One of the most exciting aspects of peer-to-peer lending is the ability for multiple investors to pool their funds together to fund a single loan. An activity that was once the exclusive province of large banks is now accessible to anyone with $25. At the same time, larger investors seeking to build a sizeable Online Lending portfolio will increasingly invest in whole loans, allowing them to deploy more capital at a faster rate. As such, any given loan might have anywhere from 1 to over 1,000 distinct investors (the largest number we saw was 1,189)! In this post, we explore investors per loan on Prosper, how these figures have changed over time, and what they can tell us about the composition of Online Lending today.
In the graph below, we see a breakout by number of distinct investors for Prosper loans originated in 2013. 50% of loans were purchased “whole”, whereas the remaining were funded by multiple investors. Of those loans funded by multiple investors, 64% had greater than 50 participants, and 42% had over 100.
Distribution over Time
While 50% of loans may be funded whole today, this was not always the case. As recently as 2012, under 3% of loans were funded by a single investor. In 2010, over 50% of all loans were funded by more than 100 investors. This dramatic shift is certainly due to the increased interest in Online Lending among institutional investors and their desire to accumulate substantial portfolios of what has become a compelling asset class.
Distribution by Prosper Rating
The ratio of loans funded by a single investor or multiple investors is not necessarily consistent across all of Prosper. In the graphs below, we see these numbers broken out by Prosper’s credit rating. It appears that smaller investors are more attracted to the lower-risk, lower-yielding loans; nearly 90% of AAs booked in 2013 have over 50 investors. By contrast, the A-B-C range appears to be the sweet spot for larger investors looking to fund whole loans.
Performance by Number of Investors
In the graph below, we see the charge-off rate for loans booked in 2011 and 2012. Loans funded by a single investor charge off at a substantially higher rate than those funded by multiple investors.
Remember that the number of investors per loan tends to differ by credit grade, so let’s take a look at where whole vs. fractional investors were investing in 2011 and 2012. As we can see in the graph below, loans funded by a single investor tended to be in the higher-risk credit grades, making the above charge-off numbers for those years not quite as surprising.
Conclusion – Whole Loan Investing vs. the Wisdom of the Crowd
All other things being equal, there is no reason why a loan funded by 1 investor would perform any differently than a loan funded by 500 investors. This has no impact on the borrower, who only has to make one monthly payment, the servicing and disbursement of which is handled completely by the origination platform. However, the performance by number of investors may tell us something about the risk profile of whole vs. fractional investors and the loans they choose to fund. Clearly, the Online Lending industry has developed significantly over the past year, gaining more interest from institutional investors who increasingly desire whole loans. While some may view these trends with trepidation, we’ve seen that loans are getting funded more quickly, which is great for borrowers, and fractional investors continue to have access to a large pool of high-quality investments. Whether from one investor or one thousand, we believe that more capital flowing through these platforms is good for borrowers and investors alike and that a rising tide will raise all boats.