TRANSCRIPT: Liquidity Outlook (2nd Annual Investors’ Conference On Marketplace Lending)

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The following is the transcript for the panel entitled Liquidity Outlook: Establishing a Secondary Loan Market held at the 2nd Annual Investors’ Conference On Marketplace Lending on December 1, 2016.

Visit IMN’s website to listen to the full audio session.

Participants

  • Michael McLaughlin, Senior Managing Director (MACQUARIE GROUP)
  • Rupert Taylor, Founder (ALTFI DATA)
  • Joseph Besecker, Chairman, President & Chief Executive Officer (EMERALD ASSET MANAGEMENT)
  • Jason Jones, Co-Founder/Managing Member (LEND ACADEMY INVESTMENTS)
  • James Wu, Chief Executive Officer (MONJA)
  • Matt Burton, Chief Executive Officer, Co-Founder (ORCHARD PLATFORM)
  • Joseph Roth, Vice-President (PROSPECT CAPITAL MANAGEMENT)

Michael McLaughlin: I thought it best to start with Matt because their firm has really done a lot to advance the development of an evolution of a secondary market and I just wanted Matt to set us up with kind of the market structure and how they’re foreseeing trading in the secondary market. As you might know, Orchard has an index that’s published on a periodic basis and that really might form the basis for how we start trading.

Matt, would you open up comments?

Matt Burton: Thanks, Michael.

For those in the audience who know me, it’s been kind of one of my personal missions to get a secondary market off the ground for a couple of years now. Peter Renton is [in] the crowd and I think I told him that I was going to first watch it in 2013 — so it turns out it has been a much more difficult endeavor, and part of it is just around being able to integrate, standardize, and normalize a lot of these data sets.

As a lot of these new digital lenders have emerged, they have in many, many cases done their own servicing and built their own technology. And so what ends up happening is as an investor, which many can talk to here, you end up with the ability to analyze the performance of a pool of loans is actually quite difficult if you’re trying to do it cross-platform today. So that was kind of a lot of the first work that we did.

The second big overhang on the secondary side is there has been a ton of uncertainty on the regulatory up front, and I have spent a small fortune trying to read the tea leaves on that side and it’s been definitely a moving target. So I think the course that we have today is this year, for those of us who have gone in front of the SEC, to either get a broker/dealer, one of the ‘40 Act fund, I’ve been told that they’re planning on treating loans as securities.

These are whole loans which is a pretty big impact and change for the industry, but they have not said that publicly or taken any enforcement action. And so that’s currently like the largest barrier to us being able to move forward because if you don’t know a basic fact on whether these are going to be loans or securities in the secondary market sale, it prevents market formation.

Michael: Thanks very much.

You’re right in front of me, Joe, you had talked about how real money from your public and private pension clients have interest in the asset class as part of the diversified portfolio, but these are stumbling blocks and not on liquidity but also the regulatory environment.

Joseph Besecker (Joe): Well, I’d asked a question earlier about imaging from Session 4 in Education. It’s great and all these people here have been around pretty much… are all industry insiders so you get people that are from plain sponsors, consultants and they were scratching and looked around, but they were just really starting to get into really figuring this out when as a lot of young, booming businesses and sectors too there was a problem.

There was an earthquake in the sector and that now it’s incumbent upon everybody to try to get a unified message as to the strengths and the weaknesses of this area. Many conversations held prior included how do I sell, what’s the story with the secondary market. A lot of the… I went to conferences, all the conferences and people are talking about putting funds together. Listen, we can have a fund if you don’t have a secondary market and it’s silly on the face.

Orchard, obviously, and others are working very diligently on this, but I do think the regulators are going to… at least the ones we speak to… I don’t think they have their act together yet either and regulators don’t like (inaudible) either. That’s one of the reasons why they don’t like to pin themselves into an answer. So there was challenges industrywide, I would like to say misbehavior, but let’s just say not stellar behavior and that has just has exacerbated the challenges for large institutional… we’re asset managers, I want to be an asset manager in this space, whether it’s just for… a combination or whatever, but simple things and I’ll use two quick examples.

It was always a challenge for me with the large platforms. I never understood whether they were using the same banks for the trust. Why? I just don’t understand that. You know, if you look at portfolio managers in traditional asset classes, there’s zillions of custodians and they were just using one or two and those are questions that were being asked of us when we were presenting to them. I didn’t have good answers and when I went back to the platforms I didn’t get good answers from them.

So you’re going to have a lot of these same questions and the secondary market is definitely going to bring a much more transparent… well, the other thing is you’re going to have price. Price will be be more… the fact that there will be a market of sorts, we won’t have to rely on somebody else saying what the price is or what the credit value is, they’ll assign something to it, but the market will determine that.

I applaud Orchard and the other people working on this because until we get to that point, it’s still going to be a really nice mortgage asset class and until we get a mature to… pioneers like Orchard and others who out there can make it and work with the regulators… and the regulators aren’t really sure where they want to be on this. I know what they’re saying, but this is new fintech and it’s a new era and they’ll get it figured out. When that happens, this business is going to thrive, it’s going to do well and the reason we made the investment four years ago on the space is because you can see it, but it’s long term plans not short term plans.

Matt: You mentioned transparency and effectively you know some… a clear way of looking into a portfolio is a clear way of ascertaining…

Joe: You want to get me in trouble. (laughs) I’m going to just say it because it’s been a thorn on my side from day one.

Platforms should not make the end-buyer buy bundled product. I don’t go to the market. If I want to buy any TF, I can, but if I want to buy an individual name or if I want to buy an individual bond or a piece of real estate…I could buy a (inaudible) but, I may want to buy a piece of real estate. Platforms got a little full of themselves and if you want an inventory, you took what they gave and what they gave they (inaudible).

Additionally, they were competing with the distribution. Some of the platforms run their own advisors. To me that was an inherent conflict… I got in trouble the last time I was speaking here with some of the platforms who were sitting in the back and it’s inherently… not now (laughter) but it’s inherently a conflict of interest. They should do what they do well and do it well and continue to do it well and let people that manage assets manage assets and people that put platforms put platforms and people that do secondary markets do that. Once we start to divide and conquer and delegate those out with transparency, with high regulation that is comparable to the traditional asset classes, we’re going to have a hell of a business here.

Michael: Yeah, and I don’t think anything that you said is… you’re not going to get in trouble for that. Those are just, you know comments…

Joe: I think the board will pass this year.

Michael: I know, Rupert, it’s a passion if you will and your interest here is in transparency around the asset class. Talk to the audience about why that is so important for really developing standards and the ability to analyze loan for loan and platform by platform.

Rupert Taylor: Sure, I mean, I think being in the industry is not very clear on the idea that there’s an agent principal conflict in the heart of the peer marketplace model which needs to be solved and that can be very effectively solved using disclosure. Disclosure creates alignment because you can tie the faith of the platform with the faith of the investor. If the platform issues loans funded in bad rates, the investor’s going to suffer, but the platform’s also going to suffer because their revenue line is almost purely exposed to loan origination fees. Loan originations dry up, the platform suffers.

Where this point falls down is the disclosure needs to be effective and I think Joe is pretty touching on… maybe we’ve got some common interest here which is one area. I think what’s interesting is disclosure is only so effective if it’s now independent and verified. It’s very difficult for investors to become truly confident in platform asset performance statistics if the platform is representing those statistics. And I think one of the big things…

Joe: It would be great if my mutual funds… I could just put my own relative scale out there, I’m always going to win.

Rupert: Exactly, that sounds unsustainable.

Joe: Five stars by my reading book.

Rupert: So I think the industry needs to find a way to allow DD to be done easily and efficiently and I think for that to happen the reward is huge because you actually encourage the mass adoption that this model needs to achieve scale and profitability. But to make DD easy, you’ve got to represent track record and all these other statistics to a common standard. You can’t continue doing it on a bilateral basis and I think to that end standard loan book disclosure represents the right intent.

Michael: Can you stop because that’s sort of a complicated topic. So what do you mean by static loan book disclosure? What does an investor get when he gets a static loan book disclosure?

Rupert: Great question. It looks like a lot, but, actually, it’s not the amount. So an investor, both in the UK and there’s some slightly different context in the UK and the US here, but, ultimately, it’s the same point.

Static loan book is a massive file and it appears to represent huge transparency because it’s the loan book. it supports what is going on right now, but the problem is it’s an enormous file, it’s extremely difficult to do it in a wave, it’s well beyond the realms of Excel. To get to what you need to actually identify net lending track record, you’ve got to stitch together all those files, okay.

That makes it even harder to open terms of analyis, but the output you can get is inconsistent. The fields are different, the definitions are different and it would be much easier if there was a consistent output to a consistent calculation methodology where you could compare a Lending Club A track record versus a Prosper A versus a Zapper A, why not?

It’s perfectly possible, but that’s not going to happen unless independent third parties are in a position to provide that to the marketpllace and then you can allow DD to be done incredibly efficicently and you can make the bar for institutions and advisors to get into this industry so much lower. You can make it so much easier for them, you can access the massive option this industry needs…

Joe: Can I ask you a question? When we would check on that, the platforms would say that that was proprietary to them from a competitive situation and as they were growing and trying to compete with each other… that if they expose that, they will lose some of their secret sauce. How do you combat that?

Rupert: Great question. Actually, I’d like to make a point at this juncture that I think huge progress is being made and actually we’re working closely with some platforms here in the US to totally recognize this, totally recognize the benefit of bringing investors apps themselves.

But, to Joe’s point, representation in any track record is about representing the investors’ side of the equation so we recognize that platforms are incredibly sensitive about allowing people to back solve their credit model. So we respect that, that barrier, that Chinese wall. We don’t want to know too much about the borrower, we just want to objectively represent the track record of what the lending achieved to a common standard so that you can see.

It’s nowhere to predict the future, we all know that. You know, past performance is not a guarantee of future performance, but it’s a damn good place to start and actually, there is ten years indenture in the space. So if you can present it consistently, you don’t upset the platform, you don’t give away the secret sauce, but you allow like for like comparison on a mass scale

Michael: I think can add that to the bottom of your investment offerings if you’re an investment professional. It’s a damn good place to start after your past performance is not an indication of the future. So there’s a lot of doubt and it’s hard to analyze even for the best in the business, the institutional clients, firms like Macquarie, for example, but I know Jason’s business has… Nova Ventures is involved and have really tried to establish a way of analyzing this market for individuals and for AIA’s, you know, aggregators of individual assets.

Jason, talk to us about what you think the liquidity is like in the secondary market and how it’s available to retail.

Jason Jones: Sure, okay, thank you.

First of all my name is Jason Jones, I invest (inaudible) LendIt conference, but we also have another business called NSR Invest. NRS Invest is a combination of a merger between Lend Academy Investments which was our SEC-registered RAA and Nickel Steamroller which was a web-based tool that’s used by the retail community.

The forward looking brand name now is NSR Invest so while it says Lend Academy Investments on this side here, it’s really NSR Invest I’m talking about. So NSR Invest is active in the secondary market.

There’s two secondary markets right now and the third one coming hopefully if Matt launches his plaform soon, I guess if the SEC gives final approval. But there is obviously institutional second securitization which will help in our marketplace lending industry and there’s a retail secondary market most known as FOLIOfn.

So first the back story, both Prosper and Lending Club run their own secondary markets up until 2008 and in 2008 when the SEC stepped in and asked Lending Club and Prosper to switch to edit securities-based issuance. Part of the settlement with the SEC was to remove the secondary markets from their platforms and FOLIOfn, a separate registered investment advisor broker/dealer inherited both of the secondary markets.

Their job was to run the technology, their job is not to invest in the technology or build it; they are the custodians of this technology. So all changes made to the secondary markets were still dictated by both Prosper and Lending Club, although FOLIOfn actually runs the secondary markets. So this has been going on since 2008.

Between 2008 and 2015, really nothing happened in the FOLIO secondary markets, neither Prosper nor Lending Club focused on it and as a result they just kind of sat there and the technology got pretty old. By 2015, if you looked at the two platforms most of the secondary volume was trading on the Lending Club platform which had more variables going in back in 2008 and as a result had more volume. The Prosper platform only had about ten investors that participated on it. We actually had a podcast with one of the investors on the Prosper secondary market who controlled 50% of the volume. So this was a small platform that had little volume and some players on it were hit, relatively speaking, although it was small.

Prosper ended up shutting down their secondary market a few months ago which is probably a good move since there was not much there. Lending Club’s, on the other hand, invested in their secondary market. Back in November 2015, they increased the number of variables available on FOLIO and along with FOLIO they opened up their API about seven months ago. As a result, we’ve seen three platforms; my platform, NSR, Lending Robot as well as a new platform called Gratafy which just launched two days ago, matched into the… kind of being facilitators of trading on secondary markets

If you look at the steps, the steps are kind of interesting. There’s been a total of 1.2 Million loans issued by Lending Club today, Of those loans, there’s a total of 125,000 loans listed on the secondary market, but 10% of all loans that have been issued by Lending Club have actually been listed on the secondary market and actually, for each loan there are fractional notes. There’s actually 600,000 fractional notes listed on FOLIO if you looked at it so approximately four to one; there’s 600,000 notes. In other words, there’s a lot of loans out there right now.

If you look at how they are listed, for current loans they trade at an average of a 3% premium kind of sitting there waiting for somebody to take it. On the loans that are between 16 and 30 days old, they trade at a 20% discount and loans that are more than 31 days old, they traded about 33% discount. So it’s kind of interesting that they’re out there.

The problems with the market right now…

Matt: Where they traded those prices or that’s where…

Jason: This is where they’re listed and this is where the problem is. The market does not provide volume or trade transparency so you can’t actually see where these loans actually finally traded and as a result there’s no transparency in the markets.

Gratafy launched two days ago and what they’re doing is they’re basically taking a snapshot of the marketplace every five minutes and hoping to see changes in listing prices every five minutes and get closer to what… they’re trying to back into what the pricing actually was at the time of the transaction. But because the markets don’t provide us the details, the market will never thrive without having that market transparency, but that thing said, at last check Peer IQ… I don’t have the statement… but Peer IQ announced at the end of 2015 that the total listed volume on the secondary market was $40 Million. So, I mean still small, relatively speaking, but it’s interesting for individual traders who love the stuff.

Typically, if you go on to the Lend Academy forums the individual traders are junkies, each guy is a credit junkie. If you go on there you can see there’s very active conversation going on about spreads, pricing premiums, trading strategies around secondary markets. They talk on forums, they typically do their back testing analysis on NSR or in Money Robot and then they make the trades. It’s an active retail community right now.

Michael: Thanks for that and the pricing transparency and pricing rationality is going to influence the new issue price ultimately. You know, the platforms are going to have to pay attention to what’s taking place in the secondary market, I mean, I think these traders that you’re speaking about, I still presume are on a small scale kind of you know, but there will be a day when… I won’t mention hedge fund names, but when big hedge funds and big investment banks come into that,10% of the production is a healthy amount of secondary market.

Jason: It is and these are retail traders, but they are pretty sophisticated. Every time we go on their forum and I look at the modeling that they’re doing, it’s pretty impressive

Michael: I wanted to get James to take it from there. I mean, James is… how it will work also heads down the path of looking at pricing of portfolios and pricing of loans and one of the things that we in the institutional market sort of wrinkle our nose at is all loans are at par kind of thing. There’s certainly all at par in the primary market, but then when do they not become kind of primary price loans, when does the pricing really take place. I thought James would describe to us his analysis of some of the things that really would influence price wise of loans. Some loans should be at105 and some loans should be at 95.

James Wu: Thanks, Michael.

So at MonJa we work closely with investors in providing quantitative modeling in marketplace lending. So we do regular pricing of client portfolios, someone doing daily pricing on portfolios and there are many variables going into pricing. As Jason mentioned, many, many of these variables very soon get extremely complicated so the usual suspects of understanding what vintage it is, understanding the grades and terms going into it. Of course, these are first quarter variables, but there are also many other variables that are embedded in the pricing decision; things like debt to income, not to mention FICO scores revolving in (inaudible), these variables that really dictate pricing.

Now what the platforms have done for pretty much… for the past eight years is going to a model where the pricing is done by the platform and this was actually an evolution, I think. Past couple of years, you go to conferences, a lot of people are constantly reminded that there is a reason platforms are setting prices. That is because prior to platforms setting prices, the original platforms were letting investors beat up prices and turns out investors are terrible at setting prices. A lot of the prices for loans were set at a point where it’s not profitable for investors, where people write about their sob stories, of their mom is sick and dying of cancer, has three months to live and they want to have a wedding right now for her memory and those loans can help it, get completely oversubscribed and of course, closer to price that doesn’t completely make sense.

So enter the platforms and they’re starting to do pricing on their own by setting the interest rate to a fair return level which is really laudable, but, of course, now as Michael had mentioned, now we’re at point where everything is priced at par and origination and there is quite a bit of a detachment between the primary origination and secondary origination

I was going to say, even though there is no central secondary market for distribution on investors, those transactions are happening today. One thing that’s easy to overlook is a lot of those transactions happen today. It’s just that they happen bilaterally, they happen really between two investors, between someone who holds a book of loans and someone who won’t want to buy them and the analysis is important, but today there is no central registry of where the pricing are.

Even though we help the investors look into many of these books, there’s a lot of uncertainties. You don’t know where their portfolio has come through, you don’t really know why the seller is selling them, you don’t know if this pool has been cherry picked by some variable that’s hidden in the loan book that’s presented to you. Surprising today on those transactions is still more art than science so a lot of these initiatives with getting a central set of transparency is helpful and of course, with Orchard platform, hopefully, soon having a marketplace that institutions can transact on, that’ll be a huge step forward.

Michael: Thank, James.

Joey, in your experience with securitization which is most recent, talk to us about how the market kind of looked at your deal and how you did, how you as an originator structured the deal, how you looked at actually the value of the underlying assets in the portfolio.

Joseph Roth (Joey): Sure, I’ll just start up by saying the prospect of our about $7 Billion (inaudible), the vast majority of our assets/our investments are illiquid assets so going back four or five years when we started investing in this asset class, our investment pieces assume that these were relatively illiquid assets so it was never part of our strategy to sell them in the secondary market. Today, we haven’t sold assets other than the securitizations as Mike mentioned.

So on the point of securitization I think, yes, it does offer liquidity, it does have a lot of kind of parallels and similarities to a true secondary market, but I think it lacks, it still kind of lacks a lot of the price discovery and true transparency that we’re talking about in the true secondary loan market. You know, I think from our experience having participated and executed a number of securitizations, we find that there is a lot of demand for these assets outside of the whole loan structure format.

As Joe mentioned, I think from our experience the lack of liquidity does create some issues for a lot of investors that would otherwise be very interested in this asset class. You know, our perspective/our view on securitization is really more of an alternative form of financing as opposed to liquidity or secondary trading or selling of assets.

Again, it’s been part of our investment thesis to use leverage prudently which, depending on the market cycle, does include and involve the securitization market, but, again, just taking a step back I think our investment thesis has been focused on buying and holding the assets and focusing on the performance of the assets, not necessarily relying on the secondary market which as Matt mentioned at the outset has taken a lot more work and time to develop than I think initially anticipated.

James: And I’ll comment that a lot of the secondary market bilateral transactions aren’t often done at a price where it’s often out of necessity, that the bid and ask are not very close at all and the liquidity really… it’s there, but it’s not there in a way that’s sustainable for any kind of volume

Michael: So to go back to you, Matt.

I’m interested in a couple of things. One, will the index trade, your thoughts on do derivative traders trade index and secondly, on your mind, who are the biggest winners in a secondary market that… predicting the future. Forget about the regulatory environment, who are the biggest sort of economic winners and beneficiaries of the secondary market?

Matt: To your first question, I do think that the index will trade, it’s not a matter of if, but when as this asset class evolves over time. It might take a lot longer than we think it, but I think over time, this asset class fits really well within a lot of fixed income portfolios and so… the way that I look at it is there’s huge borrower demand and even though the volumes are down this year on the unsecured consumer side. The demand is still there and there’s still huge demand for fixed income from institutional investors and retail. The whole job of every one on this panel as well as everybody probably in the audience is we have to fix the part in the middle to transform these assets into products that people can use and works for every type of investor out there. So I would say, I do agree that this will trade. What was the second part of it?

Michael: Who will sort of be the big winner as the secondary market emerges?

Matt: Well I think the losers are going to be the lawyers. (laughter) If anyone is like who has been in the space at all, it is incredibly expensive to do anything and a lot of the economics in this loan purchase agreements don’t end up in the price like, yes, they’re selling at par, but like when you start to dig deeper on what reps and warrants and what’s the servicing fee and what’s the earn out on the performance side, meaning it’s super complicated and so the people who are winning this battle right now is definitely the legal side.

I think that the real winner is going to be investors who require some sort of liquidity as an option. They might never use it, but if you’ll allow them to create new products or access new pools of capital that previously were just off limits because there was no way that they could explain how they could sell the assets in the case that they needed to, and so a lot of the investors in the space today are the ones that are used to holding liquids on that side as well.

I think it is also going to be very helpful for the banks who are participating because I think right now a lot of the warehouse lenders have to get really comfortable if they’re willing to hold the assets to maturity. What that is doing is it’s focusing all of the lenders on short term assets so those warehouse lenders can understand… well, this is just going to self liquidate pretty quickly, I don’t need to worry about having to move this portfolio if I end up with it, but as the secondary market comes in I think that it will allow a lot more interesting structures to evolve on that side.

Rupert: I just want to jump in and throw and even more optimistic light on that. My view is that the secondary market is a Holy Grail to some extent because it sends off a virtuous cycle whereby investors clearly benefit usually because they’re much more inclined to buy something they know they can sell. That means investor demand usually increases which means access to capital of the originators usually improves which means the originators can go out and be more creative with their origination because they’re that much sure that they can fund it so you see that for everybody there’s a benefit.

There’s a benefit for the investors, there’s a benefit for originators, there’s a benefit for borrowers, there’s a benefit for absolutely everybody. The only caveat, I would add to that to stop me being seen as a mindlessly optimistic Brit, would be to say… I think we would have to remember that alternative as in alternative finance to me doesn’t just mean different or tech-enabled, it also has to mean better than what came before. I think, firstly it’s really, really encouraging what Matt and other guys are doing in terms of creating one secondary market.

I grew up trading equities for 13 years from London against the environment, whether regulator soared single deep pools of liquidity and said, oh, that’s a monopoly, we don’t like that, that’s fragment exchanges. That was so dumb, it just increased complexity and increased the cost of executing. And so I think the first important point is one big pool of liquidity should be encouraged not on a platform by platform basis, but on a Orchard basis, whatever it may be. That is definitely in every one’s interest.

But the second point goes back to price discovery, really instinctively Jason’s insights as to the reality of secondary markets that are out there at the moment. We cannot have a situation where you can’t see what levels that’s been traded at. You know, these are basics that even capital markets in the past don’t get wrong. We must not get this wrong, we must be absolutely transparent, facilitate price discovery, etc. etc., we must do this better if this is really going to take off.

Michael: Told you he was passionate about it.

Joe: I agree with that, but I would also say go with the perfect don’t be the enemy of the good. The process of doing this, I would say and some of the others who worked on it isn’t the linear fashion and so, yeah, we got to get it right, but you got to go through the process. I mean, I was just telling you that from the institutional side we manage $5 Billion and 80% of that is in the equity funds so it’s a non-start to allow our institutional funds out. They may not even drill that, depends on what consult we have, depends how on earth bridge to non-starter if there’s no separate…

Michael: One of the biggest, most liquid markets in fixed income right now is credit derivative indices with the index markets. I remember at the beginning of those 12 to 15 years ago, the pension funds and the institutional accounts wouldn’t touch them until standardization… auction standards, how you handled the fossils sort of things, and now once those were established the market’s massive.

Joe: Well, we were saying, they may not ever really choose to use it, we were talking about, sure interventions, but they want at least that… it’s like a fire escape, you know, it’s sometimes a safety mechanism. Some will check it out inherently and others won’t, but it’s a total non-start told so we’re a group of institutions…

Michael: Give us a sense, I mean, I’ve seen you on Fox Business News and Fox Business TV and all those things. You do a great job sort of explaining what your investors are looking for in these segments. Typically you’re stuck in bonds…

Joe: It goes back to what I was saying when I asked the question before. We are in a group of people that are bright and we’re working this every day, but the people that are out there are out getting money, pension funds and what not, they’ve got lots of these. They’ve got a file of venture, real estate, equity, bonds and so when you come with the new fintech offer, somebody like ourselves are saying… okay, maybe you don’t want the straight auction, we’re going to combine with something else, whether it be a core bond portfolio, whatever it is, whatever ingenuity you can come up with (inaudible) dog tail inside the (inaudible), but…

Michael: Baloney, baloney. (laughter)

Joe: Well, I have the soft package now. I got seven dogs… but the thing is you’re trying to get them to test it out. You get so far and it’s usually at the consult level, it’s usually not in the step level where the consultants will tell me about how we can… well, I went back to the other thing, we’re using all the same custodian bank… I mean, when I talk about two major platforms, we’re using the same custodian bank that gets… we’re off the butt, we can even go and… but now if we get beyond that then you say, well, they tell me what about the secondary market.

Your best answer is well, these are short term loans and we’ll (inaudible) I would suspect that if we had a semblance of the secondary market, we could just address that question with it’s not perfect. The secondary market is not some of the things you were saying, not totally liquid, but there is a process that would open the door to a more traditional… a lot of the stuff that these guys were talking about, the high ends. I’m talking about the bread and butter, every day pension funds, defined benefits, but they have certain rules that they just can’t bend and once this happens… this is the stuff you and I have been talking about for years… once that happens I think it’s going to slowly open the door and back to what I said about you, don’t let it be the enemy of the good. We’ll start it, we’ll learn, go forward and it will be perfected just like you said with the…

Michael: CDS.

Joe: Yeah, CDS, I mean, it wasn’t perfect at first, but as you start… just like artificial intelligence, it gets smarter.

Michael: Jason, you’ve been around this business for a long time. One of the things that I was struck with your comments is what happened to peer-to-peer? (laughter) Is it still an important funding source, is it still an important liquidity source, you know, mom & pop, investing in mom & pop?

Jason: Really good question. I think Peer IQ put out a report a couple of weeks ago saying that total originations this year in marketplace lending securitization just crossed to 50% of total originations for this year in marketplace lending. That is surprising and huge.

When I think of the future of marketplace lending, I definitely see securitization as a cornerstone to the market, but if you look at the wealth management category and the retail category, it’s really small right now. I’d say retail’s probably 10% and wealth management maybe 2 or 3%. That is completely under allocated whereas securitization may be a little bit over allocated, in terms of the total pie.

I would think that a nice equilibrium of a long term would be somewhere around 30 or 40% coming through the wealth management and retail channel and another 40% coming through securitization and the rest coming from…

Joe: Were the individuals more scared or less scared from the headlines?

Jason: We experienced that inflows are right through a drama or athletic club so… the inflows slowed a little bit, but they never went negative and it kind of was reflected in what Scott Sanborn was saying at Lending Club that, you know, he doubled down on retail. Retail was pretty sticky through this whole drama.

Matt: Yeah, that’s the case in all products, even equities since hedge funds… so triggering the kind of money (inaudible).

The big issue right now is that wealth managers and wealth financiers want to get peer-to-peer into their portfolio if they have to take it our of their Schwab and Fidelity account and reallocate it to Lending Club and it’s not part of their custodian systems, it’s not part of their reporting systems. It’s a lot of back-in infrastructure, technology that needs to be done that we’re working on as much as you’re working on to integrate the back-in software. It becomes more seamless and friction is reduced on the reporting and operation side, it gets a lot easier for work wealth management…

Joe: Won’t that be easier once these guys figure out if it’s a security or a loan? (laughter) Right?

Michael: We only have a few more minutes here and we’re down to three minutes so with due respect for everybody’s time and to give the last two panels a chance.

James and Joey, realizing that your comments from your perspective is just on innovation, structures that have taken place, things that the market can benefit from if the secondary pricing mechanism existed.

James: I think if the secondary market exists, price discovery would definitely be good. Joe, I agree with your point that… don’t be the enemy of the good, but right now, bilateral transactions are not very good at all, they are barely functioning. So having a great market, having a natural secondary market will truly facilitate these transactions and we truly see demand, both from the buy side and the sell side of that so I think it will benefit investors overall.

Joey: Going back to the question before about who would be the winner. I think probably everyone kind of stands to benefit from a more developed secondary market, but I think the platforms will really be well positioned because I think one of the things we’ve highlighted is that a number of large investor population, large pools of capital will not participate in this asset class, based on our experience, given the current constructive, the illiquidity, the illiquid nature of the assets and a few other things. I think, again, it goes back to diversifying. You’ll talk about retail, institutional, pension funds; it’s really diversifying the funding sources, the sources of capital that are investing in this asset class, I think really enables growth to volume and more stable platforms.

Michael: That’s great. We just have a couple of more minutes, but I’d like to ask the audience if there are any questions?

Question: You said something, I think it was Mr. Taylor, that investors do not want to know too much about the consumer, the underlying consumer. Is that the case or is it is that they’re not being allowed to know too much about the consumer?

And is there any significance to bid on this sector for true due diligence to take place which is that the data underlying what you’re seeing is actually the reliable data, that the parameters are real, that there is no marketplace fraud going on, there is no internal fraud going on in particular slices of loans because crooksters in this particular industry, being that it’s very new coming from an older industry which is banking, they’ve populated very quickly and the most dangerous time actually is the time we’re in now. So a lot of the vintages that are being formed are being formed by the early adaptors in the crook industry. And so that’s the question, how do we protect the industry in the long run from this early vintage assault by the crooksters?

Rupert: Great question. What I meant to say was… I want to explain it a little bit further. We are seeking to represent asset performance to allow investors to do due diligence more effectively in a way that doesn’t upset the platforms, okay. So we can get these good disclosure from the platforms to allow us to represent lending track record, volume matrix on a consistent basis as long as we don’t reveal too much such that they get concerned they’re going to back sell their credit loan.

That’s not to say we’re delivering the full solution, we’re delivering that concept objective, that lending track record data which is part of the DD investors would want to do. The investors’ also want to do that courses of DD, he’s also want to go in and find out face to face with the platform, tell us more about your underwriting processes. I’ve seen the representation of your track record, that’s great, but now I want to know more, show me the guy who makes credit decisions, show me the model, show me what you’re prepared to share with me under NDA on a one on one basis.

So you’re absolutely right, there is more to this DD question than just the concept objective data, but I think just on that side alone there’s a lot more that can be done to make it more consumable, more digestible, easier to encourage the investor to also then do that next step, the more positive and kind of in a way figuring out human beings have a right to making a decision, the outputs to making a decision that aren’t always well, I totally accept that.

And does that answer your second question? It sounded like you were saying what’s the danger that there is a lot of kind of early adopted cohorts so there’s a lot of early cohorts… is that what you were getting at?

Question: Against fraud and the crooks.

Joe: Right, well the thing that I can tell you is that from the equity side we have a 10-step research process and our (inaudible) publish that is check with the professional short sellers. I will tell you that the people that do short selling for a living agree 100% with what you say. They are looking at that and believe that… you couldn’t have said it better. This is the ripest time for these people to come in here and do that sort of… bad actors, for the bad actors. So it’s incumbent upon… actually, the better job he does… when you have these highly inefficient marketplace which I know we think is efficient compared to what we had before…

Michael: Matt is shaking his head over there.

Joe: What’s that?

Matt: It’s not efficient.

Joe: No, I know, but I’m saying compared to what it was, I know we think it’s more efficient, but it’s not efficient like something that has existed for decades and that’s the time you’re 100% right and that’s what the professional short sellers look at it right now so we do have to be on guard for that, you’re 100% right.

Rupert: I accept, you know, sadly, you can’t 100% remove fraud risk, that’s a reality. But independent verification definitely is a helpful part of the process… a second set of eyes, data cleansing, trying to identify things that don’t look right. Yeah, ultimately if someone wants to cheat, there’s a danger they can cheat us. It’s a risk this industry faces, but this helps.

Michael McLaughlin: We’re out of time. That’s a great question because it sort of helps us finish off that one of the massive sort of goals and beneficiaries of a thriving secondary market will be to rule out the problems that make their way into the portfolio.

So I really want to thank my panel because of the great job, it was a very good conversation. Thank you, everybody, for your attention. (applause)

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