Sat, Jun 23, 2018
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Private Equity Strategies

Blue Elephant Goes In on Non-bank Lending

Wednesday, June 11, 2014

The recent explosion in peer-to-peer lending these days can be hard to explain to the general public, but the story behind the tremendous growth is a simple one: peer-to-peer lending became popular as a means of making small interest-bearing loans to individuals who typically would not receive a loan at a regular bank as credit and lending terms tightened. The accelerated growth in these P2P lending platforms has drawn the attention of both banks and specialty finance industry heavyweights who view it as a new vertical for loan assets. Early on it looked like financial industry biggies were going to squeeze out smaller lenders, but as the space grows it appears there's enough demand for everyone.

For consumers, the allure of P2P is pretty clear. If your credit is passable but not fantastic you have a shot at negotiating a loan with a real person and not a faceless bank or credit card company that only has profit in mind. For the lenders themselves, there's a little more risk if, for example, the loans made start to go into default or underperform. However, if they perform as negotiated these small loans can be an economical and profitable investment tool. So far, it seems like the benefits outweigh the risks to both sides as P2P loans topped the multibillions of dollars last year.

The oldest and most popular P2P lending platforms are LendingClub and Prosper Marketplace. They were originally entrepreneurial ventures, but have now gained private and institutional backing. In some ways, P2P is the finance outgrowth of e-commerce, much like crowdfunding or selling your homemade earrings on Etsy. P2P is a step above micro-finance and two steps away from the task based economies, which have also emerged with the advent of the global Internet.

Unlike micro-finance which often targets low income individuals in an effort to help them become more financially secure, the biggest P2P lending platforms have gone out of their way to avoid what could be called the subprime lending market, and focus on people who have passable to good credit but don't or haven't qualified for a more traditional loan. This focus has attracted the interest of yield-starved institutions and private funds that now have access to a new class of credit opportunities.

Blue Elephant Capital Management is one private fund capitalizing on this trend by actively purchasing and managing a highly curated portfolio of these loans. The fund currently has approximately $20 million AUM; its portfolio has a weighted average FICO score of 715, with approximately 60% invested in three-year loans and the remainder in five-year notes. Blue Elephant is one of only a dozen institutions on the Prosper platform, operating in much the same way a bank would when holding a portfolio of loans. Blue Elephant recently decided to secure additional funding from family offices and high net worth individuals by engaging the GrowthCap team to manage its capital raise on the GrowthCap platform.

Right now, lending interest rates across the different platforms hover around 4-7% for creditworthy barrowers and increase slightly for those with less optimal credit scores. That makes the rates for these loans significantly lower than even the best credit card terms, and with approvals that take only a few minutes, the process is more welcoming than an afternoon spent with a bank loan officer. Other funds are getting into the act, Marshall Wace LLP, one of Europe's biggest hedge fund managers, will launch a portfolio investing in peer-to peer loans through a closed-ended fund that will be offered on the London Stock Exchange. Marshall Wace has more than $17 billion in assets, and started a peer-to-peer lending business in late 2013. Last month it announced plans to buy U.S. firm Eaglewood Capital Management LLC, which will run the new fund. Marshall Wace will also invest in the Eaglewood Income Fund, which invests in the Lending Club platform.

Finance interest in these platforms has gotten so large that both Prosper and Lending Club have increased the hurdles to buying up loans too quickly in an effort to maintain the diversity of lenders. Prosper recently finished a $70 million fundraising round led by Francisco Partners, a private equity firm, with Institutional Venture Partners (IVP) and Phenomen Ventures participating. That company is now worth $145 million, and a portion of the funds raised will go to maintaining the diversity of the platform.

Even with those efforts, P2P is ultimately part of the rapidly growing shadow banking sector and the extent to which private funds and large institutions play in these pools is catching the attention of regulators. Regulators in the US still haven't decided what they think about P2P lending, the responses are somewhat scattershot and formal guidance is lacking. This is the same approach they've taken to crowdfunding in general, coupled with a lot of warnings about widespread fraud. Opalesque has previously spoken with crowdfunding platform owners who make a strong counterpoint – they said the same things about E*TRADE and eBay.

Yet, some signs are troubling, like the growing securitization of P2P loans which are now bundled and offered to a range of investors as seen with mortgages and student loans. History tells us that rarely ends well. However, the sheer fact that (in some cases at least), these loans are made between actual individuals could make the default recourse a little less draconian and a little more honest.

 
This article was published in Opalesque's Private Equity Strategies our monthly research update on the global private equity landscape including all sectors and market caps.
Private Equity Strategies
Private Equity Strategies
Private Equity Strategies
Private Equity Strategies


Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Paper: The performance of stocks actively pitched by hedge funds[more]

    Using a novel dataset drawn from investment conferences from 2008 to 2013, I show that hedge funds take advantage of the publicity of these conferences to strategically release their book information to drive market demand. Specifically, hedge funds sell pitched stocks after the conferences to ta

  2. North America - US fundraising for special purpose acquisition vehicles hits record this year[more]

    From AFR.com: Special purpose acquisition vehicles (spacs) are hitting the US market at the fastest rate on record, attracting the likes of Goldman Sachs and hedge fund investor Daniel Loeb for the two largest such deals in 2018. Spacs have raised $US4.5bn so far in 2018, the largest amount fo

  3. Investing - Man Group and AQR try to take aim at private equity industry, Hedge funds poised to be winners in AT&T-Time Warner deal[more]

    Man Group and AQR try to take aim at private equity industry From FT.com: The popularity of private equity investments has prompted asset managers such as Man Group and AQR to devise strategies that aim to replicate PE returns but at a much lower cost to investors. Both companies a

  4. News Briefs: David Stemerman's hedge fund holdings shrank before his run for governor, nvestment manager TSW triggers succession plan, Alan Howard joins Peter Thiel investing in Cologne-based fintech startup[more]

    David Stemerman's hedge fund holdings shrank before his run for governor But the U.S. holdings of Stemerman's Greenwich hedge fund, Conatus Capital, shrank from $2.6 billion at the apex to just over $1 billion before he announced his move into politics. (Hartford Courant) Inv

  5. British Empire: Pershing's 23% discount 'unsustainable'[more]

    From Citywire: The wide discount on Pershing Square Holdings (PSH) is 'unsustainable' and puts star hedge fund manager Bill Ackman under pressure, says British Empire (BTEM). Pershing is the third largest holding in the £850 million British Empire trust, managed by Joe Bauernfreund, which sp