* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download Title of presentation
Survey
Document related concepts
Investment management wikipedia , lookup
Private equity secondary market wikipedia , lookup
Systemic risk wikipedia , lookup
Securitization wikipedia , lookup
Payday loan wikipedia , lookup
Investment fund wikipedia , lookup
Financial economics wikipedia , lookup
Financialization wikipedia , lookup
Yield spread premium wikipedia , lookup
Business valuation wikipedia , lookup
United States housing bubble wikipedia , lookup
Moral hazard wikipedia , lookup
Credit rationing wikipedia , lookup
Interbank lending market wikipedia , lookup
Transcript
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 Disclaimer This material is the commercial property of Liberum and may not be disclosed or distributed to any third party without the express permission of Liberum. You shall not remove or modify any disclaimer or copyright or trademark notice contained in any Material. If you have received this material in error, please immediately notify the sender and destroy the material. This Material is for information only and it should not be regarded as an offer to sell or a solicitation of an offer to buy. It is based on current public information and/or from sources which Liberum believes to be reliable, but the accuracy, completeness, timeliness or correct sequencing of the information included herein cannot be guaranteed. Neither Liberum nor any source will be liable for the accuracy of, or availability of, such information or will have any duty to verify, correct, complete or update any material. Neither Liberum nor any source will be liable for any loss, cost, claim or damage (including direct, indirect or consequential damages or lost profits) arising out of or otherwise relating to any material or the use or access to or unavailability of any material. Any information or opinions contained herein are subject to change without notice. Unless stated otherwise, this material is not investment research or a research recommendation for the purposes of FCA rules or a research report under U.S. securities laws. It is provided on the understanding that Liberum is not acting in a fiduciary capacity and it is not a personal recommendation to you. The securities referred to may not be suitable for you and this material should not be relied upon in substitution for the exercise of independent judgement. Liberum and/or its officers, directors and employees may have or take positions in securities of companies mentioned in this communication (or in any related investment) and may from time to time dispose of any such positions. Liberum may act as a market maker in the securities of companies discussed in this communication (or in any related investments), may sell them or buy them from customers on a principal basis, and may also provide corporate finance or underwriting services for or relating to those companies, for which it is remunerated. United Kingdom and the rest of Europe: This material has been prepared and issued by Liberum. Liberum is a trading name of Liberum Capital Limited, who are authorised and regulated by the Financial Conduct Authority (FCA) and a member of the London Stock Exchange. Ropemaker Place, Level 12, 25 Ropemaker Street, London EC2Y 9LY.Tel +44 (0)20 3100 2000 Fax +44 (0)20 3100 2299 United States: This communication is distributed to US institutional investors by Liberum Inc, which is a member of FINRA & SIPC. 441 Lexington Avenue (15th Floor), New York, NY 10017, Tel +1 212 596 4800 Fax +1 212 596 4898. 35