On Monday we profiled Ping An Insurance, China’s largest insurer by market value.
Yesterday we looked at Zhong An, which has Ping An as one its major (12%) shareholders.
Today we look at Lufax, which is 49% owned by Ping An. Lufax is a P2P Lending Marketplace, matching borrowers with investors for a 4% fee, but they have recently branched out into other asset classes such as equities.
Lufax (whose official name is Shanghai Lujiazui International Financial Asset Exchange Co.) was founded in 2011 and raised 3 billion yuan ($483 million) from international investors in 2015.
China Marketplace Lending Consolidation
The Lufax CEO, an American born McKinsey alum called Greg Gibb, was vocal about the coming consolidation in Marketplace Lending in China in a 2015 article in Bloomberg.
“The vast majority of China’s more than 1,500 peer-to-peer lenders are going to fail, with as few as one in 20 surviving.”
In our Oct 2016 report on Marketplace Lending in China, Lufax ranked no 2 on both transaction volume and number of borrowers. They are clearly well positioned for the consolidation.
Greg Gibb of Lufax was eloquent about the small players disappearing;
“Their business models are turning into pyramid schemes. Some promise unrealistic returns to investors and lend without enough data to determine borrowers’ creditworthiness”.
The Cambrian explosion of Marketplace Lending helped the market expand. As per Bloomberg, from original research by Yingcan Group, Marketplace Lending grew almost 13-fold since 2012 to $41 billion in 2015 and grew more than six times faster than loans extended through banks.
Global 4 Horse Race
P2P Lending originated in the UK but took off in the USA. For a long time we talked about a two horse race in the USA, with Lending Club and Prosper, although there are other big players in the USA with slightly different models such as SOFI and Avant. With their recent $100m raise and already active in both UK and USA, Funding Circle joins this small global group. We profiled them in this Oct 2015 post.
Our thesis is that the globalization of Marketplace Lending will play out inexorably but in fits and starts, deeply impacted by regulation and politics. There are three drivers:
- Best practices and technology adoption. As Lufax’s Gibb put it “how do you create transparency and the right asset-scoring process?” The US and UK are mature consumer lending marketplaces, but the growth is in places like China, India, Africa and South America. The company that manages to bring global best practices and technology to these big growth markets will be a very big winner.
- Marketplaces expanding globally. So far the US firms have stayed in the US market. It is a big enough market and the problems in 2016 constrained any more ambitious plays. Funding Circle is different. They operate in a small domestic market, so like other ambitious UK firms, they went global early. How the Chinese firms play in this game will be key as they have both a big domestic market and big ambitions. We expect 2017 to be big on the M&A front.
- Lenders looking for global diversification. Most lenders have never had this opportunity before. Only big global banks could compare the risk/reward arbitrage across countries. Now any Hedge Fund can play and so even can Mrs. Watanabe and her global peer Joe Q Public. Entrepreneurs who make this easy by enabling global diversification will win. They may be acquired by the Marketplace Lending platforms or stay independent as a layer in the value ecosystem.
Lufax expanding into Equities
This article in South China Morning Post describes how Lufax is now also creating an international equity trading platform.
This goes against the grain of the Silicon Valley innovation model which is clearly focus, focus, focus. This is an example of how China is different. People used to the Silicon Valley innovation model assume that Lufax is doing rash diversification by moving from Fixed Income into Equities. The mantra is that Consumer Lending is massive and complex, so “stick to your knitting”. That makes sense if it is a small founding team using step ladder VC funding. It is different when a firm is created by one or more big established firms, so that financial, human and other resources are not a constraint. It is also different in a fast growing market where consumer trust is critical and with many spaces where no incumbent yet has that trust. One of our mantras is that “bits don’t stop at category borders”, that digitization breaks down previously distinct categories if the user need is there. There is a real user need, for multi-asset strategies (such as some Fixed Income and some Equities).
Lufax is positioning to serve Chinese investors’ asset allocation around the globe. In 2007, China ruled that each mainlander is allowed to buy up to US$50,000 worth of foreign currencies a year. This gives Chinese people a legal channel through which to diversify their assets.
Lufax plans to offer an online wealth platform in 2017 to serve those needs. According to Lufax CEO, Greg Gibb:
“Demand for overseas investment among Chinese people and businesses is constantly increasing. Lufax hopes to leverage new technologies and models to provide clients internationalised services.”
Lufax has announced partnerships with two firms – eToro for social trading and Denmark-based Saxo Bank.
Big bet on the Chinese consumer
The Chinese consumer demand for loans is high as the country transitions from being export led to becoming a consumer economy. This is leading to high growth with few big incumbents as competitors. Lending Club and Prosper have to compete with big, smart, agile banks in America. Imagine being able to bet on the American consumer 100 years ago, but with the Internet as a delivery tool.
Of course such opportunity does not come without risks such as lack of consumer finance models and a possibly overheated economy. Entrepreneurs look at these risks to guide their action plan.
Lufax has a clear bet on the Chinese consumer, both enabling them to borrow and to invest their excess capital.
However, the Chinese consumer is only one possibility in a global economy.
Along with Lending Club, Prosper and Funding Circle, Lufax is in a 4 horse race for the global consumer lending opportunity.
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