--- title: The Top 5 Trends of Institutional Investors Allocating Capital to Marketplace Lending description: The marketplace lending sector is growing up – quickly. The types of institutional investors allocating to the marketplace lending asset class has changed dramatically, from mostly family offices and fund of funds about five years ago to institutional investors such as pensions, endowments and sovereign wealth funds today. That is good news of course, and ... Read More --- [![Prime Meridian Capital Management](https://www.pmifunds.com/hubfs/Branding/pmifunds-logo.svg)](https://www.pmifunds.com/) [![Prime Meridian Capital Management](https://www.pmifunds.com/hubfs/Branding/pmifunds-white-logo.svg)](https://www.pmifunds.com/) - About Us - [About Us](https://www.pmifunds.com/about) - [Recognition & Awards](https://www.pmifunds.com/awards-recognition) - [Team](https://www.pmifunds.com/team) - Our Strategies - [Investment Strategies](https://www.pmifunds.com/strategies) - [Special Opportunities Fund](https://www.pmifunds.com/special-opportunities-fund) - [Income Fund](https://www.pmifunds.com/income-fund) - [Non-Performing Loan Fund](https://www.pmifunds.com/npl-fund) - Insights - [Insights](https://www.pmifunds.com/insights) - [Events](https://www.pmifunds.com/events) - [Videos & Podcasts](https://www.pmifunds.com/video-podcast-resources) - [Contact Us](https://www.pmifunds.com/contact) [Contact Us](https://www.pmifunds.com/contact) # The Top 5 Trends of Institutional Investors Allocating Capital to Marketplace Lending March 14, 2018 The marketplace lending sector is growing up – quickly. The types of institutional investors allocating to the marketplace lending asset class has changed dramatically, from mostly family offices and fund of funds about five years ago to institutional investors such as pensions, endowments and sovereign wealth funds today. That is good news of course, and a sign this asset class is evolving and growing. It also means there is greater overall understanding of the asset class, the fund product offerings, and an increasing institutionalization of the industry. That step up in sophistication and broader market preferences, is changing the way that fund managers, allocators and investors are analyzing and investing in the space. It is a big shift from what the typical fund used to look like just a few years ago, which: 1. only purchased loans from origination platforms 2. invested only in consumer loans 3. invested in loans only from the largest platforms such as Prosper and Lending Club 4. used a credit model to purchase only select loans from the platforms (active buying versus passively buying) 5. offered only one fund to allocators Unfortunately for allocators, these types of funds have not necessarily met the investment objectives for a variety of reasons including: declining yields on consumer loans, sub-asset/vertical portfolio diversification, platform diversification, leverage utilization and a differentiated portfolio construction methodology (e.g, not just purchasing whole loans). The expansion of institutional investors has ushered in higher investment standards for this asset class which now require a very high level of portfolio management expertise, risk management oversight and robust operational infrastructure before making an allocation. As a result, these allocators and investors have generally shifted investment activity towards the top five trends: 1. investing through a combination of loans, securitizations and warehouse lines of credit 2. investing in multiple sub-asset classes 3. using both well established and newer origination platforms 4. investing both actively and passively from platform 5. investing through multiple sub-asset class funds Let’s take a closer look. ***1-Institutional allocators investing through a combination of loans, securitizations and warehouse lines of credit*** Many allocators are starting to realize there are several investment options of investing in the marketplace lending fixed income asset class other than just purchasing whole loans. There are now two other additional methods that offer meaningful benefits. One is through bonds that have securitized whole loans in the asset class. Bonds have both advantages and disadvantages, and one unique plus is gaining access to certain platform loans that may only be available through securitizations. Another option is through offering warehouse lines of credit to lending platforms, typically through banks and now some managers. The main advantage is that a manager offering a line of credit to an origination platform, versus purchasing whole loans, may not necessarily be exposed to individual default risk on the specific loans the platform underwrites. The manager can still likely receive similar returns yields though from the origination platform while reducing credit risk. There are other potential advantages in terms of tax considerations to the fund’s investors. Today, most allocators prefer that their investments in the asset class use the full spectrum of investment options to maximize returns. ***2-Institutional allocators investing in multiple sub-asset classes*** Initially, pooled funds only invested in consumer loans because that is all the early origination platforms offered. Today, there are many other verticals such as: small business, mortgages, trade financing and student loans to name a few. Each may have quite different risk return profiles based upon factors such as average yields, collateralized/non-collateralized, personal/business loans, etc. Accordingly, many allocators now prefer managers’ who have expanded their investments in the marketplace lending asset class to these different verticals to achieve different targeted returns, diversify their investments, and better manage their risk exposure. ***3-Institutional allocators using both well established and newer origination platforms*** In the early years, hedge funds would generally only invest in larger well-established origination platforms such as [Lending Club](https://www.lendingclub.com/) and [Prosper](https://www.prosper.com/). But today, many allocators prefer funds that invest in both well-established and newer origination platforms, which may offer outsized relative returns to larger platforms and overall portfolio diversification. There are limitations, however, as newer origination platforms generally have smaller overall loan volumes and therefore will only accept a limited number of third-party investors. Accordingly, allocators realize the increasing importance of: a manager’s ability to leverage their overall size and reputation, a proven track record of establishing mutually beneficial strategic origination partnerships for research and securing additional impactful relationships with newer origination platforms for the institutional allocator’s benefit. ***4-Institutional allocators investing in asset class both actively and passively from platforms*** The larger platforms such as [Lending Club](https://www.lendingclub.com/), [Prosper](https://www.prosper.com/), and [Funding Circle](https://www.fundingcircle.com/) still offer active buying using an auction-based system. But the vast majority of platforms only allow investors to purchase all the loans they originate passively. This provides two types of value-added benefits a manager can offer an institutional allocator. For one, a manager may create alpha on active platforms by investing in loans with a lower default rate based upon other platform loans with similar credit grades and loan terms. Secondly, as mentioned above, is the manager’s ability to establish partnerships with newer origination platforms with limited supply and possibly higher risk-adjusted returns even if the manager is investing passively on the platform. As a result, most allocators prefer that marketplace lending money managers have the ability to offer both types of investments in their funds. ***5-Institutional investors investing through multiple sub-asset class funds*** Allocators typically prefer to establish relationships with fund managers that offer multiple differentiated sub-strategies within an asset class. This allows the investor to allocate to either one or more multiple funds to meet investment objectives. This is not surprising since allocators typically spend significant time performing due diligence on a new manager before making an investment. To highlight this point, allocators typically prefer to invest in traditional fixed income through money managers that offer multiple separate strategies such as high grade, high yield, municipal, and treasury bond funds. This can make it easier to select different strategies by one firm to meet their investment objectives. Comparatively, most allocators prefer now to invest in marketplace lending managers with a menu approach as well as multiple funds offering different verticals/sub-asset classes. ***Summary*** These five trends illustrate how the marketplace lending space is becoming more institutionalized across every facet including the asset management side. As a result, allocators are holding asset managers to the same institutional standards and due diligence requirements as other asset classes. These trends also highlight the evolution of the institutionalization that allocators are driving in this asset class and that is a positive catalyst for the continued growth of capital into the marketplace lending industry. *About the author: Jeremy Todd, Head of Capital Markets, at Prime Meridian has assisted many allocators in both research in the marketplace lending asset class and helped find quality managers while working for two of the leading data and technology providers in the industry. He has also written two widely distributed white papers on best practices for both domestic and offshore allocators in performing due diligence in marketplace lending. He has invested in three of the four investment options available for investors: 1) personal accounts on the retail platforms, 2) investments in third party hedge fund managers, and 3) investments in funds offered by certain lending origination platforms, but not 4) MPL bonds, but indirectly invested in bonds through third party managers.* [Return to Insights](https://www.pmifunds.com/insights/) ## Subscribe today to receive our latest News & Insights! Receive our latest stories delivered monthly directly to your inbox. [Subscribe](https://www.pmifunds.com/insights/top-5-trends-institutional-investors-allocating-capital-marketplace-lending#popup-00) ## Subscribe Now **Please fill in the required fields below.** ![Prime Meridian Capital Management](https://www.pmifunds.com/hubfs/branding/pmifunds-gray-logo.svg) 2121 N. California Blvd, Walnut Creek, CA 94596 - [About Us](https://www.pmifunds.com/about) - [Our Team](https://www.pmifunds.com/team) - [Recognition & Awards](https://www.pmifunds.com/awards-recognition) - [Investment Strategies](https://www.pmifunds.com/strategies) - [Income Strategy](https://www.pmifunds.com/income-fund) - [Special Opportunities Fund](https://www.pmifunds.com/special-opportunities-fund) - [Non-Performing Loan](https://www.pmifunds.com/npl-fund) - [Insights](https://www.pmifunds.com/blog) - [Press Releases](https://www.pmifunds.com/blog) - [Contact Us](https://www.pmifunds.com/contact) © 2026 Prime Meridian Capital Management - [Privacy Policy](https://www.pmifunds.com/hubfs/Resources/pmcm-privacy-policy.pdf) - [Japan Regulatory Disclosures](https://www.pmifunds.com/japan-regulatory-disclosures) This material is being provided for information and discussion purposes only and any discussion of any funds is qualified in its entirety by the information included in the confidential offering documents and supplements (collectively, the “Memorandum”) of Prime Meridian Income Fund, LP, Prime Meridian Special Opportunities Fund, LP, and Prime Meridian NPL, LLC (the “Funds”) described herein, and is not intended to be, nor should it be construed or used as investment, tax or legal advice or an offer to sell, or a solicitation of an offer to buy, an interest in the funds, or any other security. Any offer or solicitation of an investment in the funds may be made only by delivery of the Memorandum. Before making any investment in the funds, you should thoroughly review the Memorandum with your professional advisor(s) to determine whether an investment in a Fund is suitable for you in light of your investment objectives and financial situation. The Memorandum contains important information concerning risk factors, including a more comprehensive description of the risks and other material aspects of an investment in the funds, and should be read carefully before any decision to invest is made. The funds are only open to investors fitting the definition of an “accredited investor” as that term is defined under Rule 501 of Regulation D of The Securities Act of 1933. An investment in the funds, like all investments, contains risk including the risk of total loss, and may not be appropriate for all investors. Any performance information shown on this website is presented net of all expenses, including management fees, performance fees and other expenses including portfolio-related expenses. Returns assume the reinvestment of all capital (including distributions where applicable) on a monthly basis. The performance data represents composite fund returns, and individual investor returns may vary higher or lower from the composite return due to timing of an investment and actual fees being charged. Past performance is not indicative of future returns. Any awards or other rankings listed on this site are not indicative of future performance.  These awards or any other rankings and/or recognition by unaffiliated rating services and/or publications should not be construed as a guarantee that an investor should or will experience a certain level of results or satisfaction if they invest with Firm, nor should it be construed as a current or past endorsement by any of our investors. Firm did not pay a fee to participate in these awards or ranking surveys. In addition, any projections contained on this website (including targeted returns, opinions, estimated fees, predictions or expectations about any future event) are based on a variety of estimates and assumptions by Prime Meridian Capital Management, including, among others, estimates and assumptions regarding future operating results, the value of assets and market conditions at the time of investment and disposition, interest rates, and other realization events. Performance estimates and underlying assumptions are inherently uncertain and are subject to numerous business, industry, market, regulatory, geo-political, competitive and financial risks that are outside PMCM’s control. There can be no assurance that the assumptions made in connection with any projections will prove accurate, and actual results may differ materially, including the possibility that an investor may lose some or all of any invested capital. ```json { "@context" : "https://schema.org", "@type" : "BlogPosting", "author" : { "@type" : "Person", "name" : "Prime Meridian Team", "url" : "https://www.pmifunds.com/insights/author/prime-meridian-team" }, "dateModified" : "2024-07-19T18:21:21.708Z", "datePublished" : "2018-03-14T04:00:00.000Z", "headline" : "The Top 5 Trends of Institutional Investors Allocating Capital to Marketplace Lending", "mainEntityOfPage" : { "@id" : "https://www.pmifunds.com/insights/top-5-trends-institutional-investors-allocating-capital-marketplace-lending", "@type" : "WebPage" }, "publisher" : { "@type" : "Organization", "logo" : { "@type" : "ImageObject", "url" : "https://www.pmifunds.com/hubfs/Branding/pmifunds-logo.svg" }, "name" : "Prime Meridian Capital Management" } } ```