SAN FRANCISCO — The prodigious growth of marketplace lending has been fueled by the seemingly insatiable appetite of hedge funds and other yield-hungry investors.
But in recent months, much of that institutional money has fled the market just as quickly as it arrived. Now online lenders are struggling to find more stable sources of capital that will allow them to continue their rapid ascent.
At a large industry conference this week, the new liquidity worries seemed to be on everyone's mind.
"I think fair-weather friends showed up early, and they left early," Jeffrey Meiler, chief executive of the consumer lender Marlette Funding, said during a panel discussion, in reference to hedge funds that have exited the scene.
Lending Club CEO Renaud Laplanche sought to reassure skeptical observers by noting that his firm now gets 25% of its loan funding from banks — ironically, the same stodgy, slow-moving, antiquated banks that Lending Club and other digital-age lenders were supposed to disrupt. In comparison to hedge funds, banks provide stable, low-cost funding to online lenders.
"Banks investing on a platform that was originally designed to disintermediate the banks might sound odd. But it actually makes a tremendous amount of sense," Laplanche said Monday during a keynote address at the Lendit conference.
For Prosper Marketplace, the banking sector has not been a savior. The San Francisco firm's partnership with Citigroup was reportedly terminated recently, in the wake of a negative ratings action on a securitization deal that involved both firms.
During a speech, Prosper President Ron Suber suggested that the Citi episode taught his firm that it needs to better align its own interests with those of the companies that invest in its loans.
Prosper CEO Aaron Vermut argued that funding challenges represent the most salient issue facing the industry over the long term. He said that Prosper and other firms need to focus on finding long-term investors who have a low cost of capital.
"You're going to see slower growth. You're probably going to see some platforms fail," Vermut predicted in an interview.
Deep-pocketed investors are exiting at a time when returns in the sector have declined, partly as a result of an uptick in delinquent loans at some of the industry's leading firms.
The large U.S. loan platforms are responding to the liquidity squeeze in different ways.
Social Finance recently launched a hedge fund that will invest in loans originated by SoFi and other marketplace lenders. Lending Club and Funding Circle both raised the interest rates they charge to borrowers, which could make their loans more attractive to investors.
But higher interest rates carry costs for the loan platforms, according to analysts at Fitch Ratings. They noted in a research note this week that if the costs are passed along to borrowers, the platform becomes less competitive, and if the costs are absorbed by the platform, its profits are reduced.
Rob Frohwein, the CEO of Kabbage, said that his firm has yet not raised prices for its small-business borrowers. But during a panel discussion, he acknowledged that accessing the capital markets has become a more expensive proposition for the Atlanta-based online lender.
Avant, which specializes in subprime consumer loans, is offering tours of its loan-servicing operations in an effort to assuage investors' concerns, according to Chief Operating Officer Adam Hughes.
"We're all hands on deck," Hughes said in public remarks at LendIt.
For the larger, better established marketplace lenders, the liquidity crunch could have one benefit: it seems likely to take a bigger bite out of their smaller competitors.
"The top platforms will get significantly more attention than the 'me-toos,' " Avant CEO Al Goldstein said during a panel discussion.
Last year, the U.S. online alternative finance industry originated $36.4 billion in loans, up from $11.6 billion in 2014, according to a report released this week by KPMG.
Anthony Hsieh, the CEO of loanDepot, predicted that the market will start to consolidate because the amount of available capital is shrinking.
Investors in the marketplace lending sector expressed similar views during a separate panel discussion.
"There will be, in my opinion, fewer and fewer platforms over the next year," said Don Davis, founder of Prime Meridian Capital Management.