Direct Lending: Finding value/ minimising risk 20 October 2015 Cormac Leech +44 (0) 20 3100 2264 [email protected] Ropemaker Place, 25 Ropemaker Street, London EC2Y 9LY / T: +44 (0)20 3100 2000 www.liberum.com Liberum Capital Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 5912554 Direct Lending: Finding value/ minimising risk Big picture trends: size; growth; risk/ reward Accessing Interest income Equity investment perspective Sector issues / opportunity 2 Direct Lending: Finding value/ minimising risk $23bn of volume via 8 of the leading US & UK Online Direct Lending (ODL) platforms in 2015e* : 100x growth in 5 years • P2P volumes have grown at 151% $m CAGR since 2010 25,000 CAGR:151% 20,000 15,000 10,000 5,000 - 2010 2011 2012 2013 2014 2015e Lending Club SOFI Prosper Avant Ondeck Zopa Funding Circle RateSetter Source: AltFi Data, Co mpan y w ebs ites *Where data publicly available 3 Direct Lending: Finding value/ minimising risk ODL is a global phenomenon- largest markets: China, US, and UK $ = 2015e annual gross volume $4.4bn $1.5bn $22.7bn $157.0bn Source: www.WDZJ.com, AltFi Data, Co mpan y w ebs ites 4 Direct Lending: Finding value/ minimising risk Regional volumes: Europe ex UK Direct Lending market penetration still c15x behind US&UK and 100x behind China • China dominates globally: 85% of Global volumes Online Direct Lending $bn Global outstanding balances Online Direct Lending $bn 2015e annual ODL volumes 200 200 CAGR: 180 CAGR: 180 207% 286% 160 160 • Chinese loans shorter maturity - Based 140 140 on loans outstanding China’s share is less 120 120 pronounced at 68% 100 100 80 80 60 60 40 40 20 20 0 0 2013 2014 2015e 2013 2014 2015e China US UK EU ex UK China US UK EU ex UK Source: Liberum, WDZJ, AltFi Data, company data Source: Liberum, WDZJ, AltFi Data, company data Online direct lending annual volumes as % addressable market Online direct lending volumes as % GDP (2015 addressable market green box $trillion) • Continental Europe significantly less 14.0% 1.6% $1.4tn $1.1tn $0.2tn $1.3tn 1.5% developed: Relative to addressable 11.5% 1.4% opportunity, ODL in continental Europe is 12.0% 1.2% c 15x less developed than US & UK and 10.0% 1.0% 100x behind China 8.0% 0.8% • Primarily due to relatively tight 6.0% regulation 0.6% 4.0% 0.4% 2.2% 1.7% 2.0% 0.2% 0.13% 0.14% 0.1% 0.01% 0.0% 0.0% China US UK EU ex UK China US UK EU ex UK Source: Liberum, WDZJ, AltFi Data, company data, Bank of England, FDIC, Federal Source: Liberum, WDZJ, AltFi Data, company data, Bloomberg Reserve, ECB, OECD 5 Direct Lending: Finding value/ minimising risk Regional growth rates: Continental Europe now growing c 2x as fast as UK and US, … from a much lower base China Online Direct Lending $bn 2015e US Online Direct Lending $bn CAGR • Chinese market highly fragmented: 180 25.0 top5 platforms only 20% of volumes (vs. 160 296% 115% c80% in UK). 140 20.0 120 15.0 100 80 • Regionally China growing fastest – but 10.0 set to slow given already high market 60 40 5.0 penetration. 20 0 0.0 2013 2014 2015e 2011 2012 2013 2014 2015 • US & UK volume growth has slowed Hongling LuFax PPMoney Weidai Wzdai Other Lending Club Prosper SOFI Ondeck Avant Other SME ODL from c190% YoY in 2013 to c 100% YoY 2013: only total market data available Source: Company data in 2015e Source: WDZJ UK Online Direct Lending $bn EU ex UK Online Direct Lending $bn • Europe ex UK accelerating: c 200% 5.0 1.6 4.5 83% 1.4 206% growth in 2015e vs. 140% in 2014e 4.0 1.2 3.5 (albeit off a low base) 3.0 1.0 2.5 0.8 2.0 0.6 1.5 0.4 1.0 0.5 0.2 - - 2011 2012 2013 2014 2015e 2011 2012 2013 2014 2015e Zopa Funding Circle RateSetter LendInvest Smava Auxmoney* Pret D'Union Bondora Market Invoice Wellesley & Co. Other Zencap Geldvoorelkaar* Comunitae Other Source: Altfi data, Liberum Source: Altfi data, Liberum 6 Direct Lending: Finding value/ minimising risk UK: Online Direct Lending could account for 15-40% of annual lending by 2025 depending on segment • UK 2015e volumes: est. $4.4bn UK Online Direct Lending Annual volumes UK Online Direct Lending Annual volumes $bn 2011-2015e $bn 2011-2025e 4.5 250 4.0 0.5 • UK concentrated market: Top 6 UK 0.4 3.5 200 0.4 platforms account for 88% of total 3.0 150 2.5 0.8 volume 0.3 2.0 0.2 0.2 0.9 100 1.5 0.5 1.0 0.4 0.9 50 0.5 0.4 • Rapid growth: Already seen 13x 0.4 0.0 0.3 0 increase in volumes from 2012-15e 2011 2013 2015e 2011 2013 2015e 2017e 2019e 2021e 2023e 2025e Market Invoice Funding Circle Zopa Market Invoice Funding Circle Zopa RateSetter LendInvest Wellesley & Co. RateSetter LendInvest Wellesley & Co. • Zopa reacceleration: volumes in 2015e: Other Other 120% YoY growth (vs 45% in 2014) Source: AltFi Data, Liberum forecasts Source: Liberum forecasts UK Online Direct Lending annual volume by segment UK direct lending share of addressable market % (2015 $bn addressable total annual lending green box $billion) • By 2025, UK direct lending could reach 140 50% $100bn (excluding invoice factoring) 45% 120 $91bn $104bn $475bn $48bn 40% 100 35% 30% 80 25% 60 20% 15% 40 10% 20 5% 0 0% Invoice Factoring SME Consumer BuyToLet SME Consumer Invoice BuyToLet Factoring 2015e 2025e 2015e 2025e Source: ABFA Association; Bank of England; Liberum forecasts Source: ABFA Association; Bank of England; Liberum forecasts 7 Direct Lending: Finding value/ minimising risk UK Consumer survey: awareness of P2P surprisingly static; ISA- ability to drive c50% increase in number of investors • P2P awareness is static at best over last UK consumer survey: % of survey population aware of P2P and UK consumer survey: % survey population who are already 12months – more marketing/ new aggregator % who would consider investing in P2P lending and % who will lend once ISA-able products required… 50% 12% 45% 10% • Short term c50% boost in active investors once 40% 35% becomes ISA-able 8% 30% • Over 50% of population think P2P riskier than 25% 6% 20% 4% equities! 15% 10% 2% 5% 0% 0% • P2PFA data shows 87% CAGR in amount per 4Q14 1Q15 2Q15 3Q15 4Q14 1Q15 2Q15 3Q15 lender account but only 22% CAGR in Know what P2P is Would consider lending via P2P Have already loaned Lend when ISA-able number of lender accounts Source: ResearchNow, Liber um estimates Source: ResearchNow, Liber um an alys is UK P2PFA* number of lender accounts; £ amount per lender UK consumer survey: Estimated capital invested in P2P (non UK consumer survey: % of UK population who think P2P account pension assets) lending riskier than equities Number lender Amount per 140 16 2.0% 60% A/Cs lender A/C 1.8% 120 CAGR 22% CAGR 87% 14 55% 12 1.6% 100 1.4% 10 50% 80 1.2% 8 60 1.0% 45% 6 0.8% 40 40% 4 0.6% 20 2 0.4% 35% - 0 0.2% 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 0.0% 30% 4Q14 1Q15 2Q15 3Q15 4Q14 1Q15 2Q15 3Q15 Lender accounts ('000s) lhs Amount per account(£'000s) RHS % of non pension capital invested in P2P Believe P2P more risky than equities Source: UK P2P Finance Association; Liberum analysis Source: ResearchNow, Liber um estimates Source: ResearchNow, Liber um an alys is 8 Direct Lending: Finding value/ minimising risk EU ex UK: Larger addressable market in Continental Europe – volumes set to overtake UK by 2020 • EU ex UK 2015e volumes: est. $1.5bn EU ex UK Online Direct Lending Annual volumes 2011-2015e EU ex UK Online Direct Lending Annual volumes 2011-2025e $bn $bn vs. UK total ex market invoice 1.6 300 1.4 • Smava (45% of total) on track to 250 1.2 200 originate c $650m in 2015e, sources 1.0 liquidity from banks 0.8 150 0.6 100 0.4 50 0.2 • Accelerating growth: Faster 2015e - 0 volume growth in 2015e for both 2011 2012 2013 2014 2015e 2011 2013 2015e 2017e 2019e 2021e 2023e 2025e Smava Auxmoney* Pret D'Union Smava Auxmoney* Auxmoney (c 500%) and Pret D’Union (c Pret D'Union Bondora 160%) Bondora Zencap Comunitae Zencap Comunitae Geldvoorelkaar* Other Geldvoorelkaar* Other Total UK ex market invoice Source: AltFi Data, Liberum forecasts Source: Liberum forecasts • Regionally EU ex UK has largest Forecasted EU ex UK direct lending annual volume by segment EU ex UK direct lending share of addressable market % (2015 growth potential: 5.2x bigger $bn addressable annual lending total green box $billion) addressable market than UK but UK 180 30% 2015e ODL volumes are c2.7x larger* 160 $600bn $672bn 25% 140 120 20% 100 (*ex UK invoice factoring for 15% comparability) 80 60 10% 40 5% 20 - 0% Consumer SME Consumer SME 2015e 2025e 2015e 2025e Source: AltFi data, Liberum forecasts Source: ECB, OECD, Liberum forecasts 9 Direct Lending: Finding value/ minimising risk Yields: Regional avg in relatively tight range of 5.5-8.8% swapped into USD (China an outlier for now) • In local currency regional averages vary Average expected net yield (seasoned) of largest 5 platforms in each region: local currency (dotted) and swapped into USD (solid) from 4.6-10.8% (dotted bars) 12% • Converted to USD, ranger is tighter: 5.5- 8.8% (solid bars) 10% • Available net yields of largest platforms 8% widely intermingled by region 6% 4% 2% UK: Liberum AltFi Returns Index 0% China US UK EU ex UK 6.5 Source: Company data, Liberum estimates 6.0 Platform net yields swapped into USD (expected seasoned returns) 5.5 18.0% 5.0 16.0% 14.0% 12.0% 4.5 10.0% 8.0% 4.0 6.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 4.0% 2.0% Source: AltFi Data FundingCircle Bondora Wellesley & Co.