As the name implies, marketplace LENDING (MPL) is fixed-income. On a spectrum of pure duration to pure credit, I would classify it primarily as credit with very little duration. The default rate is above zero and recovery rates have generally not been much higher.
Not an Equity Allocation
Although the yields are high and rates of return can be similar to equities, MPL does not have any material upside potential (like convertible bonds or even distressed debt) and lack of a secondary market means virtually no volatility as well. Thus, I see very little justification for adding it to an equity bucket. It could fit nicely into a credit allocation or a risk budget, but its tough to fit into the equity sleeve of a traditional asset allocation portfolio.
If MPL is clearly debt and a fixed-income instrument, it's classification as an alternative seems to stem from the fact that it is a small, niche asset class, with no secondary market (which dampens volatility and correlations). In a private fund wrapper, I think there a defensible case to be made for MPL being in an alternative sleeve, due to some common features of those funds. Yet, for clients that are allowed to invest in these types of funds, MPL does not currently appear as attractive as many other types of private debt, so it we would not allocate it within our alternative bucket. Obviously, this could change in the future.
Relative to the traditional fixed-income landscape today, I think MPL is pretty compelling. The 10-year Treasury yield has risen quite a bit lately, but is still only at 1.85%. The Barclays Agg is not much higher and with credit spreads relatively tight, there is not much to gained from moving to investment grade or even high yield. Thus, even if you equate MPL to high yield bonds, MPL appears superior. Of course, all of the usual caveats apply.
From both a return attribution and relative value standpoint, we think MPL best fits into an credit allocation. It could be carved out as its own allocation or even fit in an alternative allocation, but we think that it is best treated as credit.