For some weeks now the number of loans available to retail investors on Prosper has been paltry. The above screenshot is pretty typical. Just a handful of loans available and all have a AA or A Prosper rating (loan grade). If you want to invest in higher interest loans, even B or C grade, then you are out of luck.
But keep in mind every day there are many other loans available; Prosper adds new batches of loans regularly (at 9am and 5pm PT on weekdays, noon on weekends). And during this time there are a number of loans available from a wide range of loan grades. But what happens is this. Within seconds pretty much every loan with a loan grade of B or below is fully invested. Large investors have been dominating the retail platform and that is leaving very little for the average investor.
Platform Dominated by Institutional Investors
I spoke with Prosper’s president, Aaron Vermut, about this problem last week. He acknowledged that Prosper has let the scales tilt too far in favor of the institutional investor. He also said that Prosper is fully aware of the problem and is in the process of making some changes.
One of the issues is that institutional investors have been able to invest in the fractional platform at up to 50% of a loan. So, it only takes two large investors to close out a loan immediately. And that explains most of the loans being fully funded in seconds.
“Clearly the 50% limit for institutional investors is not working,” said Vermut. “We are making some changes here that will help to level the playing field. I can tell your readers this – the future at Prosper is going to continue to have retail investors as an important part of our platform.”
A 10% Limit for Loans on the Retail Platform
Here is the big change. Over the last week Prosper has contacted all their institutional investors and told them to limit themselves to 10% of the loan amount on the fractional (retail) platform. Prosper is evaluating this change and may make this permanent by programmatically putting in a hard limit for every investor on the retail platform. Already, we are seeing loans stay on the platform longer. Last night when 36 new loans were added, 29 of these loans were still available for investors ten minutes after they were added.
As to be expected this move is not being welcomed by some of Prosper’s largest investors. Institutional investor interest has never been stronger but Vermut said that he is having to say no a lot lately. But he sees this as important. He is committed to maintaining a more balanced mix of investors at Prosper.
Prosper clearly had to do something. I have received many emails from disgruntled Prosper investors and you only need to read the forum to hear what many of these investors have to say. Prosper was in danger of losing a good chunk of their retail investor base.
Vermut also said that Prosper has stopped taking on new institutional investors and no funds are being approved to take on new leverage. I am sure that is going to disappoint some of the hedge funds out there but it is understandable given how far the pendulum had swung in their direction.
The Weather is in Part to Blame
Even with the increased investor interest Vermut said there should have been more loans on the platform in the last week or two. February has started out slower than expected because of some weather related delays. Some promotional mailings have been delayed due to the winter weather and that has caused fewer borrowers to apply for loans. There was also a couple of technical glitches that caused fewer loans to be added (this issue has since been resolved).
One final interesting tidbit that Vermut shared with me was this: “Despite the lower loan supply retail investor inflows have remained positive. And we want to keep it that way.”
I would like to hear from you? Have you noticed more loans available in the past week or so? I am always interested to hear your thoughts.
We will see how this pan’s out. I’ve had to start withdrawing my money from Prosper as loans are paid off. I just can’t afford to have it sitting in cash earning nothing.
I understand you want to do that. From my perspective I have gone from over $1,000 in idle cash to around $400 in less than a week. I am investing through the API but there are more loans to choose from even for people investing manually.
Peter,
Personally speaking, this post could not have come at a better time as I arrived at your website this morning to check for any new blogs posts in hopes to distract my frustration at (once again) finding zero loans on the Prosper platform. And even though I am not a retail investor on Prosper (full disclosure), I still use the regular web GUI with filters that typically yield 10 – 20 notes per day. However the past few days in a row have yielded nothing. Meanwhile, idle cash continues to accumulate. And yet I rarely (if ever) have this problem on the LC platform.
Thanks for sharing this timely and encouraging update. I was becoming increasingly convinced that I am going to have no choice but to either get API intensive or shift more of my funds to the LC platform. And even if I were to go to the API, it can ultimately become a moot point if most investors do the same. In effect, you will have a crowd of people running even faster to an empty table. A stronger throttle against the really big players was long overdue. I applaud Vermut’s willingness to pay attention to the smaller investors, retail and institutional alike.
I do have one question from your post above where you wrote:
“Vermut also said that Prosper has stopped taking on new institutional investors and no funds are being approved to take on new leverage.”
How does Vermut know if institutional investors are buying notes on leverage or not? Are you referring to an “in-house leverage” or margin account offered via Prosper? If the answer is “yes”, then I must admit I didn’t know Prosper offered margin in the first place. Would you mind elaborating?
Good Job Peter,
Chris
Chris, the API is already clogged. Milliseconds make all the difference when obtaining loans particularly in the whole loan market. With the new limits on the fractional loan pool, the demand in the whole has exploded. Keep in mind almost 50% of what prosper issues is in what they call their passive loan pool. The rest is split, 50/50 between active whole and fractional. I can tell you this new 10% cap has made a big difference for the fractional loans, it’s been much easier to get money invested. If you’d like to try using the API for a week, email me. We have a service for this.
Hi Chris, There is no in-house leverage program at Prosper. This is for large investors who are borrowing money externally for leverage usually from banks such as Citi of Chase. I imagine these clients have to sign agreements with Prosper that state whether they are getting leverage.
One thing that Vermut also said to me that I did not include in the post was this. If they have 10 different fund companies all getting leverage from Chase, for example, then that is a single point of failure for Prosper – they prefer to diversify their investor base.
Chris,
I was interested in some of your comments but confused by others. You wrote you are not a retail investor on Prosper, but you also wrote about moving your funds from Prosper to Lending Club. How is it that you would have funds with Prosper to move from the platform if you’re not a retail investor there? It doesn’t sound like you’re an institutional investor. Perhaps I minunderstood. Please clarify.
As to moving funds from Prosper to Lending Club, I have been doing just the opposite: moving my funds from Lending Club to Prosper. Why? Because at Lending Club my cash balances have been growing and growing because they have failed to reinvest them. (I have the kind of accounts where they do the investing for me. I can’t be bothered with that.)
Beginning in January I had less than $600 investible cash in my Roth IRA at Lending Club. By March that had grown to nearly $4,000, by April over $6,500 and by May my cash balance was over $10,000. I made no deposits to my IRA at Lending Club. All that cash was accumulated directly as a failure by LC to redeploy it. By the end of the year I’d removed $29,000 in a series of periodic withdrawals as a result of accumulating cash. These were funds that they failed to redeploy as they became available from interest payments and loans paid off. I have turned off the reinvestment feature in my IRA at Lending Club and will withdraw cash as it accumulates until the account is empty. Selling loans from an IRA is not permitted. The only way out it to wait for the loans to be paid off or default.
In my standard account at Lending Club, after having deposited $25,000 in January I’d withdrawn all that plus $1,000 more by year’s end. Most of my funds were moved to Prosper which has done a better job of investing them. Allowing for the deposits I’ve made, cash balances in my accounts have done down at Prosper, which is as it should be, whereas they have gone up at Lending Club which represents a broken promise, IMHO.
Hello RussG,
To answer your question above, when I was saying “I” in my original post, I was referring to my investment firm, which has institutional accounts on both platforms. P2P notes take a minor position in a fund I manage. I recently noticed an abnormal cash accumulation rate in my Prosper business (institutional) account and that was the source of my February 11 complaint post. Hope that helped to clarify?
Take care,
Chris
As a retail investor this is good news for my account — as long as it doesn’t hamper the growth and scalability of Prosper’s business. Prosper must be confident they are past the point of worrying about whether or not they will survive as a company, because saying no to institutional investors must be difficult. Management seems to know what they’re doing, I remember being much more worried under the previous crew.
In short, I welcome the change as long as Prosper can maintain their platform stability longer term.
Yes, Prosper is very confident that they will get to profitability soon and their survival as a company is no longer in question. I know today they are moving resources from the investor side to the borrower side because they really need to keep that funnel roaring along.
What a surprise! Prosper has just made what I would even term a bold move to retain its retail investor base that was clearly headed for the exits. LC management has said many times that retail investors are and will continue to be an important segment of their lending base.
My question is WHY either company sees retail investors as important going forward. Retail investors made it possible to get the ball rolling, but my vision of the “P2P” end game is one without retail investors at all. The guys and gals at LC and Prosper are very bright and must have good answers to WHY; I just can’t imagine what they are. Please enlighten me.
Hi Rob, That is a fair question. What both platforms say is that they want a diversified investor base and that retail money, particularly those in retirement accounts, is sticky money. I think that is partly the reason. I also think it helps them in branding and the whole “democratization of finance” line as well as with collections.
The interesting thing is that no new platforms are targeting individual investors – nearly everyone is going after institutional money. And if Prosper and LC had not already gone through the entire S-1 registration process I often wonder whether they would go the same route.
What an interesting concept Peter. Would this lending look the same had platforms knew then what they know now?
It might be interesting to consider that the way a company pays the bills is almost always *different from what they enjoy doing.
For example, consider how painters in the expensive city of Manhattan balance joy with profitability. The way they pay the bills is by doing these boring highly-lucrative entryway pieces for wealthy clients, hotels, and offices – highly-safe oil on canvases that are nearly guaranteed to keep each artist afloat. But once the bills are paid, they get to paint the pieces that earn them real notoriety, pieces which they actually enjoy making.
You can see the hesitancy to embrace institutions earlier in the history of these companies and their initial lack of profitability (IE: some platforms in Europe seem small, in some ways, because they have not involved institutions). Even today, Aaron Vermut has repeatedly stressed his desire to not let Prosper simply be “specialty finance” and solely cater to wealthy institutions. It would be a hell of a lot less paperwork for them, paperwork they diligently continue to file year by year.
Some in the forums might disagree, but I think both Lending Club and Prosper’s hearts are in the retail space (and purely accredited platforms envy them for this). Institutions are simply how they keep the bills paid.
Interesting discussion Simon. I would like to think you are right. I know both Aaron Vermut and Renaud Laplanche stress the importance of the retail investors and they could have easily ignored them by now. The fact that they have not does say something. Whether it is because they truly love the retail space or they just think it is good business to keep them involved is hard to say. My guess is it is a bit of both.
Always love the input here. Haven’t been able to find any loans for weeks, so this is a welcome change for this lender!
Thanks Nick. I think this is the best environment for retail investors at Prosper in over 12 months.
There is so much more than the weather to blame here but hey, lip service is still service. Retail P2P legitimized cutting banks out of this lending market. It will continue to need early adopters to test new products and markets. Institutional investors make up the bulk of stock trading but the endgame still includes retail stock investors and advisors.
I’m going to reply to my own comment to just reiterate what an absolutely lame excuse the weather is. C’mon! The vortex sucked all of the loans off of the Prosper platform but didn’t affect LC?
Good point about the stock market. I think we will end up with a similar endgame here with the bulk of the money being made up by institutional investors but with retail investors being a not insignificant portion.
Peter,
This is welcome news for sure. I haven’t made a loan on the Prosper platform since last August for these very reasons, and have been steadily withdrawing cash since.
Regarding retail participation, if you look at the trading data for stocks now vs. the 1990s, many fewer retail investors own individual stocks anymore despite it only costing $10 to make a trade. Professionals and high frequency firms dominate the day to day trading so much that most retail investors who want to invest in stocks are resigned to picking mutual fund managers and ETFs. There’s also the issue of financial advisors limiting their liability by recommending funds instead of individual stocks.
If the institutional demand remains strong on p2p loan platforms, and every indication is that it will, I foresee this business going in the direction of retail participation through closed-end funds or managed account programs rather than by individual loan picking, and you’re already starting to see some of that, such as LC’s PRIME program.
When retail investors invest in bonds – effectively lending money to governments and businesses – they mainly do so through intermediary vehicles such as mutual funds and ETFs. In p2p, investors are lending directly to that third pillar of the economy, the consumer. In the bond world, large institutions like PIMCO and Black Rock tend to suck up all the supply right away when governments and corporations go to market, just as the institutional guys are doing on p2p platforms now. Firms like PIMCO and Black Rock are buying mainly on behalf of individual mutual fund and ETF holders. The easiest structure in p2p that would be salable right now would be a closed end fund that pays a monthly dividend. Open-ended mutual funds would be too difficult right now given their daily liquidity requirements and the current fragmentation and lack of activity right now on the p2p secondary market.
Hi Chris, Thanks for chiming in. That is a great summation of where we are going. The fund ecosystem is really only just getting started in this industry and I agree that a fund will be the primary way that investors will participate in this asset class over the long term. But I also think we will see an open ended mutual fund launch in the next 18 months – all that is needed is a daily liquidity vehicle and that is coming.
I believe there will be individual investors who want to pick their own loans for the foreseeable future. But just like the stock and bond markets, most people will prefer others to manage this investment and choose the loans for them.
The bigger problem with Prosper is that there are very noticeable differences in their loan pricing.
One can fudge with statistics and grades, but experienced p2p lenders know that you will be getting a higher yield lending to LC borrowers with similar profiles.
I think Prosper credit analysts are more data miners and aren’t aware of the 3 C’s of banking,
The last time I did an apples to apples comparison based purely on interest rates was nearly a couple of years ago now but back then the platforms were very similar is the yield versus risk equation. In fact, Prosper came out slightly ahead. It would be interesting to go back and do another rigorous analysis because the underwriting models at both companies have changed significantly since then.
Peter, I have one other comment on this thread. I thought your article statement above was especially telling:
“Already, we are seeing loans stay on the platform longer. Last night when 36 new loans were added, 29 of these loans were still available for investors ten minutes after they were added.”
Ten Minutes? Really? That is the marked improvement retail investors were hoping for? I think this is yet another example of the significant mismatch between supply and demand. It also draws to the inevitable conclusion that retail investors will either need to set their alarms twice a day or get more savvy with automatic investing.
Food for thought,
Chris
The ten minutes is quite significant as it allows for the automated quick invest (AQI) to kick in for investors. This should prevent them from having to jump in during the release times to manually add notes. Of course, if people aren’t using AQI to invest, then naturally they are stuck manually logging into their accounts.
I would like to echo the remarks of writing2reality – ten minutes makes a lot of difference. As you suggest, by the end of the year most serious investors will be investing through the API and having the big guys limited to 10% is huge. This way we can have dozens or hundreds of investors participate on most of the loans on the retail platform – even when they stay on for just 10 minutes.
Chris — I’ve been using Automatic Quick Invest on Prosper which is quite easy to set up, and 10 minutes makes a difference. You can probably get more by logging on, but the AQI is better now.
Peter,
Thanks for this post.
Jason
You are welcome Jason. Thanks for prompting to to write something here.
Wow! I feel like I have been in another reality here with Prosper.
During the month of February, especially, I have been very happy with loan selection and that’s using many conservative filters (no deliquencies, etc). Granted, I am headed towards 400 loans in a few weeks, I prefer A-C with a few D and E loans. As a result, I am usually ending up with the 13-17% range. I do start at 9:05AM and 5 or 6 PM. And, yes! I have noticed that the good loans are gone within 30 minutes. Fortunately, I am retired and I prefer to personally select each loan. So far…I am a very happy camper. Literally, as a full-time RVer. Thanks for your research and post Peter.
You’re welcome David. Thanks for chiming in. If you are selecting loans from grades A-C then you have an advantage over investors like myself you focus on loans with grades C and below. The higher interest loans at Prosper are much more popular and so they are fully invested much quicker. The lower interest loans can stay on the platform for a day or more. But by investing just after 9am and 5pm PT you will have decent selection across loan grades.
Hi David,
I’m a full-time RVer, too! I’ve been with Prosper since Nov 2006 and been with LC since May 2013. Making ~10% after defaults. Better than CDs.
glad to hear that you acually r able to get on prosper I have been trying to apply for a loan and can’t get past the initial start page where it says get a rate qoute.I have called and e-mailed support with the problem but get nowhere how did you get past the first page of the hispanic lady your secret is safe with me and any help appreciated michael
Michael, I am sorry you are having trouble but there is no problem that I can tell with the Prosper site. I just went on myself and went through the initial borrower screens just fine.
You could try going directly to the Get a Custom Rate page by going here:
https://www.prosper.com/get-rate/
Good luck.
Took your advice and went to get a rate directly filled in the required information quess what your good. There is no forward to go to when I complete the information all I get is are you a member then requests my email only to have it come back saying does not show on our records please try again that is my email I have used for a long time and never had a problem in the past. when filling out the rate request there is no icon to go to other than are you a member am I doing something wrong for the computor at the library thinking maybe it’s mine I get the same result. appreciate your reply and help but I’m going to try lending group at least I can forward the information they request without any problem for consideration of loan little more costly but as stated at least when they request your information it goes through and recorded per there request if you find that I might be doing something wrong I’d appreciate it if you could inform so I can correct it for when I contact support at prosper I just beat a dead horse no point in pursueing prosper although I’m sure they are a reputal org,But I have to move forward not wait for I don’t know will contact support and end up with the same ordeal get a rate no place to go from there only are you a member frustrated highly michael.would appreciate staying in touch.