P2P lenders offer opportunities to hedge funds and investors, says industry veteran Suber

18 Feb, 2013

Peer-to-peer (P2P) lenders, web-based organisations which bypass banks matching borrowers with lenders, could provide opportunities for hedge funds and institutional investors.

Ron Suber, head of global institutional sales at Prosper, a San-Francisco-based P2P lender, said the area was receiving increased interest from hedge funds and institutional investors, particularly family offices.

“There are a growing number of investors looking at this space, particularly family offices which are looking for a stable monthly income. We have exposure to the consumer credit market, and we make money through charging an origination fee to borrowers and a servicing fee on outstanding principal balances to lenders,” said Suber, who was previously a senior partner at mid-prime Merlin Securities, before it was sold to Wells Fargo in 2012.

P2P lending has grown in recent years as banks curb back their own lending with Prosper having loaned approximately $430 million since 2007 and boasting 20,000 lenders on its platform. These web-based businesses are not burdened by the internal infrastructure, regulation and bureaucracy prevalent at most major banks enabling them to charge a slightly lower rate of interest to the borrower and share the spread with lenders. Investing in P2P businesses such as Prosper, according to Suber, has earned lenders average returns of 10% over the last three years, which given the static performance of other asset classes, could further boost their appeal to institutional investors and hedge funds.

“A diversified portfolio of peer-to-peer loans has, historically, delivered investment returns that are attractive when compared to similar asset classes.  Those returns are appealing for any investor in search of yield, and doubly so for those attempting to do asset liability matching, or anyone looking for a return that is uncorrelated with the market,” said Pat Grady, partner at Sequoia Capital, a California-based venture capital firm, which just invested $20 million into Prosper.

Suber agreed. “P2P lending also provides a diversified portfolio with consistent monthly returns not correlated to the stock market, gold or politics.”

Nonetheless, some of these loans are unsecured requiring intense due diligence on the part of the P2P business to verify and underwrite the borrowers. Furthermore, investors would want to be reassured about the creditworthiness of any borrowers they have exposure to.

Suber said due diligence on borrowers was thorough. “We do credit checks on borrowers and we run them through our own internal credit pricing model to calculate the interest rate they pay. We are very stringent on verification of creditworthiness. We estimate default rates among our AA and A rated loans will be between 2% and 3% and we price loans to generate attractive returns for lenders,” he said.

Furthermore, Suber said Prosper offered its customers protection against its own bankruptcy risk. “We worked very closely with the SEC over the past several months to implement bankruptcy remote protection for our lenders, and we’re very pleased to be the only P2P lender to currently offer this kind of peace of mind to our customers,” he said.  

Gaining acceptance among institutional investors has not been without its challenges for P2P lenders. Nonetheless, Grady said institutions are starting to recognise its potential. “Several years ago, the primary source of funding for peer-to-peer lending was individuals.  Today, hedge funds and other large institutional investors can look at many years worth of performance data, and that has them excited about these products,” commented Grady.

Prosper has had challenges lately, and in fact posted losses in its last regulatory filing. Nonetheless, Suber said the new leadership, which includes CEO Stephen Vermut and President Aaron Vermut, both colleagues from Merlin and Wells, have already started executing on an aggressive plan to grow the business.

peer to peer lendingMerlin SecuritiesWells Fargofamily officesventure capital
Spring 2012