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Direct Lending: Finding value/ minimising risk
20 October 2015
Cormac Leech Research
+44 (0) 20 3100 2264
[email protected]
Marin Cauvas Investment Banking
+44 (0) 20 3100 2176
[email protected]
Ropemaker Place, 25 Ropemaker Street,
London EC2Y 9LY / T: +44 (0)20 3100 2000
www.liberum.com
Liberum Capital Limited is authorised and
regulated by the Financial Conduct Authority.
Registered in England and Wales No. 5912554
Direct Lending: Finding value/ minimising risk
Big picture trends: size; growth; risk/ reward
Accessing Interest income
Equity investment perspective
Sector issues / opportunity
2
Direct Lending: Finding value/ minimising risk
$23bn of volume via 8 of the leading US & UK Online Direct
Lending (ODL) platforms in 2015e*
•
P2P volumes have grown at 151%
CAGR since 2010
$m
25,000
CAGR:151%
20,000
15,000
10,000
5,000
0
2010
Lending Club
Source: AltFi Data, Company websites
2011
SOFI
Prosper
2012
Avant
Ondeck
2013
Zopa
2014
Funding Circle
2015e
RateSetter
*Where data publicly available
3
Direct Lending: Finding value/ minimising risk
ODL is a global phenomenon- largest markets: China, US, and UK
$
= 2015e annual gross volume
$22.7bn
$4.4bn
$1.5bn
$157.0bn
Source: www.WDZJ.com, AltFi Data, Company websites
4
Direct Lending: Finding value/ minimising risk
Regional volumes: Europe ex UK Direct Lending market
penetration still c15x behind US&UK and 100x behind China
• China dominates globally: 85% of 2015e
annual ODL volumes
Global volumes Online Direct Lending $bn
Global outstanding balances Online Direct Lending $bn
200
200
CAGR:286%
CAGR:207%
• Chinese loans shorter maturity - Based
on loans outstanding China’s is less
pronounced at 68% of total
150
150
100
100
50
50
0
0
2013
China
• Continental Europe way behind: Relative
to addressable opportunity, P2P in
continental Europe is c 15x less
developed than US & UK and 100x
behind China
• Most likely due to relatively tight
regulation for now
US
2014
UK
2015e
2013
EU ex UK
China
US
2014
UK
2015e
EU ex UK
Source: Liberum, WDZJ, AltFi Data, company data
Source: Liberum, WDZJ, AltFi Data, company data
Online direct lending annual volumes as % addressable market
(2015 addressable market green box $trillion)
Online direct lending volumes as % GDP
14.0%
12.0%
$1.4tn
$1.1tn
$0.2tn
$1.3tn
11.5%
1.6%
1.50%
1.4%
1.2%
10.0%
1.0%
8.0%
0.8%
6.0%
0.6%
4.0%
2.2%
2.0%
0.4%
1.7%
0.1%
0.0%
0.13%
0.2%
0.14%
0.01%
0.0%
China
US
UK
EU ex UK
Source: Liberum, WDZJ, AltFi Data, company data, Bank of England, FDIC, Federal Reserve,
ECB, OECD
China
US
UK
EU ex UK
Source: Liberum, WDZJ, AltFi Data, company data, Bloomberg
5
Direct Lending: Finding value/ minimising risk
Regional growth rates: Continental Europe now growing c 2x as
fast as UK and US, … from a much lower base
China Online Direct Lending $bn
• Chinese market highly fragmented:
top5 platforms only 20% of volumes (vs.
c80% in UK).
US Online Direct Lending $bn
2015e
CAGR
200
25
115%
20
150
296%
15
100
• Regionally China growing fastest – but
set to slow given already high market
penetration.
10
50
5
0
0
2013
Hongling
• US & UK volume growth has slowed
from c190% YoY in 2013 to c 100% YoY
in 2015e
2014
LuFax
PPMoney
2015e
Weidai
Wzdai
Lending Club
2012
Prosper
2013
SOFI
Ondeck
2013: only total market data available
Source: WDZJ
Source: Company data
UK Online Direct Lending $bn
EU ex UK Online Direct Lending $bn
5
• Europe ex UK accelerating: 200% in
2015e vs. 140% in 2014e off a low base
2011
Other
4
2014
Avant
2015e
Other SME ODL
1.6
83%
1.4
206%
1.2
1.0
3
0.8
2
0.6
0.4
1
0.2
0
2011
Zopa
Market Invoice
Source: Altfi data, Liberum
0.0
2012
2013
2014
2015e
Funding Circle
RateSetter
LendInvest
Wellesley & Co.
Other
2011
Smava
Auxmoney*
2012
Pret D'Union
2013
Bondora
2014
Zencap
2015e
Geldvoorelkaar*
Source: Altfi data, Liberum
6
Direct Lending: Finding value/ minimising risk
UK: Online Direct Lending could account for 15-40% of annual
lending by 2025 depending on segment
• UK 2015e volumes: est. $4.4bn
• UK concentrated market: Top 6 UK
platforms account for 88% of the volume
• Rapid growth: Already seen 13x
increase in volumes from 2012-15e
UK Online Direct Lending Annual volumes
$bn 2011-2015e
UK Online Direct Lending Annual volumes
$bn 2011-2025e
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
250
200
150
100
50
0
2011
• Zopa reacceleration: volumes in 2015e:
120% YoY growth (vs 45% in 2014)
• By 2025, UK direct lending could reach
$100bn excluding invoice factoring- for
comparability
Market Invoice
LendInvest
2012
2013
Funding Circle
Wellesley & Co.
2014
Zopa
Other
2015e
RateSetter
2011
2013
Market Invoice
LendInvest
2015e
2017e
Funding Circle
Wellesley & Co.
2019e
2021e
Zopa
Other
2023e
Source: AltFi Data, Liberum forecasts
Source: Liberum forecasts
UK Online Direct Lending annual volume by segment
$bn
UK direct lending share of addressable market % (2015
addressable total annual lending green box $billion)
140
50.0%
120
$91bn
$104bn
SME
Consumer
2025e
RateSetter
$475bn
$48bn
Invoice Factoring
BuyToLet
40.0%
100
80
30.0%
60
20.0%
40
10.0%
20
0
0.0%
Invoice Factoring
SME
2015e
Consumer
2025e
Source: ABFA Association; Bank of England; Liberum forecasts
BuyToLet
2015e
2025e
Source: ABFA Association; Bank of England; Liberum forecasts
7
Direct Lending: Finding value/ minimising risk
UK Consumer survey: awareness of P2P surprisingly static; ISAability to drive c50% increase in number of investors
•
P2P awareness is static at best over last
12months – more marketing/ new aggregator
products required…
•
UK consumer survey: % of survey population aware of P2P and
% who would consider investing in P2P
Short term c50% boost in active investors once
becomes ISA-able
•
Over 50% of population think P2P riskier than
equities!
60%
12%
50%
10%
40%
8%
30%
6%
20%
4%
10%
2%
0%
0%
4Q14
•
P2PFA data shows 87% CAGR in amount per
lender account but only 22% CAGR in number
of lender accounts
Number lender
A/Cs
CAGR 22%
140
120
Amount per
lender A/C
CAGR 87%
16
14
12
100
10
80
8
60
6
40
4
20
2
0
0
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
Lender accounts ('000s) lhs
Amount per account(£'000s) rhs
Source: UK P2P Finance Association; Liberum analysis
2Q15
1Q15
2Q15
Would consider lending via P2P
UK P2PFA* number of lender accounts; £ amount per lender
account
UK consumer survey: % survey population who are already
lending and % who will lend once ISA-able
3Q15
4Q14
Know what P2P is
1Q15
Have already loaned
2Q15
3Q15
Lend when ISA-able
Source: ResearchNow, Liberum estimates
Source: ResearchNow, Liberum analysis
UK consumer survey: Estimated capital invested in P2P (non
pension assets)
UK consumer survey: % of UK population who think P2P lending
riskier than equities
2.0%
1.8%
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
60%
55%
50%
45%
40%
35%
30%
4Q14
1Q15
2Q15
% of non pension capital invested in P2P
Source: ResearchNow, Liberum estimates
3Q15
4Q14
1Q15
2Q15
3Q15
Believe P2P more risky than equities
Source: ResearchNow, Liberum analysis
8
Direct Lending: Finding value/ minimising risk
Larger addressable market in Continental Europe – volumes set to
overtake UK by 2020
• EU ex UK 2015e volumes: est. $1.5bn
• Smava (45% of total) on track to originate
c $650m in 2015e, sourcing liquidity from
banks
• Accelerating growth: Faster 2015e
volume growth in 2015e for both
Auxmoney (c 500%) and Pret D’Union (c
160%)
• Regionally EU ex UK has largest
growth potential: 5.2x bigger
addressable market than UK but UK
2015e ODL volumes are c2.7x larger*
EU ex UK Online Direct Lending Annual volumes 2011-2015e
$bn
EU ex UK Online Direct Lending Annual volumes 2011-2025e
$bn vs. UK total ex market invoice
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
300
250
200
150
100
50
0
2011
2012
2013
2014
Smava
Auxmoney*
Pret D'Union
Bondora
Zencap
Comunitae
Geldvoorelkaar*
Other
2011
2013
2015e
2017e
Smava
Pret D'Union
Zencap
Geldvoorelkaar*
Total UK ex market invoice
2019e
2021e
2023e
2025e
Auxmoney*
Bondora
Comunitae
Other
Source: AltFi Data, Liberum forecasts
Source: Liberum forecasts
Forecasted EU ex UK direct lending annual volume by segment
$bn
EU ex UK direct lending share of addressable market % (2015
addressable annual lending total green box $billion)
160
30%
$600bn
140
$672bn
25%
120
20%
100
(*ex UK invoice factoring for comparability)
2015e
80
15%
60
10%
40
5%
20
0
0%
Consumer
Source: AltFi data, Liberum forecasts
2015e
2025e
SME
Consumer
2015e
2025e
SME
Source: ECB, OECD, Liberum forecasts
9
Direct Lending: Finding value/ minimising risk
Yields: Regional avg in relatively tight range of 5-5-6.7%
swapped into USD (China an outlier for now)
• In local currency regional averages vary
from 4.6-10.8% (dotted bars)
• Converted to USD, ranger is tighter: 5.58.8% (solid bars)
• Available net yields of largest platforms
widely intermingled by region
Average expected net yield (seasoned) of largest 5-y platforms in each region: local currency (dotted) and swapped into USD (solid)
12%
10%
8%
6%
4%
2%
UK: Liberum AltFi Returns Index
0%
6.5
China
US
UK
6.0
Source: Company data, Liberum estimates
5.5
Platform net yields swapped into USD (expected seasoned returns)
5.0
4.5
4.0
2006
2007
Source: AltFi Data
2008
2009
2010
2011
2012
2013
2014
2015
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
SOFI
Smava
Zopa
Wellesley & Co.
RateSetter
LuFax
Auxmoney*
Prosper
Pret D'Union
Funding Circle
Lending Club
LendInvest
Geldvoorelkaar*
PPMoney
Zencap
Comunitae
EU ex UK
Avant
UK
Ondeck
US
Market Invoice
Hongling
Wzdai
Weidai
Bondora
China
EU ex UK
Source: Company data, Liberum estimates
10
Direct Lending: Finding value/ minimising risk
How risky is consumer debt? Credit cards receivables: positive
net returns for last 20+ years
• Solid returns: Avg net yield
achieved on US credit cards net
loan losses: 8.2%
• Stable losses: Peak losses
1.9x the average losses
• Consistently positive returns:
No year with negative returns in
20 years (max available data)
Similarly for UK:
• Avg net yield achieved on UK
credit cards net loan losses:
6.4%
• Peak losses 1.6x average
• No year with negative returns
in 16 years (max available
data)
US Credit card effective yields net of loan losses
20%
15%
10%
5%
0%
1995
1997
1999
2001
2003
Net yield
2005
2007
Loan losses
2009
2011
2013
2015
Avg net yield
Source: Federal reserve data, Liberum seasoning adjustments
UK Credit card effective yields net of loan losses
20%
15%
10%
5%
0%
1999
2001
2003
2005
Net yield
2007
Loan losses
2009
2011
2013
2015
Avg net yield
Source: Bank of England data, Liberum seasoning adjustments
11
Direct Lending: Finding value/ minimising risk
Macro environment currently unusually benign for Direct
Lending…
• Unemployment at 7 year lows in US &
UK
• Real interest rates are expected to close
to zero / negative for next 5 years
US & UK Unemployment rate (%) trending lower
US & UK 5y real govt. yields
12.0
5.0%
10.0
4.0%
3.0%
8.0
2.0%
6.0
1.0%
0.0%
4.0
-1.0%
2.0
0.0
2008
-2.0%
2009
2010
2011
2012
2013
US
• UK credit card delinquencies down c83%
from 2009 peak
• High yield credit spreads down 66% from
2009 peak – although relatively sharp
jump in spreads recently…
2014
-3.0%
2008
2015
2009
2010
2011
UK
US
2012
2013
Source: Liberum
US & UK 30day card delinquencies
US & Europe High Yield Credit Spreads (bps)
1,800
8.0%
1,600
7.0%
1,400
6.0%
1,200
-83%
5.0%
800
3.0%
600
2.0%
400
1.0%
200
2009
2010
2011
US
Source: Liberum
2012
2013
2014
-66%
1,000
4.0%
0.0%
2008
2015
UK
Source: Liberum
9.0%
2014
2015
0
2009
UK
2010
2011
2012
2013
2014
2015
US High Yield
EU High yield
EU Avg
US Avg
Source: Liberum
12
Direct Lending: Finding value/ minimising risk
Platform annual returns unlikely to go significantly negative in
stressed conditions
• Normalising loan losses to TTC levels
suggests yields would decline c1%
• Even under fairly aggressive stress case
assumptions UK consumer and SME net
yields stay above zero
US credit card return scenarios
UK personal loan return scenarios
14.0%
14.0%
12.0%
12.0%
10.0%
10.0%
8.0%
8.0%
6.0%
6.0%
4.0%
4.0%
2.0%
2.0%
0.0%
0.0%
Current
TTC
Net yield
Stress
Current
TTC
Net yield
Loan losses
Stress
Loan losses
Source: Liberum
Source: Liberum
UK SME loan return scenarios
Estimated current and stress annual returns for selected
platforms
14.0%
14.0%
12.0%
10.0%
9.0%
8.0%
6.0%
4.0%
4.0%
2.0%
0.0%
-1.0%
Current
TTC
Net yield
Source: Liberum
Stress
Lending Club
Loan losses
Funding Circle
Current
Zopa
Stress scenario
Source: Liberum estimates
13
Direct Lending: Finding value/ minimising risk
ZOPA returns: surprisingly resilient through global financial crisis
• ZOPA one of the few Online Direct
Lenders to have operated through the
financial crisis
• The worst annual cohort, 2008, had
annualised loan losses of 2.26% and an
average net yield of 5.9; the worst credit
grade (C1) had loan losses of 4.3% and a
net yield of 5.6%
Zopa annual returns by cohort % all credit grades
Zopa annual returns by cohort % A* credit grade
15.0%
15.0%
10.0%
10.0%
5.0%
5.0%
0.0%
0.0%
2005 2006 2007 2008 2009 2010 2011 2012
2005 2006 2007 2008 2009 2010 2011 2012
Net yield
Loan losses
Servicing cost
Net yield
Servicing cost
Average net yield
Loan losses
Average net yield
Source: ZOPA data
Source: ZOPA data
Zopa annual returns by cohort % B credit grade
Zopa annual returns by cohort % C1 credit grade
15.0%
15.0%
10.0%
10.0%
5.0%
5.0%
0.0%
0.0%
2005 2006 2007 2008 2009 2010 2011 2012
Source: ZOPA data
2006
2007
2008
2009
2010
2011
2012
Net yield
Servicing cost
Net yield
Servicing cost
Loan losses
Average net yield
Loan losses
Average net yield
Source: ZOPA data
14
Direct Lending: Finding value/ minimising risk
UK vs. US: equalizing gross yields, UK consumer platforms
appear to generate better returns
• Anecdotally, UK offers better risk
reward than US: Comparing Zopa loans
of equal gross yield (USD swapped) to
Lending Club ‘A grade’ and ‘B grade’
loans shows that equivalent Zopa loans
yields an extra 0.4-1.2% of net yield vs.
Lending Club
• Extra 1/5th net return at prime end:
The difference is most pronounced for the
Lending Club ‘A grade’ category with
Zopa offering proportionately 1/5th more
yield
• 2009-2012 cohorts used (as fully
matured)
Lending Club A grade loans: gross and net yields vs. equivalent
gross yield Zopa loans for 2009-2012 cohorts
Lending Club avg A-grade net yield (2009-12) vs. equivalent
gross yield Zopa loans
Gross yield
Net yield
Loan loss
12.0%
8.8%
8.8%
6.2%
7.3%
2.5%
1.5%
10.0%
7.2%
7.2%
6.0%
6.9%
1.20%
0.28%
7.2%
7.2%
5.3%
6.6%
2.0%
0.6%
7.7%
7.7%
5.3%
7.0%
2.4%
0.7%
7.7%
7.7%
5.7%
6.9%
2.0%
0.8%
2009
Lending Club
Zopa
2010
Lending Club
Zopa
2011
Lending Club
Zopa
2012
Lending Club
Zopa
Avg 2009-12 cohorts
Lending Club
Zopa
8.0%
6.0%
4.0%
2.0%
0.0%
Lending Club
Net yield
Zopa
Loan loss
Source: Liberum analysis, Lending Club data, AltFi Data
Source: Liberum; AltFi data
Lending Club B grade loans: gross and net yields vs. equivalent
gross yield Zopa loans for 2009-2012 cohorts
Lending Club avg B-grade Net Yield (2009-12) vs. equivalent
gross yield zopa loans
2009
Lending Club
Zopa
2010
Lending Club
Zopa
2011
Lending Club
Zopa
2012
Lending Club
Zopa
Avg 2009-12 cohorts
Lending Club
Zopa
Gross yield
Net yield
Loan loss
10.8%
10.8%
7.1%
7.2%
3.7%
3.5%
10.8%
10.8%
7.1%
7.1%
3.72%
3.67%
11.2%
11.2%
7.5%
8.4%
3.7%
2.7%
12.2%
12.2%
7.7%
8.1%
4.5%
4.1%
11.2%
11.2%
7.3%
7.7%
3.9%
3.5%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Source: Liberum analysis, Lending Club data, AltFi Data
Lending Club
Net yield
Zopa
Loan loss
Source: Liberum ; AltFi data
15
Direct Lending: Finding value/ minimising risk
P2P loans (Zopa & Lending Club) are performing 1%+ better than
bank originated loans with equivalent gross yield
• Bank originated credit assets look
attractive (e.g. US credit card net yields)
1
2
2
Net yields and loans losses of bank originated loans vs. Lending Club Grade A loans and Zopa equivalents - all USD swapped
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
US Credit cards
ZOPA (equivalent LC A-grade)
UK Credit cards
Net yield
Lending Club A grade
UK Personal loans
Loan losses
1. Loan data average of 2012 and 2013
2.Lending Club and Zopa data are average of 2009-2012 cohorts.
Source: Federal Reserve, Bank of England, Lending Club, Zopa, Liberum analysis
…But MPL loans perform better:
Net yields and loans losses after scaling to align gross yields, with losses correspondingly scaled
14.0%
• After risk-normalising, P2P loans
generate 1.6% more yield for loans with
avg gross yield of 7.7%
• …Suggests we can conservatively
backtest the performance of P2P
based on historical bank loan
performance data
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
ZOPA (equivalent LC Agrade)
Lending Club A grade
US Credit cards
Net yield
UK Credit cards
UK Personal loans
Loan losses
Source: Federal Reserve, Bank of England, Lending Club, Zopa, Liberum Analysis
16
Direct Lending: Finding value/ minimising risk
Risk/Reward for Direct Lending Proxies are attractive vs. Equities
& Property
• Better Sharpe ratio for US credit card
assets and UK personal loans than for
S&P
• S&P and commercial property had
negative returns of -37% and -23% in
2008
• Direct lending no negative annual
returns over last 20 years
• 50% repaid after 18 months (for 3 year
amortising loans)
US Credit card loan effective annual returns net of
servicing fees %
16.0%
1.8x
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
UK personal loan effective annual returns net of servicing fees
%
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Net Yield
Charge off
0.5x
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 1Q15
Net yield
Average Net Yield
Loan losses
Source: Liberum
Source: Liberum
S&P500 total annual returns %
UK commercial property total annual returns %
50%
0.4x
40%
*Sharpe ratio= (annual net return less 3m
Libor) / (standard deviation of annual
returns)
Sharpe
ratio*
25%
Avg net yield
0.5x
20%
30%
15%
20%
10%
10%
5%
0%
0%
-10%
-5%
-20%
-10%
-30%
-15%
-40%
-20%
-25%
-50%
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Source: Bloomberg
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Source: IPD
17
Direct Lending: Finding value/ minimising risk
Back-testing: levered Direct Lending returns equal / exceed S&P
returns with much lower volatility
• Unlevered, Direct Lending proxy
underperforms S&P500 over last 20
years but has no negative years and
much lower volatility
• A 200% Levered Direct Lending portfolio
matches the S&P with no drawdowns and
much lower volatility (net of mgmt and
performance fees).
Annual returns vs. standard deviation
Sharpe ratio and back testing approach
•
Sharpe ratio: avg excess annual return over avg 3m
Libor as % of annual standard deviation
•
Need to use 2 year time periods to measure
standard deviation to make P2P comparable with
Equities and Property. c 2/3rds repaid by month 24
•
For unlevered returns we assume no management
fees
•
Levered fund: assume 0.7% mgmt & operating
expense and 10% performance fee
8%
6%
4%
2%
0%
0%
5%
10%
15%
20%
25%
30%
Standard Deviation annualised
Property
1
Direct Lending- proxy vs. S&P 500 total return index
S&P 500
US Credit Card
US Credit Card levered
1
Levered Direct Lending- proxy vs. S&P 500 total return index
900
800
700
600
500
400
300
200
100
0
600
500
400
300
200
• Banks index a notable laggard
10%
1. Levered: 200% Debt/ Equity at Libor+2.3%; Mgmt fee of 0.7% assets; 10% perf fee. Source:
Liberum, IPD, Federal Reserve, Bloomberg
Source: Liberum
700
• 200% debt/ equity leverage modest by
standards of securitisation market
12%
Annual retunrs
• For return vs. volatility ratios use 2 year
time periods to make ‘apples to apples’
comparison
100
0
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
P2P-proxy
S&P500
1. Uses Credit Card Data as proxy for Direct Lending; 1% servicing fee
Source: Liberum, Federal Reserve, Bloomberg
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Levered P2P
P2P ex perf fees
S&P500
Banks
1.Levered: 200% Debt/ Equity leverage ; Mgmt fee of 0.7% of assets; with and without 10%
performance fee . Assumes debt financing at Libor+2.3%
Source: Liberum; US KBW Banks index, Bloomberg, Federal Reserve
18
Direct Lending: Finding value/ minimising risk
Niche lending segments offer the best risk/ reward lending
opportunities
• Niche platforms’ higher
returns potentially make them
M&A targets
Property Bridge
Financing
Providing timely secured financing to property entrepreneurs while
they arrange longer term cheaper financing
Insurance Premium
Finance
Lending against insurance premiums with premium payment
recoverable if loan repayments not made
Lending against life
insurance for
terminally ill
Improving quality of late-stage life
Near prime Auto
Financing
Using starter interrupt technology and GPS technology on car
collateral to improve credit performance (e.g. Car Finance
Company)
19
Direct Lending: Finding value/ minimising risk
Big picture trends: size; growth; risk/ reward
Accessing Interest income
Equity investment strategies
Sector risks and opportunity
20
Direct Lending: Finding value/ minimising risk
Both Ranger Direct Lending and P2PGI are listed vehicles focused
on the Direct Lending Sector; modest leverage
• P2PGI (ticker P2P) is a listed fund
focused on P2P platforms globally
• 61% of funds are invested in US (56%
Consumer); 27% in Europe (16%
Consumer)
P2PGI Total NAV Return Breakdown
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
‘For Illustrative purposes only’
4.2%
2.0%
10.3%
Gross yield
net servicing
2.1%
8.2%
Loan losses
Net yield
Leverage
impact
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Equity
investments
Mgmt &
Operating
Fees
1.6%
Performance
Fee
9.3%
9.3%
Profit
Dividend
‘For Illustrative purposes only’
Ranger (US SME) Total NAV Return Breakdown
• Ranger Direct Lending (ticker RDL) is
a listed fund focused primarily on US
secured Online Direct Lending
platforms. 100% US asset mix; 84%
secured
0.4%
3.8%
1.8%
14.9%
2.7%
Gross yield
net servicing
Loan losses
1.4%
12.3%
Net yield
Leverage
impact
Equity
investments
Mgmt &
Operating
Fees
Performance
Fee
12.8%
Profit
11.6%
Dividend
Source: Bloomberg / analyst reports
21
Direct Lending: Finding value/ minimising risk
Online Direct Lending Funds typically have targeted NAV returns
25% higher than other income funds
• ODL funds offering higher returns:
Sample of 4 London listed Direct Lending
funds offer an average total NAV return of
10.1% vs. 8.0% for other income funds
Target NAV Return
‘For Illustrative purposes only’
12%
10%
8%
6%
4%
2%
0%
Ranger Direct Real Estate
Lending Fund
Credit
Investments
P2P GI
Victory Park GLI Finance SQN Asset
Finance
Income
Average target Return NAV - ODL Funds
UK
Mortgages
Ltd
Starwood
Sequoia ICG Longbow
GCP
European
Economic
Infrastructure
Real Estate Infrastructure
Investments
Finance
Fund
Average target Return NAV - Other Income Funds
Source: Bloomberg/ Other
22
Direct Lending: Finding value/ minimising risk
Retail capital channels into Direct Lending are evolving…
Preliminary
Currently topical
Description
Example
Inception Date
Classic P2P
Diversified Closed-End
Investment Trust
Dedicated trusts for larger
platforms
1-stop-shop P2P portal/
Offering convenient
structured products
P2P platform directly
connecting with lenders
Listed Investment trust lending
via multiple platforms
Dedicated listed Investment
trust lending passively via one
platform
Single account / product for
retail investors
e.g. Zopa
e.g. P2PGI / Ranger Direct
Lending
e.g. LendInvest/ Funding
Circle / Direct Money
Under development
2005
2014
2015e
Under development
Pros / cons for
Investors
Pros: Lost cost
Cons: Time intensive
Pros: Diversified access
Cons: Higher costs
Pros: Efficient access;
accessible via
brokerage account
Cons: Less diversification
Pros / cons for
Platforms
Pros: Relatively low churn
of lending capital
Cons: Only likely to attract
early adopters/
sophisticated
investors
Pros: Increased access to
funding especially for
early stage platforms
Cons: Funding can be
easily diverted to
other platforms
offering better returns
Pros: Scalable permanent
capital
Cons: More difficult to
attract capital initially
for less established
platforms – due to
relative illiquidity
Pros: Convenience;
diversified low cost,
structured solutions
Cons: Unavailable
via security broker
Pros: Access to broader
retail mass market;
equity ownership of
portal
Cons: More fluid funding
than dedicated trust–
contingent on
performance
23
Direct Lending: Finding value/ minimising risk
Big picture trends: size; growth; risk/ reward
Accessing Interest income
Equity investment strategies
Sector risks and opportunity
24
Direct Lending: Finding value/ minimising risk
At least 4 key drivers underpinning sector long term
sustainability…
1
Online credit data as good/
better than bank data
•
Ongoing unbundling of credit info ecosystem
•
Enhanced credit data via FinTech innovation
Traditional Lender
Operating expense: 5-7%
2
60% relative cost efficiency
for smaller loan amounts
•
Reserve Requirements
Online Direct lenders (ODLs) are c60% more efficient vs.
traditional lenders
Branch Infrastructure
Operating expense: ~2%
Customer Acquisition
Technology and business model
drive cost down
Underwriting
Customer Acquisition
Underwriting
Origination
Servicing
Origination
Servicing
Average net promoter score (NPS) – 1Q2015
3
Improved User Experience
•
78%
ODLs are using technology to drive convenience and better
64%
43%
21%
9%
user experience=> better Net Promoter Scores
Lending Club Credit Unions
a. ODL reduces systemic risk since no single point of failure
4
Government support for
ODL sector
a
Community
Banks
Regional
Banks
Credit cards
Systemic Risk Comparison: Traditional Banking vs. MPL
b. In addition, ODL enables government to channel credit
where it is most needed (e.g. SME – British Business Bank,
NTMA in Ireland)
b
Government agencies already using MPL
25
Direct Lending: Finding value/ minimising risk
Over $220m of equity capital already raised in 2015 by UK
platforms
• RateSetter estimated forward revenue
multiple, a c20% discount to Lending
Club valuation multiple (9.2x)
• Funding Circle valued at over $1bn on
relatively high revenue multiple – due
to US/ global opportunity
Date
Apr 15
Date
Amount raised
$150m
Amount raised
Est. post money Val.
$1bn
Est. post money Val.
Est. Price/Revenue*
23.3x
Est. Price/Revenue*
Investors
• Direct Lending now accessing equity
capital from mainstream asset
managers
Mar 15
$31m
$230m
7.7x
Investors
Date
Amount raised
Jun 15
Date
$34m
Aug 15
Amount raised
$9m
Est. post money Val.
N/A
Est. post money Val.
N/A
Est. Price/Revenue
N/A
Est. Price/Revenue
N/A
Investors
Investors
Paul Forster
*Estimated forward revenues over the next 12 months at time of transaction
Source: Company data / press reports; Liberum estimates
26
Direct Lending: Finding value/ minimising risk
Significant equity value creation: Average IRR from Series A:
143% with valuation 0.8x run rate loan originations
Lending Club
Prosper
IRR: 74%
IRR: 311%
20
10,000
14.2
15.0
15
14.5
8,000
6,000
4,000
3.5
0.0
0.4
A (Aug 07)
B (Mar 09)
0.8
1.8
2,000
25
3,000
0
C (Apr 10)
Share Price $ (LHS)
D (Aug 11)
E (Jun 12)
Valuation m$ (RHS)
F (Apr 14) IPO (Dec 14) Curr. (Oct 15)
2,000
15
10
3.0
1,000
1.4
0
0
A (Jan 13)
Run rate loan origination m$ (RHS)
Funding Circle
B (Sep 13)
Share Price $ (LHS)
C (May 14)
Valuation m$ (RHS)
D (Apr 15)
Run rate loan origination m$ (RHS)
OnDeck
IRR: 147%
1,200
1,000
800
521
600
800
600
400
307
122
50
14
0
A (Apr 11)
14.3
5
0
200
4,000
30
20
5
5,000
34.5
35
10
1,000
40
B (Mar 12)
Share Price $ (LHS)
C (Oct 13)
Valuation m$ (RHS)
D (Jul 14)
IRR: 39%
30
25
1,500
20
14.7
15
400
10
200
5
0
0
E (Apr 15)
Run rate loan origination m$ (RHS)
2,000
20.0
1,000
9.0
5.2
0.4
1.5
A (Jan 06)
B (Jan 07)
2.1
500
2.8
0
Share Price $ (LHS)
C (Aug 11)
C 1 (May 13)
D (Mar 14)
Valuation m$ (RHS)
E (Apr 14)
IPO (Dec 14) Current (Oct
15)
Run rate loan origination m$ (RHS)
27
Direct Lending: Finding value/ minimising risk
Substantial growth for LC and ONDK still expected despite share
price declines
• LC and ONDK share prices
under some pressure post
IPO
Lending Club share price IPO to date, $
• Reverse engineering current
valuation suggests market
still expecting 22-32%
revenue CAGR over next 10
years
Lending Club DCF: what’s implied in current share price?
$bn
30
6.0
25
5.0
20
4.0
DCF
$5.5bn
3.0
15
2.0
10
1.0
5
0
Dec- Jan-15 Feb- Mar- Apr-15 May- Jun-15 Jul-15 Aug14
15
15
15
15
(1.0)
2015e 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Sep- Oct-15
15
Revenue
Net Income
Source: Bloomberg
Source: Liberum preliminary estimates (not under coverage)
On Deck Capital share price IPO to date, $
OnDeck DCF: what’s implied in current share price?
$bn
30
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
-0.2
25
20
15
10
5
0
Dec- Jan-15 Feb- Mar- Apr-15 May- Jun-15 Jul-15 Aug14
15
15
15
15
Sep- Oct-15
15
DCF
$0.6bn
2015e 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Revenue
Source: Bloomberg
Net Income
Source: Liberum preliminary estimates (not under coverage)
28
Direct Lending: Finding value/ minimising risk
Equity opportunity to anticipate institutional lending capital –
particularly in non-P2P direct lending
Segmenting direct lending landscape
Institutional lending capital as valuation catalyst
‘For Illustrative purposes only’
Estimated US 2015e Volume by Category with Examples of each Lender Type
Volume
Valuation
DL: $71bn*
ODL: $27bn
MPL: $20bn
P2P: $16bn
Potential
impact of
institutional
loan capital
*Estimated US annual SME & Consumer 2015 volume $bn;
Source: NFIB, FDIC, Company data, NFIB, Liberum estimates
Source: Liberum analysis
Frequent opportunities
to access equity before
Institutional lending
capital deployed
Time
•
Direct Lending (DL): All non-bank lending executed both offline and online
•
•
Online Direct Lending (ODL): Smaller loan size direct lending to SMEs and consumers
where the majority of the borrower interaction and underwriting is online
Origination run rate vs. equity valuation: Platform revenue and valuation are closely
linked to volumes (approximately linear relationship)
•
Institutional lending capital – valuation catalyst: Investing in platform equity
concurrent with institutional loan capital deployment drives exceptional investment
returns
•
Market Place Lending (MPL): ODL where the platform retains none of the credit risk.
Lenders buy whole/ fractional loans via the platform
•
Peer to Peer lending (P2P): MPL where retail investors can invest in fractional loans via
the platform
29
Direct Lending: Finding value/ minimising risk
Liberum Alternative Finance- what we’re focused on…
Specialist strategic adviser and development partner to the Alternative Finance
sector
Working with entrepreneurs and investors in emerging, highgrowth AltFi businesses
• Focus on online direct and marketplace lending and equity
crowdfunding
• Work with leading platforms in the sector and back new and
emerging ventures
• Support platforms in their development and provide specialist
advice and expertise in funding from a dedicated team that
knows the leading platforms and institutional funding providers
At Liberum we:
• Raise equity capital through our Investment Banking and
Equities teams
• Source lending capital funding for platforms
• Act as a strategic development partner and selectively provide
venture capital
*Selected businesses Liberum have sourced funding for or invested in
• Partner with investors to source equity and loan investment
opportunities and raise funds
• Sponsor the benchmark Liberum AltFi Indices
30
Direct Lending: Finding value/ minimising risk
Big picture trends: size; growth; risk/ reward
Accessing Interest income
Equity investment strategies
Sector risks and opportunity
31
Direct Lending: Finding value/ minimising risk
Regulatory Priorities: fraud risk, fee transparency and
management incentive alignment
• Risk of capital being misappropriated/ loan risk not matching
description/ collateral not matching contract
Fraud minimisation
via central data
repository
• In contrast to other Fintech products (e.g. P2P FX and Payments) –
payments for P2P lenders are extended over time => ponzi scheme
risk is higher
• Potential solution: Regulator-managed data repository that
automatically monitors and cross references all loans to individual
bank statements – funded by a small sector levy
• Retail investors often use the rate offered as risk proxy
Fraud prevention / detection platform
Lender
ODL lender
Borrower
Cashflow information & other contract info
Regulator data
repository
Annual lender returns pre and post fees %
• Currently possible for ODL platform to transform a high borrower APR
into a low investor net return via large opaque fee margin
Fee transparency
• Retail investors may take more risk than intended /have less protection
in stress scenario
• Potential solution: require clear statement of annualised platform
fees.
Gross yield less credit
losses
Fees
Net yield
Alignment of management incentives with lender returns
• Marketplace lenders typically take no credit risk
Management
incentive alignment
Management
compensation
• Potential incentive to prioritise short –term growth over credit quality
• Potential solution: portion of staff performance compensation should
be continuously deferred until loans have been fully repaid
Lender returns
Current management payoff
More aligned payoff
32
Direct Lending: Finding value/ minimising risk
Future retail banking impact? MPL loans may become
increasingly like ‘cash’ as liquidity & connectivity improves
Future Central Bank engagement with MPL
MPL liquidity will become approx as good as deposits
•
MPL systemically important once > e.g. 25% of Consumer and SME lending
•
•
Targeted monetary policy: MPL will enable government to target components
of the economy e.g. SME credit by region and industry
•
MPL may become part of money supply mgmt: central banks could buy /
sell pools of MPL loans (via ABS market) as part of their open market
operations
Central bank MPL liquidity : Central banks should provide unlimited sector
liquidity at discount for performing MPLs
• Bagehot: “In a financial crisis, central banks should lend freely against good
collateral at a penalty rate”
•
Inherent structural liquidity: due to amortisation flowback e.g. 1/3rd of 3yr
loans are repaid annually.
•
Payment connectivity: In future, P2P will connect with mobile wallets and
payment systems providing public good investment returns AND immediate
access to savings
MPL loans likely to behave as broader money: ‘M5’
MPLs will have real time flows to / from mobile wallets
Potential future asset liquidity categories
Future MPL linkages with payment fintech
‘M5’ MPL loans*
P2P Platforms / Funds
M4 bank deposits
Attractive returns: e.g. 510% pa
P2P Platforms / Funds
Returns: 5-10% pa
M0: Cash
Rapid Loan repayments imply
significant structural liquidity
*With govt/ institutional liquidity backstop
33
Direct Lending: Finding value/ minimising risk
Conclusions
• Regionally, more growth in Europe: Continental Europe originations likely to overtake
UK by 2020 (currently 3x smaller); China set to slow relatively
• Better Sharpe ratio vs other asset classes: MPL asset class offers better risk /
reward ratio than equities (up to 4x higher)
• Focus on lending niches: smaller & overlooked segments offer best debt and equity
opportunities
• Retail sector access evolving towards low cost/ convenient solutions; MPL not yet
reached mass market; aggregator solution/ packaged products under development
• MPL loans to partially disintermediate cash: as means of payment and store of
value; opportunity in integration with digital wallets & current accounts (once liquidity
challenges addressed).
34
Direct Lending: Finding value/ minimising risk
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35