Marketplace Lending Keynote Luxembourg School of Finance

Marketplace lending as rapidly emerged and grown. Is it a new asset class or a technology front end? The Fintech Forum at the University of Luxembourg's School of Finance keynote explores some of the major ideas and these

1. MARKETPLACE LENDING: PRACTITIONERS PERSPECTIVE ON THE FUTURE Dr. mark r. bell

2. The Practitioners Perspective A two sided brain leads to my view on the opportunity and pitfalls: ACADEMIC Senior Research Fellow at the Emory Goizueta Business School Center for Alterative Investments Academically trained Georgia Tech College of Computing Board Advisor PRACTITIONER Managing Partner at Diversified Trust Company, $6 billion independent comprehensive wealth manager that was an early buyer of Lending Club loans Director at Fund that Flip, fintech innovator Former Executive Vice Chairman at Brand Bank, a multibillion dollar depository bank Founder of Ethos Partners, private equity firm focused on growth equity and technology Director of Strategy at D.E. Shaw

3. Explosive Growth in Marketplace Lending Unsecured Consumer CAGR* 146% BILLIONS ($) As of 1.31.2016 * CAGR – Compound Annual Growth Rate. Sources : Lend Academy, Lending Club, Prosper , Funding Circle USA, OnDeck Capital and Liberum Capital research

4. Exciting Growth in Innovative Companies There are over 170 serious platforms in existence today, including 67 countries have marketplace lenders Finovate estimates there are over 70 fintech companies with valuations in excess of $500 million* *July 2015

5. Excitement is Warranted Because an Authentic Value Proposition Exists 20% 15% 10% 5% 0% Average Credit Card Rate 20.05% 1 14.3% 3 MPL ORIGINATORS 7.4% 4 2.65% 2 Aggregate Bond Index Return Average MPL Coupon Average Realized Return in MPL Loans Source: Lending Club 4 th Quarter and Full Year 2015 Earning Presentation, February 11, 2016. 1 Source : Public filings and Citi ABS research. Based on simple average of average credit card rate of following credit card companies: Citi Credit, American Express, Bank of America, MBNA, Discover Card and GE Private Label card programs. 2 Barclays Capital U.S. Aggregate Bond Index 2016 annual total return . 3 Average interest rate for borrowers who received a loan to consolidate existing debt or pay off their credit card balance per the Lending Club survey. 4 As of 12.31.2015, Median Adjusted Net Annualized Return for investors with 100+ notes, note concentration of <2.5% of portfolio value, all loan grades, and portfolio age of 12-18 months (Source: Lending Club). Market Place Lender Spread Example MPL presents a true “win-win” for borrowers and investors

6. Fintech has also “Unbundled” the Bank Most Americans dislike their bank and feel it is undifferentiated in its offering Strong user interface (think gamification), compels high user acceptance Rapid decline in relationship banking, likely irreversible Source: CB Insi ghts.

7. There are Some Very Real Concerns to MPL’s Unbridled Success Venture c apital investment remains very strong, fueling young companies… can the bubble endure a pullback? I. Source: Company filings and broker research. (1) Return at IPO. Source: Company filings and broker research. (1) Return at IPO Global – First Round Global – Non-First Round Global Deal Volume

8. There are Some Very Real Concerns, continued Consumer remains remarkably strong… can the lenders endure a consumer pullback ? II. Nearly a decade of consumer credit improvement Most recent data shows uptick in credit card charge offs

9. There are Some Very Real Concerns, continued Banks are coming into the space Lighter regulation and a fast following approach make banks strong competitors (or allies ?); Goldman chooses to build and not buy Balance sheet FinTechs appear to be winning, as such, banks and companies that partners with banks have an advantage III. This raises the question: Is this really a new industry or a technology frontend for traditional banking? Banks, while not the majority, are the largest buyers of Lending Club loans

10. Additionally, many marketplace lenders are struggling “Prosper Marketplace to Cut Jobs and Shuffle Executives” - Wall Street Journal, 5/3/2016 There are Some Very Real Concerns, continued IV. “As Lending Club Stumbles, Its Entire Industry Faces Skepticism” - New York Times, 5/9/2016 “ OnDeck Losses Grow as Lender Sells Fewer Loans” - Wall Street Journal, 5/2/2016

11. Important to Keep Perspective Since 2007, marketplace loan originators are only ~$40 billion compared to a US consumer credit market of $3.7 trillion (i.e., ~1%) Excitement is due to rate of growth, not amount of loans (which remain a tiny percentage of the market) Mar k et pl a c e l en ding o r ig inat io n s by quarter ($ billio n s) ( C umulat iv e total in the U SA s in c e 2007 is $35.7 billio n )

12. Fintech Competence Traditional Financial Competence Area of overlap will create new firms of the future III. As such, important to remember we are still dealing with a nascent sector with very few assets, the fate of which is uncertain. Like other areas of Fintech, a blended outcome more likely Important to Keep Perspective, continued New companies? Or new go to market for existing companies?

13. Marketplace Lending has Adapted Quickly and Been A dopted F aster T han W ould H ave B een A nticipated This is where we are moving This is where Diversified Trusts substantial investment began 2006 2009 2012 2015 2018 Question for investors: Is this an asset class or a trade?

14. What is the Future? Bellwethers to watch: Kabbage  Will they go public? Greensky  Part of bank platform or go public? These and others will dictate the viability of balance sheet vs. pure originator models Watch for continued M&A vs. in house development

15. Areas for Continued Research A significant question remains as to what role marketplace lending can and should play in an institutional portfolio The view is that the allegedly low correlation and high risk adjusted return would make it well-suited for portfolios The challenge is the illiquid nature of the loans and the relative newness of the industry has prevented academic analysis Spread compression leads to idea of trade over asset class We are now working with industry sources, along with Professor Roman Kräussl and Zsofia Kräussl on analysis that should help answer this question

16. Takeaways Marketplace lending growth continues, but has not yet been tested by a credit cycle or general pullback Perhaps best to see marketplace lending as part of the evolution of lending rather than a revolution (traditional lenders will integrate technology through development or acquisition) Further academic research needs to be done to confirm if marketplace lending can be viewed as a unique asset class in portfolio construction– watch this space !

17. MARKETPLACE LENDING: PRACTITIONERS PERSPECTIVE ON THE FUTURE Dr. mark r. bell [email protected] [email protected] diversifiedtrust.com emorycai.org