Peer-to-peer lending is becoming a misnomer.
Founded on the notion that any old Joe could lend a small sum of money to Bob or Jane for a nice return, websites operated by companies like Prosper Marketplace Inc. and Lending Club Corp. are evolving into tools for more sophisticated, deep-pocketed investors.
A growing number of institutional investors, including asset managers, pension funds and hedge funds, are providing financing for individual borrowers alongside the consumers the platform was built for.
Having more institutional investors on board will enable the companies to fund more loans and help drive growth for Prosper and Lending Club — but they may need to think of a new label for their service.
"You can't have peer-to-peer lending if one of those peers is an institution," Christine Pratt, a senior analyst at Aite Group LLC, said.
Still, that should not diminish the companies' relevance, analysts said.
"If it makes the … marketplace more vibrant because there's more money, more borrowers [and] greater balance, that's not a bad thing," Mark Schwanhausser, a senior analyst at Javelin Strategy and Research, said. "This is an alternative marketplace regardless of where the money is coming from. If it's I-to-P instead of P-to-P what's the difference?"
The story, or pitch, that peer-to-peer lending sites first used when they emerged a few years ago was that they were a place where individuals could borrow from other individuals — strangers, family or friends — in a formalized way.
Bringing more institutional investors into the mix changes the dynamics of the system, said Philip Philliou, a partner with the consulting firm Philliou Selwanes Partners LLC in New York. Some of the novelty of peer-to-peer lending is lost, he said.
There is also some question whether institutional investors will want to participate.
"As a practical matter, I have to believe an institutional investor … for this to be worthwhile, they need to be looking at making hundreds of thousands of these investments," Philliou said.
Others see bringing institutional investors into the fold as part of the industry's natural progression.
"This is a way to bring in a steadier flow of money, a more reliable flow of money to fuel that marketplace," Schwanhausser said. "These are natural steps."
Prosper is being proactive in luring big-money investors to its site, evidenced by its hiring in mid-March of James Alexander, who has 15 years of institutional sales experience.
As executive vice president of investment sales for the San Francisco company, Alexander is tasked with expanding Prosper's roster of institutional investors, which includes registered investment advisers. Institutional investors contribute only about 5% of funding volume on the site.
Chris Larsen, co-founder and chief executive of Prosper, said he hopes to increase that percentage to as much as 40%.
"The key thing is you want to be able to operate if all institutions went away," he said during an interview in New York. "You want a diversified funding source."
Larsen was adamant that individual, retail investors will continue to make up the majority of investors on the site.
One of the benefits of the concept of peer-to-peer lending is that it is "like having a million miniwarehouse lines," he said. "In a crisis, some will be scared, some will stay. There's a real fundamental advantage to that model."
Some experts said Prosper's model is not all that different.
"The more institutional money they gather in, the more finance company-like they become," Christine Pratt of Aite said. "That model becomes more the model of a finance company and not a friendly, happy family-lending-to-family model."
