A little bit of P2P is all I need – Mambo in Lending

mambo-no5

Ladies and Gentlemen, the lending sector merits a Mambo song and I’ve started the lyrics for you all to create your own version.

A little bit of Prosper in my life

A little bit of Lending club by my side

A little bit of Funding Circle is all I need

A little bit of Lending Home all night long

 

A little bit of Monica in my life
A little bit of Erica by my side
A little bit of Rita is all I need
A little bit of Tina is what I see
A little bit of Sandra in the sun
A little bit of Mary all night long
A little bit of Jessica here I am
A little bit of you makes me your man 

There are dozens of platforms for your Sandra, Tina, or Mary; and most of them offer ways for retail to access the primary market of loans, be it consumer loans, small business, student, invoice, real estate loans etc. However, it remains tedious and complicated to manage portfolios be it 10k or 100k or more. Diversification leads to having to deal with Thousands of orders and even then, retail can’t optimally spread holdings across the FICO spectrum and at the same time be diversified with respect to other risk factors (e.g. industry concentration, geographic concentration etc.).

Bottom line it is really hard work to manage a portfolio of P2P loans on a platform. Monica, Erica, Rita,… are high maintenance! Hector, a NY based retail investor on the Prosper platform, attests to that too in Back to the future of P2P Lending, we interview one of those peers.

Add on to that reality that often retail will be “politely” front-run by those managing loan portfolios with the quantitative support that retail doesn’t have.

Most mass affluent retail investors that could allocate 100k or more to P2P loans (viewing it as a fixed income alternative with a reasonable expected risk-adjusted return compared to high yield) would and should be looking to diversify beyond one single platform.

No matter how wonderful Monica is, it is very sensible to have Jessica or Mary also on one’s side. It reduces platform risk and it reduces lending subsector concentration risk (smallbiz, invoice, real estate). These are even more important in a market that has taken a step backwards in terms of its progress in developing a secondary market. Remember that in the US lending market right now, we only have Lending Club that hasn’t shut down its secondary market business. Prosper did. At the same time, note that Small Business loan platforms like Funding Circle require 50k minimum which makes it very hard for retail to include it in a diversified loan portfolio.

Add on to that the Faith and Trust that retail needs to have to any and all of these platforms in terms of their credit assessment algorithms, because realistically speaking there is no way for a retail investor to perform any due diligence on that front.

With all these considerations in mind, I go back to humming

A little bit of P2P is all I need

A little of Prosper in my life

A little bit of Lending club by my side

A little bit of Funding Circle is all I need

A little bit of Lending Home all night long

This is the exact mix of platforms included in a soon To Be Issued fund by LendingRobot, a SEC registered investment advisor. They have been assisting investors to manage P2P loan portfolios over the past 5 years. They have recently offered an automated service for 45bps per year that employs ML algorithms. This has been in the form of a managed account up to now. Lending Robot will soon launch a hedge fund for accredited investors that employs the ML algo and invests in these 4 platforms.

In the US, there aren’t many listed vehicles for retail to invest in the marketplace lending space. There are a few publicly traded stocks (if the equity part of capital structure is what you are looking for)

Market capitalization in Bil

Lending Club – LC

$2.4

Lending Tree – TREE

$1.33

Yirendai – YRD an ADR from the East

$1.17

OnDeck – ONDK

$0.3

There are plenty of quasi-lending bets that a retail investor can also consider through ADRs of Chinese companies in the Internet of Finance space which has heavy lending components. The likes of Alibaba, JD Finance, Tencent could be considered but of course, these are broader plays. Renren (RENN) is one that retail may have missed because the brand is associated with a social internet platform with a focus on games, social commerce, social networking etc. The market cap of this tech platform is close to $14bil. Did you know however, that Renren has significant equity holdings in SOFI, Lending Home? Lendacademy reported

“Renren has participated in SoFi’s series B, D, E and F rounds for a total investment of over $242 million. According to the 2015 year end report, “The Company held 28.85% and 21.20% equity interest of SoFi as of December 31, 2014 and 2015, respectively.” 

I suggest that it would be better to consider buying SoftBank, the Japanese telco & internet giant (SFTBY ADR) because through the Vision Fund ($100billion!) they have invested heavily in SOFI.

“the conglomerate – Softbank- convinced SoFi to eliminate the idea of an initial public offering (IPO) and allocate the $1 bln investment to accommodate SoFi’s growth.” Source

Moving to another part of the capital structure, River North Marketplace just recently (in Sep 2016) launched a closed-end fund RMPLX which investors can buy any day but you can only redeem four times a year (AUM $40mil). Lots of diversification offered:

“buying from a few different originators, we get diversification there from an idiosyncratic risk that might arise at one originator, as well as we get different types of loan segments, so unsecured consumer, small business and specialty finance… there’s diversification in those different segments. Then, again, to further thinking about diversification, there is diversification across geography. We have loans in all 50 states. We have a variety of different credit characteristics, so there’s lots of diversification in this pool.”

In the US, retail investing in marketplace lending requires and will require for a while, Monica, Rita, Jessica, Tina and Mary on our side. Lets keep Mambo humming and diversifying as we are chasing investments that can generate yield on a reasonable risk-adjusted basis.

Europe offers more closed-end funds that make sense to consider for UK residents but are have additional complexities for other Europeans due to differential taxation and currency risks. Orchard platform, a leading Fintech focused on the secondary P2P loan market for institutional (NsrInvest is more for retail) tracks these funds in their weekly snapshot.

orchard-snapshot

 

Premium/Discount (rounded) NAV in millions
P2P Global Investments (P2P)

-20%

£608 Mixed with equity
VPC Specialty Lending (VPC)

-17%

£293 Pure multi sector loans
Funding Circle Income Fund (FCIF)

+7%

£172 Pure SME loans
Ranger Direct Lending (RDL)

-8%

£160 Multi sector (pure) loans
SME loan Fund (SMEF)

-7%

£49 Pure SME loans

A glance at this ranking, explains why Funding Circle will be looking to raise more shares this year (ordinary upon approval of existing shareholders or C shares). Seems also that the SME focused fund structures are favored over the multi-sector ones (including consumer loans etc). This snapshot also leads us to continue mambo humming in lending with Monica, Rita, Jessica, Tina and Mary on our side.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.

 

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