Tightening spreads in the unsecured consumer loan sector are driving investors to the less-mature MPL real estate space, according to Val Katayev, managing partner at Prime Meridian Capital Management.
“The lack of track record for some of the newer assets in the alt-lending [space] allow for investors to generate a higher return until markets mature…and real estate is still a fairly new MPL category, relative to consumer lending,” according to Katayev.
Following the industry shakeout in 2016, many consumer MPL players tightened their credit standards and capped origination volumes. “Platforms originating on the consumer side are still pretty tight from what I have seen, but there are more categories to deploy capital,” he said.
On average, real estate MPL loans are yielding 2%-3% higher than unsecured consumer loans in the sector, according to an investor source. Average net returns on real estate MPL platforms are between 8% and 9%, according to the investor.
“Real estate loans on marketplace platforms look great out there, and because it’s mostly first lien and fully protected by an actual hard asset, there is an increase in interest in the market for that asset class,” according to Katayev.
Larger institutional investors are still cautious about the asset class. Bigger institutional money, for now, is sticking with and flowing into the consumer side, Katayev said. However, once the real estate platforms gain more credibility, usually by reaching the five-year threshold, “you definitely [will] see a lot more institutional interest,” he said.
Katayev is still bullish on the unsecured consumer lending space, despite concerns over credit performance. “I don’t foresee any major shakeout in the near future, since a lot of the startups went away, and we now have more solid players,” he said during the Frontiers of Digital Finance conference in New York yesterday. It’s still unclear how the platforms will perform during an economic downturn, he said, but many have already taken precautions by diversifying funding sources and tightening credit standards.
Prime Meridian manages more than USD 500m in marketplace loans, according to Katayev. The company currently has four funds, including two consumer loan funds, a small business loan fund, and a real estate fund, according to the company website. The latter is the company’s most recent publicly announced fund, and was launched in March last year, according to a company press release.