Private Equity Lines Up to Buy Crowd Funding Debt

[Corey Dutton]

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/

[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+.