a deep dive into platform performance€¦ · a deep dive into platform performance. ... platform,...
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![Page 1: A Deep Dive into Platform Performance€¦ · A Deep Dive into Platform Performance. ... platform, or of an entire platform loan type 5 Challenge 1 - Sampling issues. AltFi Data Analytics:](https://reader033.vdocuments.us/reader033/viewer/2022042811/5fa199c2ac34143b452ee026/html5/thumbnails/1.jpg)
A Deep Dive into Platform Performance
![Page 2: A Deep Dive into Platform Performance€¦ · A Deep Dive into Platform Performance. ... platform, or of an entire platform loan type 5 Challenge 1 - Sampling issues. AltFi Data Analytics:](https://reader033.vdocuments.us/reader033/viewer/2022042811/5fa199c2ac34143b452ee026/html5/thumbnails/2.jpg)
Tech enabled lending represents a revolut ion: Financial Intermediat ion can be done better ‘onl ine’
Improved Borrower Experience
Removal of ‘bricks & mortar’ cost
Access to new data sources to improve
pricing of risk
Brand new asset class Originate to distribute model requires originators to
demonstrate alignment
But…..
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Investors have now discovered these high return / low correlation assets
Scaling this opportunity requires:✓ Ability to perform ‘like for like’ analysis of standardised metrics✓ Verification of asset performance by an independent third party✓ Analysis needs to extend beyond return to risk adjusted return
UK SME Originator EU SME OriginatorUS Consumer Originator
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Bad News = Calculation of performance of
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Good News = Availabil i ty of Data
thousand of loans, with distinct characteristics, is:• complex• diff icult to standardise
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• Performance varies between loans• Cohorts and pools wil l not behave consistently• Makes l ike for l ike comparison diff icult
- Between platforms- Versus other asset classes
We need to capture the track record of an entire platform, or of an entire platform loan type
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Challenge 1 - Sampling issues
![Page 6: A Deep Dive into Platform Performance€¦ · A Deep Dive into Platform Performance. ... platform, or of an entire platform loan type 5 Challenge 1 - Sampling issues. AltFi Data Analytics:](https://reader033.vdocuments.us/reader033/viewer/2022042811/5fa199c2ac34143b452ee026/html5/thumbnails/6.jpg)
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Challenge 2:Seasoning
Default profile creates distortionsCohort analysis can be misleading until loans have fully matured
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Generic Cumulative Net Loss Curvedefaults net of recoveries as percent of original principal by months since origination
Source: AltFi Data
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Months Since Origination
Seasoning Distribution of Young Portfolio% of total outstanding loan amount
Source: AltFi Data7
Challenge 3 - Variable origination growth rates
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Months Since Origination
Seasoning Distribution of Aged Portfolio% of total outstanding loan amount
Source: AltFi Data
Fast growing book:• high proport ion of young loans• lower default rate• higher net return
Slowing growth book:• high proport ion of old loans• higher default rate• lower net return
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• Reflects a portfol io perfectly diversif ied across all loans• Is equal t ime weighted to capture cohorts of al l ages• Naturally adjusts to variations in origination growth rate
To create metrics that:• Are genuinely comparable• Are free from ‘ageing’ distortions• Capture the impact of al l lending activity• Are comparable with other asset classes• Can be viewed as a t ime series
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One solution is to use a methodology that…
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‘Equal t ime weighted, constant portfol io’ metr ics• Exposure to every loan• Equal exposure to each cohort
• Imagine that every Q you invested a perfect ly diversif ied $1,000
• Output is the annualised rate of that portfol io
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Months Since Origination
Equal Vintage Seasoning Distribution% of total outstanding loan amounts
Source: AltFi Data
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12 month trail ing return from equal t ime weighted, constant, portfol io
• Net of fees and defaults • Adjusted for recoveries
• Defaults written down to historic recovery rate / asset proxy
UK SME Originator EU SME OriginatorUS Consumer Originator
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AltFi Data Analytics: Web based analytics subscription service
Same analysis can be applied
to all constituents of
net return i.e. interest
income and net loss…
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…providing us with a standardised, L4L comparable, measure of r isk…
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So by disaggregating our net return methodology, we can create comparable metrics of r isk to be viewed alongside comparable metrics of return
…result ing in a l ike for l ike appraisal of risk adjusted return.
Net Return Loss Coverage
UK SME Originator 6.47% 2.8x
US Consumer Originator 5.12% 1.7x
EU SME Originator 5.42% n/a
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Yield Net Return Net Loss
UK SME Originator
Loss CoverageMultiple by which interest income covers net loss
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Yield Net Return Net Loss
US Consumer Originator
Loss CoverageMultiple by which interest income covers net loss
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D I S C L O S U R E
I S S U E R S
EU SME Originator
Yield Net Return Net Loss
Loss CoverageMultiple by which interest income covers net loss
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• Calculating platform performance is complex• Standardisation can bring clarity• Return should be viewed in tandem with risk• Analysis suggests that digital ly enabled loan
assets offer a signif icant return premium versus conventional assets of similar duration
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Conclusion