Many investors in marketplace lending have learned the hard way about volatility in sub-prime credit.
As the number of marketplace lenders proliferates so does the number of asset managers dedicated to investing in the sector, either directly or in securitized form. And when these investors dwell on the differences between these loans and other types of sub-prime credit they know whereof they speak.
A striking characteristic common among many of them is their past experience at firms intimately involved in the US sub-prime mortgage market before it blew up the global financial system.
New York-based Blue Elephant Capital Management was one of the earliest investors to specialise in marketplace lending. It was founded in 2013 and is led by JP Marra, who used to run the treasury, mortgage pass-through and agency trading desks at Lehman Brothers.
Jeff Kronthal, KLS
The first securitization of marketplace loans was undertaken by Eaglewood Capital Management in 2014. That firm, which has subsequently been bought out, was led by Jon Barlow, former portfolio manager and vice president in proprietary trading at Lehman. As Euromoney reports this month, Chicago-based investment manager RiverNorth Capital Management plans to launch the first closed-end fund focused on marketplace lenders. It will be managed by Philip Bartow, who focused on non-agency residential mortgages and esoteric asset-backed securities at, yes, Lehman Brothers.
Not everyone was at Lehman. KLS Diversified Asset Management, which works closely with Funding Circle and is taking the first-loss piece of its debut securitization, is led by Jeff Kronthal, who was head of global credit, real estate and structured products at Merrill Lynch before leaving in 2006, just before the market nose-dived and the firm was forced to merge with Bank of America. KLS alumni include Gyan Sinha, now CIO at marketplace lending investor Godolphin Capital Management, but previously at Bear Stearns leading the strategy in structured credit.
Other more familiar names from the financial crisis are also active in marketplace lending. Ex-Citi CEO Vikram Pandit has invested in CommonBond, Orchard Platform and PeerIQ, while former Morgan Stanley CEO John Mack was an early investor in Lending Club. If breakneck growth in marketplace lending does trigger a big rise in losses at these platforms, at least many involved will be in familiar territory.