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Credit Analysis and Valuation Methods for Marketplace Lending Loan Portfolios

We dig in to the complex topic of valuation with this Q&A piece conducted with Houlihan Lokey

March 14, 2018 By admin Leave a Comment

Views: 6,017

[Editor’s note: Many of us have questions on marketplace lending loan valuation so when we were approached to see if we would be interested in a Q&A post on the subject we jumped at the chance. The Lend Academy team created the list of questions and Gunes Kulaligil, Director in Houlihan Lokey’s Financial Advisory Services business provided his answers.]

As Marketplace lenders continue to lend at a fast pace, there has been a significant increase in the past several years in non-bank consumer, student and small business lending. Although these platforms operate in a similar fashion, there is a wide variety of underwriting guidelines thereby producing loans with notably different credit profiles and terms. As a result, prepayment and default performance vary significantly based on the platform originating the loan and the credit grade of the loan as determined by the platform. Additionally, loan performance and platform performance have been mixed, with losses sometimes coming in higher than expected and governance issues shaking investor confidence in the sector.

Despite these challenges, origination rates have climbed back towards their prior highs, and funding sources have been expanded with increased interest from whole loan buyers in flow agreements as well as investors seeking to acquire tranches from securitizations. The recalibration of performance expectations has hit many platforms and continues to be an ongoing process, thus highlighting the need to determine the relevant default and prepayment drivers necessary for accurate fair value analyses. While a robust and liquid secondary whole loan trading market has not emerged as some market participants had hoped, secondary transactions are occurring, especially as loans are aggregated into securitizations. Many of these transactions occur at a premium to par and can provide meaningful insight into pricing and relative credit performance of one platform versus others over time.

1. What are the most prevalent methods of valuing loan portfolios today?

Discounted cashflow (DCF) methodology at the loan or cohort level is the most prevalent valuation methodology used today to value marketplace loan portfolios and related assets, including tranches in securitizations and servicing rights, regardless of the lending vertical. I emphasize “today” because marketplace lending is an evolving corner of consumer & business lending that is small and fragmented in general, with over a hundred lenders, both small and large, with a handful of large lenders accounting for the lion’s share of the issuance. Despite its still nascent nature, marketplace lending has caught the eye of nimble credit-focused alternative investment managers and the relatively risk averse large bond funds alike. Credit investors usually acquire whole loan portfolios or subordinate bonds off of securitizations on a levered basis, whereas many of the larger bond funds focus on the senior bonds in securitizations.

The investment thesis from the credit funds’ perspective is the opportunity to achieve mid single to double digit returns on a levered basis with a short duration versus the bond funds’ thesis which could essentially be described as a yield pickup strategy where the buyers expect to achieve unlevered single digit returns with shorter duration than whole loans and ample structural credit support present in securitizations in the form of subordination and excess spread. Non-bank lending owes its ability to attract the attention of such a diverse group of investors not only due to the sector’s capacity to offer a wide range of credit exposures and duration, but also due to its future growth potential with a confluence of support from increasingly tech-savvy borrower demographics, a de-regulatory environment and innovative partnerships in the Fintech ecosystem.

2. Are valuation methods standardized? If not, why not? How does this lack of a valuation standard affect investors?

[Read more…]

Filed Under: Guest Post Tagged With: Houlihan Lokey, loan portfolios, marketplace lending, Valuation

Views: 6,017

The Most Valuable Online Lender? The Answer May Surprise You

GreenSky offers a unique type of point of sale financing and has just closed a $200 million round.

January 3, 2018 By Ryan Lichtenwald 2 Comments

Views: 181

GreenSky is a company that has flown under the radar for years. The Atlanta-based company has built a wildly successful business but generally doesn’t like to talk about it publicly.

Yesterday we learned from the Wall Street Journal that the company received a new $200 million funding round from Pimco, valuing the company at nearly $4.5 billion. According to the WSJ, the company will use funds for general corporate purposes and is exploring to enter other categories in point of sale financing.

GreenSky is now the most valuable online lender, surpassing SoFi and is also the second most valuable private fintech company behind Stripe. GreenSky was previously valued at $3.6 billion in 2016. GreenSky works with retailers, health care providers, merchants and contractors to offer financing up to $55,000. The loans are then funded by a variety of banks.

What makes GreenSky unique is their vast sales force. They have thousands of merchants and contractors who work directly with customers. As a customer is making a purchase decision, these merchants and contractors can offer financing. It’s a true win-win relationship and has allowed GreenSky to grow without having to deal with the high cost of customer acquisition that most online lenders face. It’s a truly differentiated model and with this new round it will be interesting to see where they go from here.

If you’re interested in learning more about GreenSky and its founder David Zalik, Forbes did a fascinating feature back in September 2017.

Filed Under: Peer to Peer Lending Tagged With: GreenSky, Pimco, unicorn, Valuation

Views: 181

Prosper Announces $165 Million Series D at a $1.9 Billion Valuation

April 9, 2015 By Peter Renton 5 Comments

Views: 70

Prosper logo

On the eve of LendIt last year Prosper announced their largest funding round ever – a $70 million round that valued the company at $600 million. This year, with LendIt just days away, they have upped the ante with the announcement last night of a $165 million round at a whopping $1.865 billion valuation.

Prosper has welcomed many new equity investors into this round. Interestingly, there are quite a few banking names on this list: Credit Suisse NEXT Investors, part of Credit Suisse Asset Management, J.P. Morgan Asset Management, SunTrust Banks and USAA. There were several others in the round but these were the major banking names.

I reached out to Prosper CEO, Aaron Vermut, to discuss this new round and what it means for Prosper and the industry. When I mentioned all the banking names in this round he acknowledged that banks in general are very much interested in the space right now. And the asset management arms of large investment banks like Credit Suisse and J.P. Morgan are also looking to deploy money on the Prosper platform for their clients.

Focused on Growth

When I asked Aaron what he was going to use this money for he said that Prosper is focused on growth and “professionalizing the business”. By this he means improving some of the areas where Prosper is not where they want to be today. This includes improving the investor experience for retail investors, something that has been on their to-do list for a while, but it looks like a new investor platform is finally going to happen this year.

[Read more…]

Filed Under: Peer to Peer Lending Tagged With: funding, Prosper, Valuation

Views: 70

The Lending Club IPO: A First Hand Account at the NYSE

December 11, 2014 By Peter Renton 34 Comments

Views: 1,040

IMG_1489

Lending Club banners outside the New York Stock Exchange on IPO day

When I first started writing about this industry in 2010 I did it because I loved the concept and believed in its potential. Back then I was pretty much alone in that thinking.

But earlier today many thousands of investors around this country decided that they also believed in this industry’s potential as they bought equity in Lending Club in the first IPO this industry has ever seen.  It was an historic and groundbreaking day.

When Lending Club sent me an email early last week inviting me to their IPO celebration today on the floor of the New York Stock Exchange I didn’t hesitate. I wanted to be there and was honored that they included me.

So, this morning I arrived at the NYSE at 8am. There were dozens of people milling about outside admiring the huge Lending Club banner including a who’s who of the P2P lending industry. All the invited guests, numbering probably 100 or so, then headed inside where we were all presented with a bright red Lending Club jacket. [Read more…]

Filed Under: Peer to Peer Lending Tagged With: IPO, Lending Club, public company, Valuation

Views: 1,040

Lending Club Offering 50 Million Shares at $10-$12 in IPO

December 1, 2014 By Peter Renton 58 Comments

Views: 1,004

Lending Club S-1 Registration Amendment 3

Lending Club has a new S-1 registration out this morning as they begin their investor roadshow this week. It gives us a window into their expected valuation and the amount of money they expect to raise. From their filing:

LendingClub Corporation is offering 50,000,000 shares of its common stock and the selling stockholders are offering 7,700,000 shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market currently exists for our shares of common stock. We anticipate that the initial public offering price will be between $10.00 and $12.00 per share.

After the IPO there will be 361,111,491 shares of common stock outstanding at Lending Club so at $12/share this will result in a $4.33 billion valuation. This is less than all the pundits originally suggested and is only a small increase over the $3.76 billion valuation Lending Club received in April. Of course, they are no doubt hoping to get a pop on day one that will value the company much higher than that.

Lending Club Directed Share Program

There is a little information in the prospectus about their Directed Share Program (the shares that will be set aside for retail investors). Here is the entire paragraph relating to that program.

[Read more…]

Filed Under: Peer to Peer Lending Tagged With: Directed Share Program, IPO, Lending Club, Valuation

Views: 1,004

Lending Club Increases IPO to $650 Million Targeting Mid-December

November 26, 2014 By Peter Renton 2 Comments

Views: 932

According to this piece published in the Financial Times this afternoon Lending Club has boosted the size of its planned IPO from $500 million to $650 million. Tracy Alloway and Arash Massoudi, the reporters who penned the story, are probably the best sourced journalists when it comes to the Lending Club IPO so we can be confident these are not just idle rumors.

Here is an excerpt from the article:

Lending Club had initially aimed to sell around $500m worth of stock in its IPO on the New York Stock Exchange but has decided to increase the size of the offering to about $650m, according to people familiar with the deal.

One person added that the company would likely set a valuation range that starts at $3.8bn – Lending Club’s value during its final private financing round earlier this year – and then adjust the pricing based on investor demand.

Analysts expect the company to achieve a valuation of between $4bn and $5bn. A spokesperson for Lending Club declined to comment.

The article also goes on to state that the investor roadshow should start next week and that Lending Club is targeting a mid-December IPO. This is also what I have been hearing.

The most interesting part of the article, in my opinion, is the news about the valuation. It was Alloway and Massoudi who first broke the story back in June about the $5 billion valuation for Lending Club. Since then I have heard rumors of $6 billion and even $10 billion but with the valuation range starting at $3.8 billion Lending Club is clearly looking to be a little more conservative. This is probably a good thing – no one wants to see the stock down 20% in their first day of trading due to an aggressive valuation.

There will likely be more news over the next two weeks and I will do my best to keep all Lend Academy readers up to date and informed.

Happy Thanksgiving everyone.

Filed Under: Peer to Peer Lending Tagged With: IPO, Lending Club, Valuation

Views: 932

An Analysis of Lending Club’s $5 Billion Valuation

September 29, 2014 By Peter Renton 30 Comments

Views: 2,394

[Editor’s note: Many people have been discussing Lending Club’s somewhat lofty valuation so I thought it would be useful to bring in a valuation expert to do some analysis.  Ho Wan Lee, CFA, CAIA, is a senior associate in the valuation group of Arcstone Partners LLC. Arcstone specializes in the valuation of high-growth companies and complex securities. Current and former clients include some of Silicon Valley’s best known tech companies.

Note that neither Lending Club nor Prosper are clients of Arcstone, nor does Arcstone have privileged information relating to Lending Club, which is the subject of Lee’s analysis below. The analysis is the unique work of the author and is based entirely on information available to the public. Mr. Lee’s analysis is provided for informational purposes only, does not constitute an opinion of value, and should not be construed as investment advice.]

Lending Club (“LC”), the world’s largest online marketplace connecting borrowers and investors through its online lending platform, is expected to launch its IPO in the coming weeks. The amount of the raise and the IPO placement price are still unknown at this point in time, but according to an article in the Financial Times the Company is anticipated to raise more than $500 million with an implied valuation of about $5.0 billion. One question apparently on everyone’s mind is this: is a $5.0 billion valuation reasonable?

The Company has shown rapid appreciation in value over the last several years. It was valued at $3.8 billion in April when it acquired Springstone, a company that facilitates education and patient financing. So to begin, a $5.0 billion IPO valuation represents a 33.3% increase in value from April of this year, and an annualized increase of 88.2%. Certainly, some of this increase in value could be explained by what we valuation analysts refer to as a “liquidity premium”, which essentially reflects the increase in value when a stock is freely tradable. Moreover, comparing the implied increase to the historical increase in observed valuations of LC while still a private company, the jump in price does not seem outrageous.

Table 1: LC’s valuation over time

Lending Club Valuation over time

So that’s one way to look at the $5.0 billion implied valuation. What about valuation multiples? Looking at LC’s venture round pricings on a multiple of total originations, it has remained relatively consistent in the 0.8x – 0.9x range. If we assume a 0.8x origination multiple, a $5.0 billion IPO valuation would imply LC’s total origination of $6.3 billion as of September 2014, which is not unreasonable considering LC’s recent trend.

Table 2: LC’s Valuation/Originations over time

[Read more…]

Filed Under: Peer to Peer Lending Tagged With: IPO, Lending Club, Valuation

Views: 2,394

Prosper Raises $70 Million at a $600 Million Valuation

May 4, 2014 By Peter Renton Leave a Comment

Views: 39

Prosper logo

On the eve of the LendIt Conference Prosper has announced their largest investment round ever. They have closed on a $70 million round from Francisco Partners, Institutional Venture Partners and Phenomen Ventures.

This monster round comes on the heels of Prosper crossing $100 million in loans issued in April and the $1 billon milestone just one month ago. It has clearly been a good year for Prosper so far.

I chatted with Prosper CEO, Aaron Vermut, about this big news – it was the second time in the past week that we have talked about some very positive news for Prosper.

The $70 Million Includes a $20 Million Secondary Round

Of the $70 million total investment, $50 million is going on to Prosper’s balance sheet. The remaining $20 million is a secondary round where some existing shareholders are cashing out.

While the 8-K will be out with all the details in a couple of days sources tell me that this new round is at a $600 million valuation. This is up from a $100 million valuation less than eight months ago.

When I asked Vermut what he would be using this new money for he talked first about expanding the team. Prosper is opening up a second office in Phoenix, Arizona that will be a loan verification and underwriting center. Vermut said that there is a lot of underwriting talent in Phoenix and they are looking to tap into that expertise at a much lower cost than in San Francisco.

Prosper’s lease at their current location in San Francisco is up at the end of the year so they will be moving to a new location later this year. They expect to have a total of 150 employees by the end of the year split between the two locations.

Both Vermut and Ron Suber, president of Prosper, have said to me recently that Prosper is close to becoming cash flow positive. Then why raise so much money? When I posed that question to Vermut he had an interesting reply. He said while they didn’t need to raise $70 million, having a strong balance sheet will help the company in many ways – not the least of which is in recruiting more top talent for their management team.

Prosper will be expanding their board from five seats to seven. David Golob from Francisco Partners will be joining the Prosper board along with Aaron Vermut himself.

Here is the official press release as well as coverage in Techcrunch and Bloomberg. 

Filed Under: Peer to Peer Lending Tagged With: funding, Prosper, Valuation

Views: 39

Lending Club Now Valued at Over $2 Billion

November 13, 2013 By Peter Renton 8 Comments

Views: 68

More big news out of Lending Club this morning. I reported in May about Google’s investment in Lending Club that resulted in a $1.55 billion valuation for the company. Today, Ari Levy from Bloomberg broke the story that Russian billionaire Yuri Milner’s DST Global and Coatue Management LLC have invested $57 million in a secondary round at Lending Club. The story also stated that with this transaction Lending Club is now valued at $2.3 billion, up 48% in just the last six months.

The transaction values LendingClub at $2.3 billion, said two people with knowledge of the deal, who asked not to be identified because the valuation is private. LendingClub Chief Executive Officer Renaud Laplanche said the share sale closed yesterday and consisted entirely of stock purchased from early backers.

As Laplanche said above this is not money that is going on to Lending Club’s balance sheet, it is a secondary round. Meaning that shares have been purchased from existing Lending Club shareholders.

The increased valuation does not surprise me at all. In October, Lending Club’s monthly new loan volume was up 50.7% from May when the Google deal was announced. So an increase in valuation of 48% is right in line with this increase.

Here is another interesting little nugget from the story: [Read more…]

Filed Under: Peer to Peer Lending Tagged With: IPO, Lending Club, Valuation

Views: 68

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ABOUT LENDIT FINTECH NEWS

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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