Every quarter around this time I get emails from readers asking when I will be publishing my quarterly returns post. For many years now it has been one of the most popular features on Lend Academy. People like to know how others are doing so I have been sharing my returns here every quarter since Q4 2011. Over the years I have diversified beyond my initial investments in Lending Club and Prosper into the three major asset classes within marketplace lending: consumer, small business and real estate.
Overall Marketplace Lending Return at 7.28%
One could almost say my returns are in a downward spiral. Since peaking in Q1 2014 at 12.44% my returns have decreased pretty much every quarter and for the last two years that decrease has averaged around 0.5% per quarter. Two years ago I stood at 11.3% and my weakest Lending Club account earned a respectable 8.19% and the average return of my original six accounts was 9.51%. Times have indeed changed since then.
This past quarter my overall returns stood at 7.28% and the returns for my original six accounts were 5.07%. My worst Lending Club account was my original account there and it came in at 1.95% for the year. The only good news, if there was any, was that I did not have a negative quarter in any of my accounts this quarter unlike in Q1.
For those readers who may be new to my quarterly returns post the reason for the drop in my returns are issues, primarily at Lending Club, in the D and E grade loans issued in late 2015 and early 2016. These have underperformed significantly, particular the 36-month loans, and these are the loans I have made the bulk of my portfolio. Now, I made some adjustments at the start of this year but these loans are still defaulting at higher than expected rate and it will be the end of the year I expect before I will see things begin to improve.
Now on to the numbers. Click the table below to see it at full size.
As you look at the above table you should take note of the following points:
- All the account totals and interest numbers are taken from my monthly statements that I download each month.
- The Net Interest column is the total interest earned plus late fees and recoveries less charge-offs.
- The Average Rate column shows the weighted average interest rate taken directly from Lending Club or Prosper.
- The XIRR ROI column shows my real world return for the trailing 12 months (TTM). I believe the XIRR method is the best way for individual investors to determine their actual return.
- The six older accounts have been separated out to provide a level of continuity with my earlier updates.
- I do not take into account the impact of taxes.
Now, I will break down each of my investments from the above table grouped by company.
Lending Club
As you can see in the table above I have a total of five Lending Club accounts. The screenshot here is of my very first account that was setup in June 2009. While Lending Club shows an 8.19% return I ignore that number and do my own calculation. My TTM return here is at an all time low of 1.95% but at least I have reversed what happened in Q1 when I had a negative quarter. As I shared in my Q1 results I had an annualized return of -2.63% in Q1, my Q2 annualized return has bounced back nicely to 6.32%. I am hesitant to say the worst is behind me because in my largest Lending Club account, my wife’s traditional IRA I barely broke even in Q2 with an annualized return of 0.74%. This brought the TTM on that account down to 3.58%. I think I will have some more difficult quarters here before the bad loans work their way through the system.
Prosper
It has to be said that during these difficult times at Lending Club my Prosper returns have held up quite well. My main Prosper account was opened in 2010, I initially invested $50,000 over a period of 18 months or so and it has grown now to almost $88,000. While my Lending Club accounts have struggled my main Prosper account has been quite consistent remaining in this 8-9% range. This is a taxable account and my losses here are well over $3,000. While I can offset these losses against some of my other investments I am no longer adding any new money to this account.
Direct Lending Income Fund
The Direct Lending Income Fund continues to be my most consistent performer returning solid double digit returns every quarter since I started investing back in 2013. Having said that there are some changes coming up with this investment. Apparently, by sharing my returns here I am in violation of the investment agreement I have with them. As this fund scales to the billion dollar range they are getting more strict with compliance. The only way I could continue investing was to remove all references to my fund returns. That was not something I was willing to do. So, my full investment was redeemed as of June 30, 2017. There will be more on my plans here in next quarter’s update.
Lend Academy P2P Fund
The Lend Academy P2P fund, managed by the team at our sister company NSR Invest, invests in Lending Club, Prosper and Funding Circle loans and has a small position in Upstart as well. I have been pleased that the fund has not been that impacted by the weakness at Lending Club because we do have a significant position there. The TTM returns have maintained around the 7% mark which is a full two percentage points higher than my own combined Lending Club/Prosper returns.
P2Binvestor
Asset-backed small business lender P2Binvestor has been very consistent and remains one of my favorite investments (full disclosure: I am on the advisory board of this Denver based company). These are short-term loans, backed by accounts receivable, with 30-60 day liquidity. I like the diversification this investment provides and the fact that you can earn a double digit return with such a short duration makes this a compelling investment. While I have two loans in default right now I have still not lost a penny of principal in the four years I have been a P2Bi investor.
PeerStreet
PeerStreet is a real estate platform focused on fix and flip properties. These are short term loans, typically between 6 and 24 months, and they are backed by the property. I started investing in April last year and I just made my 2017 IRA contribution in June. I have now made my 2015, 2016 and 2017 IRA contributions to PeerStreet as I focus on building up my real estate holdings. They have a $1,000 minimum investment which allows for decent diversification – I am currently invested in 19 properties.
Streetshares
Streetshares have been my top performing investment now for two quarters in a row. In fact, my returns have gone up in this most recent quarter to 14.12%. These are small business loans made to primarily veteran-owned business with typical loan durations of 12 to 24 months. You can invest as little as $25 per loan and I have built up a portfolio of over 100 loans since I started investing in 2015. They also offer Veteran Business Bonds, an offering for non-accredited investors, that pays a fixed 5% per year.
Final Thoughts
My Lending Club investments continue to be a drag on my overall returns. There are signs that recent vintages are performing much better so as I move into 2018 I expect my returns will start to go back up. But for the rest of this year I don’t see much chance of any significant improvement there.
My own strategies are also moving more towards the conservative end of the loan spectrum. I think that has been the lesson here for me. I was overweight on D and E grade loans and not diversified enough across the whole universe of loans. That is changing as new reinvestments are now being channeled into lower risk loans in some of my accounts. This will mean that double digit returns will not happen again but I have a better chance of consistently hitting 6-8% returns. With my overall investments my goal is to get back to 8-10% returns in 2018.
Finally, as I do every quarter I want to end by highlighting the net interest number which for the last 12 months stands at $51,413. This is the lowest total for net interest for over two years but it still means that my overall investments are growing. In fact I crossed over $750,000 in my total marketplace lending portfolio this past quarter.
As always feel free to share your thoughts in the comments below.
Please explain why your net annualized Lending Club return differs from the value calculated by Lending Club. Lending Club shows my return at 6.77%. I started acquiring loans on 6/8/15. I have predominantly C,D and E grade loans. I wonder what my real return is? [I am aware that you use the XIRR() function in Excel to calculate IRR.}
Hi Michael,
Good question. The main difference between Lending Club’s NAR and my XIRR() return number is that NAR is calculated on the life of the loans in your portfolio whereas my calculation is looking at only the change in account value over the last 12 months.
You can find out more here:
https://www.lendingclub.com/public/about-nar.action
As always Peter, I applaud you, and always look forward to your quarterlies.
Looking forward to see what your next moves will be, as to what you will deploy monies from DLIF you will receive into.
Also glad NSR invest is holding their own.
Have you ever thought about bitcoins, ethereum, mining of them, etc?
Keep up the great work always educating on the goings on in the industry with your insightful work thru lendit.com, the free educational site, which everyone should subscribe to:)
Thank you!
Thanks Hrant. I own a few bitcoin but I put that outside my marketplace lending investments. While I am getting more involved with blockchain I still consider cryptocurrency a more speculative investment.
I always enjoy these posts. They provide us a nice framework we can all use when evaluating our returns. The big news to me was your decision to exit Direct Lending Income Fund. It doesn’t seem reasonable that their terms of agreement do not allow an investor to share the performance of their returns with others. Do you know if this is common practice for similar investment vehicles? Presumably none of the other investments you’ve included in your report have this restriction and I’m sure many if not most already have >$1B AUM.
Also interesting was how well your Prosper accounts have performed versus LC. I see your average interest rates for Prosper were even higher than LC so loans for both were towards the risky end of the spectrum. It was an apples to apples comparison.
Thanks Rob. Just to be clear it was not my intention to exit the DLI Fund, I was given very little choice. I would have happily stayed an investor for the foreseeable future.
As for other investment vehicles, I know some have issues. In the last few weeks I have been looking at options when I tell some of these platforms I will be publishing my returns they say I cannot do that. But for the existing holdings everyone is fine.
In my accounts Prosper has been performing better than LC for some time now. They did not get as aggressive as LC in the higher risk segments and defaults have been within the historical range. But recent vintages from LC show promise again so the pendulum could easily swing the other way at some point. That is one of the main reasons I like investing in multiple platforms.
Impressive that you are willing to give up investing in the fund for transparency sake. Kudos to you!
Depending on how long until the next recession, the current weakness in lower grade notes may end up saving lots of people lots of money. It’s a shame we have to go through it though 🙁
Hi Rawraw,
This is not just an investment portfolio for me. I have chosen this industry as my career and I have a public leadership position here. I take that responsibility seriously.
Agreed on your other point. People will (hopefully) have learned the lesson not to concentrate their investments in the highest risk loans. And that serve them well in the next recession.
Peter, I checked out StreetShares and I didn’t see any investments available. They were for businesses and that made me hesitate. With Lending Club and Prosper, except for preferring the lower-rated, higher-yielding loans, I’ve essentially used the “braille method” in indiscriminately investing, which has worked out well. I have the feeling that with investments in StreetShares, unless I know which business to invest in, I may be making bad investments. Would you say that StreetShares vets their investments as well as Lending Club and Prosper do, so that blindly investing the same thing on all available investments would work well?
Hi Tom,
I like the way Streetshares have done their underwriting. In fact, I have recently added to my investment there and am investing in every loan they originate.
Hi, I’m thinking of using Lendingclub as the fixed income portion of my portfolio based on the assumptions that the 30-yr bull market in long bonds is coming to an end (and short bonds have little yield). Currently I have an average interest rate of 17.5% and an adjusted net annual return of 5.2% ( I opened my LC account in Q3 2015). The cashflow characteristics of an LC account should allow to move from say a 40/60 to a 60/40 portfolio in just over a year (without using margin). That could be ok, and may be a benefit in avoiding being too early loading up on stocks in a market decline and selling down too early when stocks are particularly expensive.
My question is what kind of a drawdown I might expect to see in a LC account in the next recession? The charge-off rate would have to go over 17.5% to see a decline in principal, but by how much? Will it go to 20%? 30%?. I have no idea. If consumer credit is more like equity than a bond it may not be the best idea to use it as the fixed-income portion of a portfolio. Ideas?
LendingClub publishes loss curves in their 10Q. Look at the ones from the recession. If your weighted average interest rate is that high, look at the loss rates for high grade notes.
I’ve had a look at that now. Even for C,D,E grades it shows a more or less flat return in 2007/08 — i.e. little to no loss of principal. A & B grade grades show positive return in low single digits. If that is typical of performance in a recession I see no reason not to use consumer loans instead of corporate/government bonds.
I feel the current charge-offs rates (11-14%) are high, perhaps due to poor underwriting in 2015/16 (as per article above). The 60 month loans were bad — ~40% of portfolio but ~60% of charge-offs. I’ve stopped buying 60 month loans. I think I may widen out to take A thru E grades to help performance in a recession.
I haven’t invested in LC. Is the difference between your “average interest rate of 17.5%” (presumably that’s an annual rate) and “adjusted net annual return of 5.2%” the result of defaults?
Yes, Spencer that is correct. With one slight nuance when looking at Lending Club’s Adjusted Net Annual Return. That adjusts the account down (both the return and the balance) to exclude loans that are expected to charge off.
Yes — You can see the details of LC loan performance here
https://www.lendingclub.com/info/demand-and-credit-profile.action
and interest rates here
https://www.lendingclub.com/public/rates-and-fees.action
Thanks much Peter & Mike.
Those default rates are a REAL bear! “A” grade loans are much less risky, so their avg. rate is 7.26%/yr. and defaults are relatively low, so the “net return” is 4.86%/yr. Conversely, “E” grade loans are much riskier, have avg. rates of 19.94%/yr. and much higher defaults, so their “net return” is still only 5.59%/yr. If I’m reading Peter’s stats correctly, his overall net return is a good bit better (7.28%/yr.), however, none of those rates seem like anything to get very excited about, especially considering the work/time involved in picking the “right” loans.
A big part of the problem with these LC loans is that they are unsecured; the likelihood of collecting anything when the borrower defaults is pretty low. Hence, charge-offs on these unsecured loans amounts to pretty much the entire amount owed at the time of default.
Rea estate loans, on the other hand, have the underlying real estate as collateral. If the original loan was 75% LTV, the lender forecloses, and the value turns out to be 10% less than the estimate when the loan was originated, the lender only loses 10% of the loan amount (plus collection/foreclosure costs). Hence, charge-offs on real estate loans are significantly lower than those on credit card debt. Also, real estate loans are amortized, so the lender receives monthly pmts. up to the time of default (reducing, somewhat, the loss in event of default).
Correction: in the real estate example, the value after default could be as much as 25% less than the estimate when the loan was originated, and the lender wouldn’t lose anything (except foreclosure/collection costs).
Of course, the interest rates on secured real estate loans are overall lower than that for unsecured consumer debt, particularly for lower credit quality loans. For example,Lending Club historical return for A grade loans is 7.26% but the rate increases dramatically for lower credit quality to as high as 24.04% for F + G quality loans. By contrast, secured, short term real estate loans which probably have lower risk than consumer loans rated below A grade, but are not risk free, typically yield 7-8% (with LTV of 75% on, e.g., PeerStreet).
Thanks for the interesting post, Peter. Are the “returns” you refer to “annual returns”? Is the “Average rate” the average annual rate of the loans you funded? The XIRR is significantly lower in most cases. Is that result of defaults in the loans you funded?
What does everyone think of real estate crowdfunding investments, such as crowdstreet.com, fundrise.com, Realty Shares, etc., have?
I’ve invested in Atlanta, Ga.-based Groundfloor since the platform was introduced. As long as the company focused on loans in the Atlanta area (during proof of concept), things went pretty well. When they expanded into other states, defaults/losses increased significantly. They promoted high interest rates to attract investors, but in doing so only attracted ultra-high-risk borrowers. Geography/proximity prevented inspection of projects to ensure funds which were advanced were actually spent on the project. Scalability seems to be a major hurdle for any real estate crowdfunding platform. It’s time-consuming to review loan offerings on their site. Too many loans are based on borrower or broker valuations, instead of independent appraisals. Loans which are expected to pay interest over 12 months are frequently pre-paid in only a few months. Their rating of loans leaves a lot to be desired.
Now looking into other platforms, like PeerStreet, which seems to have done a better job of matching lender/investor and borrower rates, and risk.
Hi Peter,
Couple of questions for the Streetshares update you have shared above.
– What’s the risk criteria you are invested with at StreetShares: Low or All or High?
– Can tax write-offs be claimed for the losses realized since principal money is lost here?
Love that you share your quarterly returns.
Thanks,
LC.
I initially invested in the High Risk loans but I have recently made a $20,000 addition to my account there so to speed my deployment of capital I am investing in all loans until that capital is fully invested. Then I will likely go back to just the high risk loans.
While I am not qualified to give tax advice it is my understanding that losses can be claimed as bad debts on your taxes. But you will need to check with your own accountant.