrowers and lenders through an online platform. Borrowers may decrease the cost of debt, and investors can potentially realize an attractive income stream, by investing in MPL loans. Patrick Galley, Chief Investment Officer and Portfolio Manager for RiverNorth Capital Management, provides an overview of MPL and discusses the compelling reasons why institutional investors should consider this asset class.

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RiverNorth

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Gillian Kemmerer (00:01): Welcome back to the final day of the Schwab Impact Conference here in Chicago. I’m Gillian Kemmerer for Asset TV. I'm joined by Patrick Galley, he’s the Chief Investment Officer of River North. We're going to talk a little bit about Market Place Lending. Patrick, thanks for joining us. Patrick Galley (00:13): Thanks Gillian. Gillian Kemmerer (00:14): Tell us a little about River North. Patrick Galley (00:15): River North, we’re a Chicago based registered investment advisory firm. We were founded in 2000, but really in 2004 we changed the focus of the firm to opportunistically invest in closed-end funds. So we manage open-end funds, close-end funds and hedge funds. Gillian Kemmerer (00:31): OK. So, because you're now closed-end funds specialist, tell us a little bit about why you're specifically interested in marketplace lending. Patrick Galley (00:36): Well marketplace lending. It's about a ten-year-old asset class, a lot of people haven't heard about it. But really, it's one of the oldest asset classes if you think about it. It's actually consumer credit, so credit card companies have had a monopoly on consumer credit for many many years, decades in fact. Marketplace lending came about ten years ago using what we know as the internet and the Internet was simply a form where individuals/consumers could go and apply for credit. So the marketplace lending platforms originate and then sell these loans typically to institutional investors. Formally, it was known as peer to peer investing so individuals were buying loans from individuals that were getting the loans. And that has now become institutional and we're one of the larger institutional investors in the marketplace living space. That started about two years ago. Gillian Kemmerer (01:25): What are some of the attractive features specifically of this asset class, might you decide to open the funds? Patrick Galley (01:29) Well low duration, high coupon, stability of the of the asset are some of the major features. That's I think very attractive for an uncertain fixed income environment a lot of folks are afraid of interest rates rising. These are fixed rate coupons but fully amortizing loan. So the duration of these loans are approximately 1.4 years of very low duration. Now that sounds a little bit too good to be true, there are losses these are consumer loans. Probably one big misconception is that these are (inaudible)near-prime and sub-prime, but rather super prime and prime borrowers. So, these are high quality loans but there are going to be losses. Gilliam Kemmerer(02:05) Talk to me a little bit about your due diligence process in selecting the loans that you choose to invest in? Patrick Galley (02:09): Well, that's actually interesting because it's more of a statistical process. Our due diligence is more upfront on the platforms themselves so the underwriting process of the platforms. There's about one hundred sixty platforms out there we're working with four of them today. So the due diligence process is all about the platforms and their underwriting process and then we buy pro-rata from those platforms. So we're not handling picking these loans, you can't go through and pick these loans. But rather you can do your due diligence upfront on the platform itself, understand their underwriting process, understand their systems and then you can take off from there. Gillian Kemmerer (02:43): So if you're an institutional investor that's heard, they’re interested in getting involved. Why do you think this really suits the institutional space? Patrick Galley (02:49): Well the institutional space I think a lot of them are asset liability managers. So they have a liability side of the equation. A lot are shooting for a 7/8% return, that's almost unachievable in today's fixed income market. There's not a lot of retail money chasing the marketplace lending loans. So you don't have the technical noise that you might have with other asset classes that we've seen. So low duration high coupon, stability of the asset, I think it fits very well for institutional investors. Gillian Kemmerer (03:14): Well Patrick, thank you so much for taking the time to share a little bit on this market today and a little bit more about River North for those who are unfamiliar. Patrick Galley (03:20): Thanks Gillian. Gillian Kemmerer (03:21): Thank you for tuning in from Schwab Impact in Chicago I'm Gillian Kemmerer.