White Paper Summary: Incorporating Marketplace Lending Into An Institutional Portfolio

Summary: 2017 white paper by RiverNorth

· After the 2008 Financial Crisis, small regional and community banks either closed, merged, or were acquired by larger banks reducing the availability and accessibility of small business loans. Marketplace lending ("MPL") has rapidly emerged to serve this unmet demand.

· MPL is disrupting the credit industry by using technology to reduce the administrative costs of underwriting and lending at scale, allowing for better data on borrowers, faster origination, and more efficient servicing while attracting capital from both retail and institutional investors.

· RiverNorth believes the financial health and discipline of the consumer is the main driver of MPL performance, as holding loans until maturity is the primary way to achieve liquidity.

· RiverNorth recommends constructing a diversified portfolio across several MPL platforms to reduce idiosyncratic originator risk and achieve a “beta” forward approach to investing.

· By incorporating MPL into an institutional portfolio, RiverNorth believes it can bring three important benefits:

1. Incorporating consumer credit risk/return into a traditional portfolio typically consisting of corporate credit risk.

2. Higher coupons relative to other traditional credit instruments which have seen yields crash.

3. Illiquidity premiums associated with MPL are outsized when viewed within the context of price volatility that is driven by technical trading in public credit markets.

Source

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