I have been thinking about this idea for some time. With Lending Club now profitable and growing like gangbusters and Prosper with a new bankruptcy remote vehicle for all investors I think it is time to revisit the idea of risk.
Despite the question in the title of this post I don’t truly believe that p2p lending is a low risk investment. I think most of us would agree that Treasury bills or an FDIC-insured investment is pretty much all we can consider as low risk.
But let’s look at the mainstream investments for a moment. The stock market is at an all time high and yet everyone remembers that it has had two major corrections in the past 13 years where values went down roughly 50%. The bond market has had a great run for many years now but at some point in the next couple of years that run will likely be over. Both those investments represent a real risk of principal loss going forward.
Lending Club in a Very Strong Financial Position
Now, let’s consider an investment in Lending Club today. In February it issued $120 million in new loans and is now running at a profit. It is safe to say that loan volume in March will be north of $130 million and increase steadily from there. Returns to investors continue to be strong and there is an IPO looming on the horizon where it will pocket a huge cash war chest.
There is very strong demand from institutional investors with new large investors coming on board all the time. But in recent conversations I have had with Lending Club management they say retail investor demand is also growing very strongly. When their IPO happens this will become even more pronounced as investors from all 50 states will become eligible to invest. Suddenly investors from large states like Texas, Ohio, Pennsylvania and New Jersey will come flooding in to Lending Club.
The future is indeed very bright for Lending Club and it would take an unforeseen calamity to alter their growth trajectory now. With a well-diversified investment there is little risk of principal loss at Lending Club and the potential return is 10% or more.
Prosper Offers Additional Protection for Investors
Taking a look at Prosper they are clearly not in as strong a position as Lending Club. In recent months they have been reduced to a tiny market share but there are early signs of a resurgence. They are going to post a better month in March (month to date volume is up 73% over last month) and all signs point towards a record month for them in April.
Even though Prosper is clearly the number two player and they are in a weaker financial position they have implemented a bankruptcy remote vehicle for all investors. This provides an added level of protection for investors that offsets the increased platform risk in my opinion. With a new management team and their recent large cash infusion they are also in a relatively good financial position.
Now, anyone who has been reading this blog for a while knows I am a big cheerleader for the industry. I do not pretend to be completely objective in my coverage; I invest a lot of my own money in Lending Club and Prosper and plan on investing a lot more. I want the industry to continue to flourish.
So, while I don’t really believe that an investment in p2p lending is a low risk investment I think we can all agree that it is a lower risk investment today than it was two or three years ago. I would also propose that today it is also a lower risk investment than an S&P 500 index fund or a total bond market index fund.
But what do you think? Am I crazy to even suggest this? As always I am very interested to hear your comments.