1996 was great year. Hootie & the Blowfish were packing stadiums. Cellphones were just starting to get a little bit smaller than that monstrosity famously used by Michael Douglas in the 1987 classic film, “Wall Street”. Starbucks opened its first store outside of North America, gracing Asia with custom lattes. The infrastructure to support this new invention called the Internet was developing. Money was pouring into NASDAQ as a new generation of technology stocks were setting IPO records.
It was also the year that I had the opportunity to organize my very first Wall Street conference.
The debut of that conference – 20 years ago almost to the very day – was a seminal moment in my career. For, it was on that day that I first recognized the colossal power of the industry conference.
The revelation came to me as I concurrently watched our presenters’ stocks tick up while our conference attendees swarmed the payphones of the Grand Hyatt rushing to place buy orders with their trading desks. It became clear to me that certain conferences could be leading indicators of stock prices, secular trends and sometimes even economic growth.
Ever since that day, I have been using these forums as a mechanism for evaluating stocks and measuring the overall health of various industries. Conferences and annual conventions provide so many foretelling metrics – if you know what to track. Personally, I look at everything from attendee growth, the venue, the presentations, the mood of the participants, the exhibit booths, and even the menu.
For the past few years I have been using the flagship LendIt conference as the chief barometer to gauge the strength and direction of P2P investing and crowdfinance (see: “Are We in a Peer-2-Peer Bubble?” and “Inspiration and Insights from LendIt 2014“). As the definitive global conference for online lending, LendIt has been a consistently dependable industry bellwether.
LendIt 2016 was very telling indeed. Based on my observations and conversations at last week’s convention, I predict that the industry is headed towards its most significant transformation to date – one that will alter the industry’s entire investor demographic and allow it to scale to unforeseen new heights.
I would describe the mood at the first three flagship LendIt conferences as nothing short of euphoric. While a great deal of enthusiasm remains, it seemed that LendIt 2016 exuded a more down-to-earth aura. I believe that the recent turmoil in traditional equity and bond markets had a sobering effect on everyone – especially considering institutional P2P investors (excuse the oxymoron) had been trimming their P2P investing due to redemptions in other asset classes.
Although P2P has been consistently outperforming conventional fixed-income asset classes, and even though P2P notes are less exposed to interest rate hikes, I got the sense that online lenders are starting to realize that our sheltered industry is more intertwined with the broader capital markets than most care to concede.
By contrast, last year’s LendIt felt a bit like Internet World in the late 1990s. The bulls were out in full force. There was almost a sense of irrational exuberance. The attendance nearly tripled from the prior year. Participants were high on recent industry IPOs. There was a dramatic upgrade in exhibit booths. The pop-up stands from the prior year were replaced with elaborate trade show booths that looked more like mini-apartments.
While this year the booths were just as – if not even more – grandiose and the attendance continued to set new records, there was one very noticeable sign of prudence – the missing lobster.
THE LOBSTER FACTOR
When lobster was served for lunch at LendIt 2015, I started feeling the slightest twinge of a bubble. Instead of acknowledging any frothiness, I reasoned that the NY Marriott simply prides itself on its posh menu, and I argued that we were not experiencing a P2P bubble, but a financial revolution. I’ve been to more conferences than I care to count and, hands down, the NY Marriott Marquis dishes up the best food!
But when I detected no sign of lobster (or even some shrimp or monk fish) at the San Francisco Marriott Marquis last week, I naturally started to wonder, had the industry peaked?
THE SUBER PERCEPTION
One thing I enjoy as much as a four pound lobster is the annual state of the industry address that Prosper President Ron Suber gives each year at LendIt. Ron wrapped up the inaugural LendIt in 2013 by reporting that although the growth was staggering, the industry was only in the top of the 2nd inning. It has become a tradition that every year, days before the next LendIt conference, I reach out to Ron and ask him, “What inning are we in now?”
Given the lobster factor, one would assume that P2P was reaching the 9th inning, right? Not even close. According to Ron, “P2P is only in the 4th inning and it looks like we’ll probably be going into overtime.”
Once again, Ron’s 2016 keynote did not disappoint. What resonated most with me was when Ron underscored the fact that the industry has come to an inflection point. He noted that P2P has evolved from a novelty, to an interesting new niche, to a great idea. But, according to Ron, in order for P2P to become something that people can’t live without, the industry must undertake a number of improvements including: delivering new products and services that make it easier for investors to invest in P2P loans. As stated by Ron, “Until we increase access to our asset class through new vehicles, we will not be something that people can’t live without.”
Increasing access and enhancing distribution was the essential theme throughout every conversation I had at LendIt 2016. And I spoke to a lot of people. A lot. So many that I literally lost my voice by the end of the show. (Note to LendIt 2017 exhibitors: instead of mints, consider handing out throat drops).
THIS YEAR’S CHATTER WAS ALL ABOUT DISTRIBUTION
Everybody I spoke with at LendIt 2016 seemed to be on a hunt for new investors. Not just any investor. They were seeking long term investors. This was a stark contrast from last year’s conference when online lending platforms were much more interested in finding borrowers. Market sentiment was very different a year ago – as was P2P’s investor demographic.
Last year there was too much fast institutional money chasing too few loans. The change in investor sentiment caused these hedge funds to scale back on their P2P investments. This deviation on P2P’s supply/demand scale resulted in an unanticipated investor gap that needed to be filled.
Today, lending platforms are looking for more stable funding sources – currently targeting closed-end funds, family offices and pension funds. Regulatory constraints and a very specific technology challenge keep most lending platforms from servicing the most dependable investor there is – the retail investor.
However, due to legislative developments as well as technological advancements to support tax-deferred micro alternative investing, P2P is about to experience a seismic investor demographic shift – from institutional back to retail. Mark my words – P2P is about to become P2P again.
2016 – BRINGING THE “P” BACK TO P2P
Bringing the “P” back to P2P is not without its obstacles. While most states permit small retail investors to purchase notes through P2P leaders like Lending Club and Prosper, they are legally prohibited from investing in almost all other categories of private debt. Additionally, because most of their investment capital rests in retirement accounts, the vast majority of retail investors are only able to invest in P2P through their 401(k)s and IRAs. Since traditional 401(k)s and IRAs cannot hold P2P notes, retail investors must use what is called a Self-Directed IRA (SDIRA). Until just recently, the low-tech SDIRA industry did not possess the technological wherewithal to seamlessly integrate with hi-tech P2P platforms.
Fortunately, over the past three years, two key dynamics had been occurring in confluence to overcome these challenges. The legislative winds began shifting in favor of the retail investor while a new hi-tech SDIRA solution was being developed to make P2P notes easier and more affordable to hold in retirement accounts. (Read more about these two coinciding factors in the recently released white paper titled, “The Renaissance of the Retail Investor and its Monumental Impact on Marketplace Lending, Equities Crowdfunding, and the U.S. Retirement System”)
In fact, everything changed last week at LendIt when IRA Services Trust Company unveiled its ISCP™ technology, the first highly scalable, bank-grade secure, cloud-based retirement investment solution. ISCP™ gives P2P platforms the ability to truly scale through real-time access to more than 43 million investors and over $14 trillion dollars in 401(k) and IRA accounts.
Crowdfinance SDIRA Expert, James A. Jones, referred to the ISCP™ as “an industry game-changer and the first step toward resolving what is becoming a mounting industry-wide distribution problem.”
I couldn’t agree more. In fact, with the ability to now seamlessly tap into this significant pool of retirement capital, I believe P2P will experience its most remarkable growth spurt yet. This modern SDIRA can do for P2P today what the IRA and 401k had done for mutual funds 30+ years ago – allow an nascent asset class balloon into a multi trillion dollar industry.
Now, if only we can get Hootie to come out with a new album or better yet, play at LendIt 2017.