It was almost seven months ago when the news first came out about a massive deal that was in the works at Prosper. But then nothing. Every time I checked in with Prosper about it since then they said it was still in process. Today, we learned that the deal has indeed closed and what a deal it is.
The official press release came out this morning. The details of the deal are pretty much what we learned back in August. A consortium of investors has committed to buy Prosper loans worth up to $5 billion over the next two years. The press release details who is in this consortium:
The investors in the consortium are affiliates of each of New Residential Investment Corp., Jefferies Group LLC and Third Point LLC, and an entity of which Soros Fund Management LLC serves as principal investment manager.
People familiar with the matter told me that the consortium has been buying loans at Prosper since Q4 last year. They also said that all loans are being purchased at par and there is no discounted servicing either. So, as far as profitability goes this is a fantastic deal for Prosper. Of course, there is one catch. The investor group will receive warrants for Prosper shares that will represent a 35% ownership stake in the company if they purchase the full $5 billion in loans in the two-year time frame.
The Wall Street Journal reported that Prosper will be starting its own securitization program in the second quarter and loans purchased by this consortium will make their way into these securitizations. Another interesting piece is that the consortium has lined up $1 billion in warehouse financing from the likes of Credit Suisse, Deutsche Bank, Goldman Sachs and Morgan Stanley.
So, let’s put this $5 billion loan purchase commitment into perspective. It is hard to overstate how big of a deal this is for Prosper. While Prosper has not released their Q4 numbers yet my estimate for their 2016 total loan volume is around $2.2 billion. So, from the outset this deal will represent at least 50% of their business. Now you get a sense of why the Prosper board was willing to give up 35% equity in their business to get this deal closed.
Now, the challenge will be this. What happens if this consortium stops buying at some point? Prosper needs more large investors. I am a little worried they are putting all their eggs in one basket. I would like to see some more big deals closed this year so they can bring more balance to their business and not be reliant on one large investor even when their interests are aligned (given the equity kicker). The good news is this deal should see them back in growth mode again and back above their 2015 high water mark of $3.7 billion in originations.