The vast majority of insitutional investors want to break into direct lending, a Wharton FinTech survey found.

Institutional investors are taking increasing interest in marketplace lending, the practice of connecting borrowers directly to investors as an alternative to traditional bank lending, according to a survey published Monday.

The survey found broad awareness of marketplace lending among institutional investment professionals, with 85% of respondents interested in making some form of investment.

At the same time, only 29% said they currently had capital allocated to the space.

Institutions’ interest is likely to disrupt an industry that until recently was known as “peer-to-peer lending,” whereby individual investors were matched with individual consumer borrowers.

Richards Kibbe & Orbe, a law firm, and Wharton FinTech, a student-led initiative, surveyed some 300 investment professionals, about half of whom worked at investment funds with more than $500 million under management and more than a tenth at funds with upward of $10 billion in assets.

Sixty-three percent of investment professionals said they expected returns from investments in marketplace lending to outperform those of corporate credit of similar quality, such as corporate bonds.

As to which types of investment interested them, respondents most often cited credit investment, with 27% looking to the purchase of whole loans, 23% to direct investment in a lending platform and 31% interested in multiple strategies.

Thirty-one percent said they would like to target small-business loans, 28% consumer loans and 24% each real estate and education loans.

Respondents expressed most concern about the risk of low credit quality among borrowers and marketwide credit events.

They were least concerned about potential competition from banks or established nonbank lenders.

The investment professionals said their concerns about marketplace lending would be eased by the development of a mature secondary market — either for the loans themselves or indirectly through a mature securitization market and active trading of the underlying risk. 

Researchers said these responses from investment professionals suggested that the marketplace lending industry was about to be transformed.

“We’re very much in the early days of this disruptive industry,” Wharton FinTech co-founder and co-president Steve Weiner said in a statement.

“The intense interest among institutional investors, who haven’t yet entered the industry in force, signals that it is on the verge of evolution.”

The report’s researchers said they expected near-term regulatory activity in the marketplace lending space.

Moreover, based on the responses to the survey, they expected big increases in capital provision by institutional investors. They said this would grow the overall market and accelerate the movement away from the original peer-to-peer lending model.

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