Next Edge Capital Specialty Finance Report
- 1. SPECIALTY FINANCE OVERVIEW AND OPPORTUNITY
- 2. OVERVIEW: WHAT IS SPECIALTY LENDING? Specialty finance, alternative lending, shadow banking, and internet enabled lending are a few of many titles used to broadly define lending activities, primarily technology based, conducted outside the typical banking system. Digital enabled lending offers individuals an autonomized, technology driven approach to borrowing and lending money. It’s through this marketplace that borrowers and lenders are digitally paired. The borrower being an individual or small to medium sized business (SME), and the lender, a wide array of capital providers. The Internet is doing to this industry what it’s done to every other industry — create efficiencies, competition and price transparency Although various forms of alternative finance have long existed, they have become much more popular through the wake of the 2008 financial crisis. Reconfigured regulation, repurposing technological capabilities and a shift in consumer perception towards certain banking activities have been the driving force behind this change. Relative to the size of the overall unsecured lending marketplace, these digital alternative lenders have captured only a small percentage of market share to date, leaving considerable room for growth. In this paper we will explore the enabling factors that have led to a rise in decentralized industry players and the opportunity that has uncovered itself as a result. “ ” Technology based businesses have the opportunity to transform finance over the next generation Larry Summers, Fortune, April, 2015 “ ”New York Times, March 2014
- 3. CONTRIBUTING FACTORS New regulations are playing an integral role in developing the digital lending marketplace and has paved the way for new entrants and competition. A combination of factors including, but not limited to the Dodd Frank Wall Street Reform (U.S.) and Basel III, have forced banks into tightening their product offerings to consumers and small to medium sized businesses (SMEs). Thus driving clients into the arms of these new platforms. REGULATION This has led banks to pull back from dealing in some areas such as loans to non-investment grade companies.1 This has led to reduced credit availability in some lending areas as it has made the cost of doing business more expensive for regulated banks.1 Tightened Lending Requirements1 Scrutiny Surrounding High Risk Lending1 TECHNOLOGY Technology, overall is best known for disrupting industries by taking a business model and redefining it with efficiencies in cost and time. This could not be truer for the evolution of the specialty finance industry. CHANGING DEMOGRAPHIC • Convenience for the borrower • The efficiencies of the system drives down the operating costs, leaving room for competitive interest rates to be passed on to the end client Over the past decade, the general population of the western world has welcomed a digital lifestyle with both arms open. Increased online security standards and a cultural shift towards living professional and personal lives online has created a need to seek the most convenient, technological way in which to live our lives. Specialty finance lending offers simplicity and convenience to the application process and provides a safe, familiar space for this activity. • Big data analysis influences new ways of gauging credit worthiness • The use of advanced technology to automate credit analysis, and processing has resulted in quicker loan decision making Silicon Valley is coming after the banking industry “ ”Jamie Dimon, CEO, JP Morgan Chase, Fortune, April, 2015
- 4. MARKET SIZE & OPPORTUNITY FOR GROWTH Currently, there is an estimated $3.2 trillion of consumer debt in the U.S.2 (Chart 1). To date, only 1% 2 has been captured by the digital lending market, yet these companies are growing at an accelerated pace as both borrowers and investors recognize the advantages relative to the traditional bank lending model3 (Chart 2). The European alternative finance market has seen significant growth in the past three years, from €487m in 2012 to €2,957m in 2014, with an impressive average growth rate of 146%.4 (Chart 3) Alternative lenders approved 62% of small business loan requests in January 2015. This compares to big banks which approved just 21%. In a recent Fed survey which asked why they were rejected, almost 45% replied that banks are just not lending to their type of firm.1 Other Consumer Student Credit Card Auto $1.27 tn $0.92 tn $0.84 tn $0.14 tn THE ADDRESSABLE MARKET FOR PEER TO PEER LENDING IS CONSIDERABLE $3.2 Trillion of US Consumer Debt Chart 1 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 2010 2011 2012 2013 2014P Personal Loans (1) Small Business (2) EXPONENTIAL GROWTH IN US ONLINE LENDING Chart 2 EUROPEAN ALTERNATIVE FINANCE MARKET SIZE AND GROWTH RATE 2012 - 2014 €M Chart 3 3 4 2 2012 2013 2014 487m 1211m 2957m 149% 144% Avergae Growth Rate 146% EUROPEAN ALTERNATIVE FINANCE MARKET SIZE AND GROWTH RATE 2012 - 2014 €M
- 5. BANK REALLOCATION OF CAPITAL IS CREATING OPPORTUNITIES FOR ALTERNATIVE LENDERS In both Europe and the U.K., SMEs find it increasingly challenging to find available financing through the typical banking system (Chart 5 & 6) Studies show that most managers of European SMEs feel that the availability of bank loans have not improved since the financial crisis, and may have even deteriorated or worsened4 . Governments are aware of the funding gap and in many instances are embracing these new lenders. Recent figures show that the US, UK and China, represent the vast market share of the online lending market totaling 96%7 , however these businesses are taking a foothold globally.2 Due to the traditional lenders vacating this sector (Chart 4), talent and proven management teams are available and have formed alternative finance businesses with significant backing. Very attractive to this talent and investors to the space are that, unlike traditional brink-and-mortar lenders, online specialty finance companies have low overhead, attractive margins and scalability. Goldman Sachs estimates that just between consumer loans and SME lending outstanding, there is $387 billion ‘at risk’ of leaving the banking system over the next 10 years.1 MARKET SIZE & OPPORTUNITY FOR GROWTH P2P BUSINESS LENDING HAS TRIPLED SINCE 2013 P2P CONSUMER LENDING HAS SEEN RAPID GROWTH Chart 4 80% 85% 90% 95% 100% 105% 110% 2008 2009 2010 2011 2012 2013 2014 Personal Loans Total Loans In Banking Industry SMB Loans $100K - $1M SME Loans < $100K LendingClub, Prosper, Upstart Fundation, Funding Circle, Lending Club Ondeck, Can Capital, Kabbage Significant Digitally Enabled Lenders: Access to finance remains one of the most pressing challenges facing European SME’s today “ ” 5 Chart 5 Chart 6 6 6 4
- 6. CONCLUSION The digital enabled lending space is proving to be lucrative to sophisticated investors, which is helping to fuel the growth in the sector. Funds are flowing from institutional investors into peer to peer consumer loans, for example, leading to the creation of investment-grade asset classes being packaged and financed in the traditional capital markets.4 Providers of capital to these non-bank lenders have an opportunity to capture attractive yields traditionally made by the banking sector. Various forms of participation in this growth are occurring from private equity providers used to finance working capital, to enablers of capital utilized for lending activity. The latter being done via the purchase of these loans from the platform (packaged), or by structuring a debt facility with prescribed terms and security. Change is happening, the future looks bright and along with that comes opportunities for investment in this emerging industry. Next Edge Capital Corp. 1 Toronto Street, Suite 200 Toronto ON M5C 2V6 [email protected] 1. “The Future of Finance, The Rise of the new Shadow Bank, Part 1” Goldman Sachs, March 3rd , 2015 2. “Peer-to-Peer Lending: Prospects and Pitfalls” Moody’s Investor Service, January 29th , 2015 3. Victory Park Capital, September 2014 4. “Moving Mainstream, The European Alternative Finance Benchmarking Report”, Ernst & Young, February 2015 5. “Introduction to Alternative Lending”, Fundnation, March 19th , 2015 6. “Understanding Alternative Finance, The UK Alternative Finance Industry Report 2014”, Nesta, November 2014 7. “Alternative Lending: A Regulatory approach to Peer-toPeer Lending”, Grant Thornton, 2014 This information is communicated and/or distributed by Next Edge Capital Corp. (the “Company”) identified above. Opinions expressed are those of the author and may not be shared by all personnel of Next Edge Capital Corp. These opinions are subject to change without notice, are for information purposes only and do not constitute an offer or invitation to make an investment in any financial instrument or in any product to which the Company and/or its affiliates provides investment advisory or any other financial services. Any organizations, financial instrument or products described in this material are mentioned for reference purposes only, which should not be considered a recommendation for their purchase or sale. Neither the Company nor the authors shall be liable to any person for any action taken on the basis of the information provided. Some statements contained in this material concerning goals, strategies, outlook or other non-historical matters may be forward-looking statements and are based on current indicators and expectations. These forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to update or revise any forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the statements. The Company and/or its affiliates may or may not have a position in any financial instrument mentioned and may or may not be actively trading in any such securities. This material is proprietary information of the Company and its affiliates and may not be reproduced or otherwise disseminated in whole or in part without prior written consent from the Company. The Company believes the content to be accurate. However accuracy is not warranted or guaranteed. The Company does not assume any liability in the case of incorrectly reported or incomplete information. Unless stated otherwise all information is provided by the Company. Past performance is not indicative of future results. Unless stated otherwise this information is communicated by Next Edge Capital Corp.