Private Equity Lines Up to Buy Crowd Funding Debt

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Private equity is starting to pay attention to this ever growing trend in private money lending of raising capital via crowdfunding platforms, also called peer-to-peer lending (P2P Lending). For those who still don’t know much about this new form of private money lending, P2P Lending is a loan that comes from individuals instead of a bank. Such lending platforms offer consumer loans for between $1,000 to $30,000, and interest rates are between 6% to 30%, with loan fees of between 1% to 5%. Private equity is definitely starting to see the benefits of securitizing these massive tranches of debt being generated by these P2P lending platforms.

BlackRock purchased approximately $330 MM in consumer loans this year that were made by ‘Prosper,’ which was America’s first P2P lending platforms. BlackRock plans to securitize this debt by slicing and dicing it up and selling it off to investors the “old school” way. In fact, a new US based investment management company called ‘Prime Meridian’ offers two funds that only invest in P2P loans.

For those of us who have always thought that crowdfunding was a trend and nothing more, we may be starting to think otherwise!

Read the entire article here: http://bankinnovation.net/2015/07/from-p2p-lending-to-lending-marketplaces-the-graceful-dance-has-started/

The article is correct about the trend, but this isn't anything new and has been going on extensively for a few years now. Institutional investors purchase more than two thirds of the loans on all the major marketplaces. In fact, there is so much institutional buying of peer-to-peer loans, that both the economist and Forbes pointed out last year, that it really shouldn't even be called peer to peer anymore. 

http://www.economist.com/news/finance-and-economic...

When I started investing in peer to peer, three years ago, you could easily find lots of available loans. Nowadays, there's so much competition with the institutions using high-frequency software, the individual investors like me also have to use high-frequency software, or we won't get any loans.

But it is an awesome model and an amazing financial innovation.

Ian Ippolito How have your returns been vs default rate? Not trying to hijack the thread. Was wondering if you could expound on your experience. What type of loans what interest rate what's high frequency software Thanks

Yes I'd be pretty curious to see what the default rate is on these portfolios as well....

Also, how are these crowdfunding platforms being regulated under Dodd Frank and the CFPB (Consumer Financial Protection Bureau). Consumer lending requires licensing post Dodd Frank. Are you and these other platforms subject to licensing requirements or do you just fly under the radar due to the novelty of these platforms?

@Jeanette Adler,  I've been very happy with the returns. I've averaged between 7% and 8% over the last three years (that's net, after accounting for defaults). So obviously, they charge the consumers a significantly higher rate. They rate each loan using a letter grade from A to F. Loans of A are the safest, but also pay the least interest. F loans are the riskiest. I have mostly B and C loans, with a smaller amount of A and D, and a tiny percent (2%) of E.

I use a program called Lending Robot which is a high frequency trading program. What this means is that I don't manually invest in each note. I set up in advance my criteria for notes, and every time Lendingclub has new notes available, Lending Robot grabs all the ones that meet my criteria in just a few milliseconds. The cost is 0.45% of my portfolio per year, which is well worth it. It's great, because my investing is basically on autopilot, and doesn't require me to do anything. In the old days, it wasn't necessary to use this kind of software. But today, with all the competition from the private equity firms, if you don't have the software you end up most of the time with nothing at all (or at best, the discards).

Historically, no one has ever lost money on Lendingclub if they've invested in at least 100 notes. This includes a little bit of time at the end of the last recession, so that makes me feel fairly confident in them. Consumer loan defaults are related to unemployment, so when unemployment rises, the return goes down. But as long as unemployment doesn't skyrocket to levels beyond the last recession, it seems unlikely to me that the investment will go negative.

So if you're interested in doing it, I would recommend a minimum of $2500. Since the minimum note size is $25, that gets you 100 notes. Of course, the more notes you have, the better diversification.

@Corey Dutton, yes, the SEC does regulate these types of loans. So the major marketplaces have had to register with the SEC. This is not the same as real estate crowdfunding, where most of them are operating under exemptions to securities law under 506B, 506C, or regulation A+.

Originally posted by @Ian Ippolito :

@Jeanette Adler,  I've been very happy with the returns. I've averaged between 7% and 8% over the last three years (that's net, after accounting for defaults). So obviously, they charge the consumers a significantly higher rate. They rate each loan using a letter grade from A to F. Loans of A are the safest, but also pay the least interest. F loans are the riskiest. I have mostly B and C loans, with a smaller amount of A and D, and a tiny percent (2%) of E.

I use a program called Lending Robot which is a high frequency trading program. What this means is that I don't manually invest in each note. I set up in advance my criteria for notes, and every time Lendingclub has new notes available, Lending Robot grabs all the ones that meet my criteria in just a few milliseconds. The cost is 0.45% of my portfolio per year, which is well worth it. It's great, because my investing is basically on autopilot, and doesn't require me to do anything. In the old days, it wasn't necessary to use this kind of software. But today, with all the competition from the private equity firms, if you don't have the software you end up most of the time with nothing at all (or at best, the discards).

Historically, no one has ever lost money on Lendingclub if they've invested in at least 100 notes. This includes a little bit of time at the end of the last recession, so that makes me feel fairly confident in them. Consumer loan defaults are related to unemployment, so when unemployment rises, the return goes down. But as long as unemployment doesn't skyrocket to levels beyond the last recession, it seems unlikely to me that the investment will go negative.

So if you're interested in doing it, I would recommend a minimum of $2500. Since the minimum note size is $25, that gets you 100 notes. Of course, the more notes you have, the better diversification.

@Corey Dutton, yes, the SEC does regulate these types of loans. So the major marketplaces have had to register with the SEC. This is not the same as real estate crowdfunding, where most of them are operating under exemptions to securities law under 506B, 506C, or regulation A+.

 I've been with Lending club since 2011. I'm averaging 9.5 %. 

Ian, i'm thinking abut going with Lending Robot for the reasons you mentioned.

Have you been happy with their service?

@John De Gennaro , Yes, I love Lending Robot, and it has been working great. I started later than you did, so I missed out on the very early years when interest rates were higher as well as when it was possible to invest a large amount of money using simply the automated investment on Lendingclub. It was taking months to deploy just $5000 to $10,000 when competing against all the hedge funds, etc.. Then when I used Lending Robot I was able to invest more in a few minutes than I had two months before.

It also has an additional credit model which can be used to try to squeeze out a few extra points of yield. The fussier you get with the criteria, the better the quality but the lower the volume. So I don't use the credit model when investing a large amount initially, but then use it to reinvest the interest.

Ian, then that does it for me. I'm joining the robot. Oh i remember so many loans to choose from it was unreal. I didn't have enough money to buy them all.  And your right the interest was definitely higher. 

Oh by the way, i've put in many hours (if not days) of research and when i went to your site and seen #1 crowdfunding platform i couldn't agree more. Hands down. I plan on looking it over.

I invested with Prosper at end of November 15 and it took about a month and a half to deploy all the funds using their quick invest tool. Its completely automated once you set it up, and now and as soon as funds accrue it buys more notes according to my criteria.

Invested: 30% C notes, 40% D notes, 30% E notes - Showing 11.4%  annualized return at the moment but its still very early to tell. Would be fantastic if that kind of return can be maintained.

I invested in Lending club in the early days and my returns were in the 10% range and then just before they went public they dropped to around 5% because they deducted more reserves for loan losses. I have been taking my money out ever since (slow process) and investing mainly with Patch of Land where I not only have security behind the loan but average returns of 11%. 

@John De Gennaro , Glad to hear that you agree on my criteria for judging the sites. :-) It is unreal how much time it takes to properly vet all the sites, so that's why I posted the information… To save other people from going to the same problem. It's all pretty self-explanatory, but if you have any questions or problems just let me know.

@Saul L. , It would be awesome if those kind of returns can be maintained. Unfortunately, the way the loss curves work is that when the loan is young, each month you will have quite a few charge-offs. As he gets older and older it eventually "seasons" and you start to get less and less as it stabilizes. When you get to that stage, you can make an accurate guess on what the actual return is.

You can picture of the loss curve here: https://www.lendingclub.com/public/about-nar.actio...

Here is an article talking about how after 18 months, the losses stabilize: http://www.lendingmemo.com/lending-club-prosper-return-curve/

Thanks @Ian Ippolito - Yes I was aware that it is not a sustainable return - just hadn't looked into understanding why. The links you gave put it into perspective.