Free Updates

Exclusive content to your inbox for FREE!

Options for Accredited Investors at Lending Club and Prosper

by Peter Renton on April 16, 2012

Before I started writing this blog I had no idea what an accredited investor was. It sounded kind of official but what did it really mean? It is actually just a designation by the SEC that an investor has reached certain levels of income ($200,000 annually) or assets (more than $1 million excluding a home). Here is the full definition from the SEC.

Accredited investors have more options because they are considered more sophisticated investors (of course that may or may not be true) and presumably they can understand investment risks better than your average investor. They can invest in all kinds of different investment vehicles such as hedge funds or private equity that are not available to average investors. They can also invest differently when it comes to p2p lending.

Invest in Lending Club and Prosper From Any State

Accredited investors in Lending Club and Prosper do not need to open an account at either company in order to invest. They have access to private placement funds that are not available to the general public.

These private placement funds are allowed to take on accredited investors from any state, thereby circumventing the restrictive state requirements set forth by Lending Club and Prosper.

This Article is Purely Informational

In researching this article and I spoke with many senior managers at Lending Club and Prosper and I was warned that I can only share publicly available information. You see, these private placement funds have strict rules and part of these rules is there can be no public solicitation for investments.

So let me be clear. This post is for information purposes only and I am not recommending investment in these private funds.

LC Advisors Offers Two Private Placement Funds

If you read the latest Lending Club prospectus (which was just released last week) there is all kinds of information about LC Advisors. This, of course, is publicly available information and as such I can share details here.

LC Advisors is a Subsidiary of Lending Club

LC Advisors, a subsidiary of Lending Club, is an SEC registered investment advisor that also acts as the general partner to two private investment funds. They started offering these funds through private placement in February 2011. By the end of last year the total investment in these funds exceeded $75 million and as was reported by Lending Club last week that number is now over $100 million.

There are two funds run by LC Advisors. A conservative fund called the Conservative Consumer Credit Fund (CCF) that invests in only A and B grade notes and the Broad-Based Consumer Credit Fund (BBF) that invests in all loan grades.

Both funds are very careful not to tread on the toes of retail investors. There are rules that prevent them from investing in new notes and when they do invest they only take small portions of the notes. In the latest prospectus Lending Club shares that on November 30, 2011 the average investment per loan by CCF was $4,098 and for BBF was $3,575. The average percent ownership per loan was only 23.7% and 24.7% respectively.

As for returns, well, that is not shared in the Lending Club prospectus but I was surprised to read in the Wall Street Journal last week that basically provided this information. According to that article CCF is up 5.9% for the first eleven months and BBF is up 10% in its first year.

There is a Minimum Investment of $500,000

Now, investing is these funds is only for the truly wealthy accredited investor. These are 3C1 funds and as such they have a maximum limit of 100 investors. When these funds first launched the minimum investment was $100,000 but sources tell me now that minimum has increased to $500,000.

This is probably a good move because I am sure Lending Club will get some more demand after all the hoopla last week around John Mack joining the Lending Club board.

Prosper Funds for Accredited Investors

Now, Prosper has taken a different tack. There are no private placement funds on offer through any Prosper subsidiary. But there are still options. Unfortunately, Prosper was very explicit that I cannot reveal the names of these funds publicly.

But I can say this. If you read this Wall Street Journal article the journalist reveals the name of one of the funds. And then this investment advisor discusses how he invests in Lending Club and Prosper for his clients – and reveals the name of the other fund. My research also revealed the presence of a third fund but again I am not able to share any more information about that.

Now, if you are interested in learning more about Prosper’s options for accredited investors then I encourage you to call Prosper and ask for Austin Bryant. He will be happy to discuss more details with you.

Of course, you can be an accredited investor and ignore these funds. That is my preferred method because it provides more flexibility not to mention a lower minimum investment. But I also realize there are those investors who like the idea of p2p lending and want to invest but want somebody else to do the work for them.

{ 4 comments… read them below or add one }

White Coat Investor April 16, 2012 at 11:29 am

What is the ER on these funds? Any idea what the minimums are on the Prosper funds?

Surprised to see the minimums so high. There are lots of “accredited investors” (heck, half of doctors qualify just by virtue of their income, even if they have a negative net worth) out there who would be unwise to drop a half mill into a single asset class, even if they had it.

I’m also surprised to see the returns so low. It doesn’t seem to take that much effort to choose the better loans. You’d think someone doing it full time all day long could do better than average. Although if the ER was very low, I suppose I’d be willing to look at it as an “index fund” type approach.

Reply

Roy S April 16, 2012 at 2:03 pm

Wow! Talk about walking the fine line. “I cannot reveal the names, but you can find them here and here.” I am assuming that you are prohibited from revealing the funds by the SEC and not Prosper and LC, yes? After all, I don’t see a downside to either LC or Prosper in publicizing these funds to larger retail investors who may not want to take the time to manage their investments. If it is the SEC, then their views are that while these accredited investors are smarter than the non-accredited investors, they are still too stupid that the funds can’t solicit the public for investments. Or is it that this is some super secret club that the government doesn’t want the ignorant masses to find out about?

This is a very interesting post. I’m a micromanager myself, so the only reason I would go this route would be if I were residing in a state where I couldn’t invest in either…or I actually relaxed a bit and stopped being so uptight.

Reply

Peter Renton April 16, 2012 at 5:54 pm

@White Coat Investor, On the LCA funds the expense rate is 0.55% to 0.75% according to the LC prospectus. I believe the minimums are $100K on both Prosper funds.

I think the returns are right is line with the averages less expenses. According to Lendstats A & B grade notes at Lending Club in 2011 are returning 6.63% – take away expenses and you have 5.9% or thereabouts. Lending Club have long claimed around a 9.6% return across all loan grades and so I even thought the returns for BBF were higher than expected.

@Roy, It is the SEC who make the rules around private placement funds and Prosper are very wary of doing anything to displease the SEC. The fact that these are third party funds means that there is less information about them. You won’t read anything about private placement in Prosper’s prospectus. But the names of these funds are readily available to anyone willing to do a bit of digging – I just made it easier for people to do that digging.

As for your micromanager comment. I think in p2p lending it is not that difficult to get a better than average return my micromanaging your account – as long as you know what you are doing.

Reply

Charlie H April 18, 2012 at 10:26 am

Hefty miniums, but if you can only have 100 investors, might as well make the miniums high.

Reply

Leave a Comment

Notify me of followup comments via e-mail. You can also subscribe without commenting.

{ 1 trackback }

Previous post:

Next post:

Real Time Analytics