We’ve been getting pitched a bunch of companies in the lending space. We like the space a bunch, and I outlined a couple of reasons here.
Alternative Lending Platforms are interesting because…
Post financial crisis regulations have made it harder for traditional banks to lend (due to capital requirements) and many other financial institutions were either deemed systemically important or forced to become holding companies to gain access to Fed money.
Technology has made it less expensive for companies to market themselves and originate loans.
Markets have sucked, and so alternative assets have become a new place for investors to earn high yields. Platforms like LendingClub have done an amazing job connecting investors with borrowers in a way banks haven’t been able to do well.
But while these lending platforms are now in vogue, they face a variety of risks (many of which are being driven by too high of valuations):
(1) chasing unqualified borrowers because lofty valuations are expecting unrealistic loan volume out of these companies
(2) the chase of unqualified borrowers will cause default rates to rise
(3) we’re in a time of incredibly low default rates, and I don’t know that it will continue…
(4) I can’t imagine these shadow banking tech-platforms will continue going un-regulated (it’ll likely take one big screw up before the gov’t gets nervous and over reacts)
(5) While big tech companies can sky rocket in valuation and come back down, financial institutions can’t without it causing major ripples across our economy. As new companies getting valued and treated like “tech companies” begin to act more like “financial institutions” they’ll incur much of the volatility tech stocks do, but with the systemic risks financial institutions exhibit.
It’ll be important these companies continue to avoid balance sheet risks.
We’re Still Bullish!
This doesn’t mean I’m done investing in lending platforms! We’re looking at a couple right now that I really like. Tech has offered credit markets to segments of the population who have never had access to the traditional banking systems.
Easier UX, better data, and less expensive operations have democratized the credit economy in a major way.
We are just approaching it with caution…