A report into the evolution of the peer-to-peer sector by UK analysts Pitchfork has looked at where investors will find the best bets for the industry, in order to weather the next phase of the credit cycle. Largely US directed, the report has pointers for similar jurisdictions, such as the UK and Australia and includes data from the PitchBook Platform, which tracks more than 33,000 valuations of venture capital-backed companies. "Other than aggregation of mortgage originators and credit card issuers, online platforms for lending directly did not take off until after the financial crisis," the report says. "Questions remain as to how this rapidly scaling industry will weather some very public storms." As these platforms face growing pains, a hybrid model has emerged, combining balance sheet and marketplace lending and promising to ameliorate the inherent moral hazard of loan originators. One of these hybrids, Prosper (the only peer-to-peer lender to weather both the financial crisis and the settlement of an early class action lawsuit from investors), announced in May that it would lay off over 28 per cent of its staff due to declining loan volume. "Accurately pricing risk in a secondary market would mitigate the inherent moral hazard of originators," the Pitchfork report observes. "On one argument, a more liquid market for online loans would create a positive incentive structure to maintain loan quality by facilitating the price discovery that would allow marketplace lenders to compete on more than coupon."The fact that institutions typically purchase these loans at par indicates that the originator does not factor into how they trade.The report's authors wrote that the reputational risks of an originator's portfolio underperforming in the secondary market have greater residual effects than the lost yield if held on their balance sheet. Institutional investors began to chase yield in their fixed income allocations, as sovereign and corporate credit began to trade at record low levels thanks to central bank asset purchases. As we stand now, over a third of outstanding sovereign debt trades at negative nominal yields. In other words, the long-run knock on effect from underwriting underperforming loans in an efficient marketplace platform are worse than the short-term losses from charge-offs.