Podcast 13: Don Davis of Prime Meridian on Institutional Investing

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Don Davis is the president of Prime Meridian Capital Management and the managing partner of the Prime Meridian Income (PMI) Fund. This is a fund for accredited investors that was started in 2012 and invests primarily on the Prosper platform today.

While many of us complain about the competitive investing environment at Lending Club and Prosper today and how difficult it is to invest in all the loans that meet our criteria, institutional investors have an even more challenging time. Here, Davis walks us through some of these challenges and how his fund is managing them.

In this podcast you will learn:

  • Why Davis decided to create a fund in the p2p lending space.
  • How and where the PMI Fund invests.
  • Who the typical investors are in the PMI Fund.
  • How the PMI Fund ties in with Novus Investments, his investment management firm.
  • The investment strategy for the PMI Fund.
  • The importance of phasing in large investments to reduce cash drag.
  • The size of the PMI Fund and Novus Investments.
  • The returns the PMI Fund provides for investors.
  • Where yields are going for p2p investors.
  • How Davis feels about the dramatic growth at Prosper and Lending Club.
  • Why he feels that Prosper and Lending Club are doing a good job today.
  • The challenge with the reduced maximum investment amount of 10% of the loan at Prosper.
  • What Davis thinks of the recent acquisition by Lending Club.
  • The difference between an active and a passive investing approach.
  • What the future holds for Prime Meridian.

You can subscribe to the Lend Academy Podcast via iTunes or Stitcher. There is an audio player directly below or you can download the MP3 file here.

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Anil @ PeerCube
Apr. 26, 2014 1:00 am

Great podcast, really enjoyed the balanced view from Don. He wasn’t all ‘hail to the chief’ type and had fair bit of cautions.

Chris
Chris
Apr. 27, 2014 12:47 pm

I thought it was an informative podcast as well. The only topic I wish would have been addressed is Don’s position on using “qualified” (retirement) money versus “non-qualified” (non-retirement) money. For example, of the funds Don is currently managing, are they all non-qualified (taxable) accounts or does his firm structure some of these funds to meet the IRA/retirement/non-taxable requirements? Peter, did he mention (or did you ask any questions about) this topic offline?

Don Davis
Apr. 27, 2014 4:57 pm

Thank you, Peter, for the interview and asking a lot of great questions. You are a much better public speaker than I. 🙂 To answer Chris’ question, the fund accepts both qualified and non-qualified accounts. Another point I didn’t get a chance to mention in the interview is when Peter asked about returns. It’s very important to know how returns are calculated when a lending fund reports their performance. I have seen some very aggressive cash on cash accounting methods from some other funds out there which will inflate the returns in the first year until the defaults start rolling in. The PMI fund uses the very conservative default accrual accounting method which is the gold standard for the banking/credit card industry. All estimated defaults are fully accrued into a very healthy and growing default reserve account which is later reconciled against future defaults when they occur. Any Prosper/LC lending fund that has been around for at least a year should show lower returns in 2014 because gross yields have come down over the past year. Most funds will likely fall somewhere between 7-9% this year net of fees and defaults. If a newer fund begins reporting annualized returns that are higher than this, then they either likely do not have a diversified fund, or worse, they are not properly accounting for future defaults.