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An Investor’s Due Diligence Lessons in Marketplace Lending

This investor shares what he has learned doing due diligence on 40 origination platforms and 50 investment vehicles.

May 30, 2017 By admin 17 Comments

Views: 2,083

[Editor’s Note: This is a guest post from James R. (“Jim”) Hedges, IV. He was one of the early leaders in the hedge fund and alternative investments industry, and is the author of Hedges on Hedge Funds. He was the Founder and Chief Investment Officer of LJH Global Investments, LLC, an alternative investment advisory firm which advised on over $5 billion of alternative investment allocations.  In 2017, Mr. Hedges founded HEDGES COMPANY (www.hedges.company) to provide insights on alternative investments to entrepreneurs, investors and fund managers.  The firm is especially focused on specialty finance and co-investment opportunities.  Mr. Hedges is also a partner in LJH Financial Marketing Strategies, LLC (www.ljhfm.com). He lives in Los Angeles, California.]

When I began working in the family office and hedge fund worlds in 1992, private investors were looking, foremost, for return enhancement and, secondarily, for diversification. Fast forward 25 years, investors are still looking for return enhancement, but less on the equity side, and rather more for current income. In the early 1990’s, hedge funds were a secretive, largely unregulated landscape with virtually no disclosure and very little educational information available for those looking to allocate capital to the space. As a result, investors often did not know how to differentiate fund managers and tell the difference between an A- player and a C- player. There was a profound lack of thought leadership, and those charged with advising new entrants in the market had to do a great deal of educational missionary work and lay out a thoughtful path of insights.

In today’s marketplace lending sector, it is a similar story. There is a proliferation of funds in the space, and assets are flowing in to funds to the tune of hundreds of millions of dollars per quarter. There are ample industry-focused conferences and e-publications, but there remains precious little in the way of independent research and insight for private investors, institutions and the consultants who serve both groups. Product differentiation is difficult, and there is still not a robust set of data analytic tools or benchmarking indices.

In terms of the landscape, on one side of the field, we have a universe of loan originator platforms. Best known names like Lending Club, Prosper and SoFi have dominated the press, but there are, in my estimation, well over 100 unique specialty finance loan origination platforms, and within that group, loans are being originated in an ever-increasingly diverse set of sectors, such as:

  • Unsecured consumer credit for debt consolidation and emergency expenditures
  • Real estate lending (often secured by real property)
  • Small business credit
    • Merchant Cash Advance
    • Equipment Financing
    • Factoring
  • Retail installment contracts (RIC’s)
  • Solar equipment financing
  • Education financing
  • Automotive repair financing

Each of these segments has unique drivers impacting customer acquisition costs, underwriting procedures, and borrower behavior. Consequently, many of the segments offer differing yields, default rates and durations.

On the other side of the marketplace lending landscape, once the loans are originated, there are many different asset management structures through which capital inflows are being allocated, including:

  • Managed Accounts for institutional investors
  • Hedge Fund Vehicles (i.e. private partnerships: funded all at once with shorter lock-ups)
  • Private Equity Vehicles (i.e. private partnerships with investment drawdown periods and long-term lock-ups)
  • Fund of Funds investing across a spectrum of originator strategies
  • UK-listed Funds (i.e. closed end funds, most of which trade at meaningful discounts to their NAV)
  • Luxembourg SICAV’s
  • 40 Act Funds (interval funds which mostly have staggeringly high fee burdens)
  • Notes and Variable Life Insurance wrappers for tax efficiency

[Read more…]

Filed Under: Guest Post Tagged With: Due Diligence, hedge funds, marketplace lending

Views: 2,083

Will the Real Marketplace Lender Please Stand Up?

Understanding the hidden consumer regulatory risk for hedge funds

January 20, 2016 By Ryan Lichtenwald 1 Comment

Views: 964

Regulation of peer to peer lending

[Editor’s Note: This is a guest post from Michael Mann and Margot Laporte. Michael Mann is a partner in the Washington, D.C. office of Richards Kibbe & Orbe LLP. Margot Laporte is an associate in the Washington, D.C. office of Richards Kibbe & Orbe LLP.]

The recent growth of marketplace lending platforms has resulted in non-bank entities, such as hedge funds, engaging in activities that could conceivably be construed as consumer lending transactions. The Consumer Financial Protection Bureau (the “CFPB”) was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 as an independent agency within the Board of Governors of the Federal Reserve System to regulate the offering and provision of consumer financial products and services and to enforce federal consumer financial laws against banks and other covered entities. Currently, the CFPB does not have authority over non-bank entities that engage in activities such as marketplace lending that do not constitute the offering or provision of financial products or services directly to consumers. However, as marketplace lending becomes more sophisticated, the line will continue to blur between the regulated consumer lending activities of banks and other covered entities, which include the origination, brokerage, and servicing of mortgage, student, and payday loans, and the unregulated marketplace lending activities of non-bank entities, which includes the provision of liquidity to online lending platforms that originate loans to consumers.

While marketplace lenders historically have partnered with originating banks that are subject to regulation by the CFPB and other banking regulators, as the marketplace lending space expands, we expect that the sources of funding will expand as well. In this article, we outline the potential risks and theories of regulation for non-bank entities engaged in funding and other activities related to marketplace lending and suggest several areas where proactive policies and procedures implementing best practices in advance of specific regulatory guidance would benefit non-banks engaged, directly or indirectly, in the fast evolving marketplace lending industry. [Read more…]

Filed Under: Guest Post Tagged With: hedge funds, marketplace lending, regulation, risk

Views: 964

P2P-Picks Brings Hedge Fund Style Loan Picking to Small Investors

April 23, 2013 By Peter Renton 25 Comments

Views: 982

Hedge Funds have many advantages over individual p2p investors. One of them is that they have Ph. D level statistics gurus combing through the loan history of Lending Club and Prosper in order to develop sophisticated investment models.

Enter Bryce Mason. He has a passion for statistics and p2p lending. So, he has spent hundreds of hours developing an investment model for his Lending Club investments, a model that is similar to what the large hedge funds use. And he is about to make it available for small investors.

He first told me about his work at the beginning of last year and he has been sharing the picks from his model with me since last summer. A couple of months ago he launched his website, P2P-Picks.com, in private beta and a small group of investors have been putting it through its paces.

What is P2P-Picks?

The simple graphic above demonstrates what he has done. He has analyzed the historical loan data at Lending Club focusing only on those loans that have matured. This way he can work out exactly how much each loan has returned for investors. And we are talking about quite a large sample size of loans. More than 10,000 Lending Club loans issued from 2007 through March 2010 have reached maturity.

P2P-Picks uses all the data in the historical file (and even some data that is not) in order to determine which loans on the platform will perform best. Bryce has developed a ranking system that can assign an expected return for every loan. The loans with the best expected returns (in the top 10%) are shared with investors on his site.

How much of a difference is there when investing with this model? Below is a chart that shows the projected performance. As it says this chart is based on backtesting the model on the loan history. The X-axis of this chart shows the percentage of loans included and the Y-axis shows the expected return. As you can see if you target the top 10% of loans the return can be expected to be between 12% and 13%.

How P2P-Picks.com Works

P2P Picks works off the Lending Club BrowseNotes.csv file. This is the file of all the available loans on the platform that any investor can download. Every 15 minutes P2P Picks downloads the latest file and then runs every loan through its proprietary scoring model. It then ranks each loan based on expected return and presents the top 10% of loans to its users. Then users can click on buttons to invest in $25, $50, $75 or $100 notes.

P2P Picks will not do your actual investing for you. When you click the green Go button on the site you are taken to Lending Club’s site where it will allocate the note amount selected to the particular loan.

This is how I use it. I look at my available cash to determine how many loans I need to get back to being fully invested. I then start at the top clicking on the $25 buttons of each note. Then I click the Go button which will launch a new browser window but then I quickly come back to P2P Picks again and click the next Go button.

Then when you are done you stay on Lending Club’s site and click View Order. Then Confirm the investment, assign it to a portfolio and you are done. Once you get used to it you can easily invest in 15-20 loans in less than a minute. I have been doing this, on average, once every two days since the site launched.

What is the Cost?

Right now while it is still in beta the price is free. Once it launches you will pay 0.5% of the value of the notes (50 basis points). So, a $25 note will cost $0.13, a $50 note costs $0.25 and so on. Then at the end of every month your credit card will be charged for all the picks you have made in the preceding month.

P2P-Picks is Launching in May

Almost $200,000 has been invested now by over 100 investors through P2P-Picks and the numbers are growing every day. The system is very stable and I have been using it on an almost daily basis for several months now with no problems.

I have been investing a portion of my main account with this model since August of last year. I have 325 notes totaling just under $10,000. While it is obviously too early to make a judgment call yet on how his model is performing for me I can say this. Of the 325 notes I have invested in I have had no charge-offs, there are no late loans and there are just two notes that are in grace period. My Nickel Steamroller ROI for this portfolio says it is 16.79%.

Bryce is intending to make P2P-Picks available for everyone next month. As of late April it is still in private beta but if you are interested you can join the waiting list by filling out the Contact form on his site.

I welcome a site like P2P-Picks coming online – it is one way to help level the playing field between the hedge funds and the small investors. What do you think?

Filed Under: Peer to Peer Lending Tagged With: hedge funds, investment model, p2p-picks

Views: 982

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LendIt Fintech News, Powered by Lend Academy, has been bringing you all the news and information about fintech and online lending since 2010 when it was founded by Peter Renton. We not only have the industry’s most active news site, but also the largest investor forum and the first and most popular podcast.

We are a team of fintech enthusiasts who have been covering the industry for many years. With a deep knowledge of online lending, digital banking, blockchain, artificial intelligence and more our team covers the daily news and writes in-depth editorials.

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