direct lending: finding value/ minimising risk ropemaker place, 25 ropemaker street, london ec2y 9ly...
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Direct Lending: Finding value/ minimising risk
Ropemaker Place, 25 Ropemaker Street,London EC2Y 9LY / T: +44 (0)20 3100 2000www.liberum.com
Liberum Capital Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 5912554
20 October 2015
Cormac Leech Research+44 (0) 20 3100 [email protected]
Marin Cauvas Investment Banking+44 (0) 20 3100 [email protected]
Direct Lending: Finding value/ minimising risk
Big picture trends: size; growth; risk/ rewardAccessing Interest incomeEquity investment perspectiveSector 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
2010 2011 2012 2013 2014 2015e
0
5,000
10,000
15,000
20,000
25,000
Lending Club SOFI Prosper Avant Ondeck Zopa Funding Circle RateSetter
*Where data publicly availableSource: AltFi Data, Company websites
CAGR:151%
3
$m
Direct Lending: Finding value/ minimising risk
4
Source: www.WDZJ.com, AltFi Data, Company websites
ODL is a global phenomenon- largest markets: China, US, and UK
$ = 2015e annual gross volume
$22.7bn
$4.4bn$1.5bn
$157.0bn
Direct Lending: Finding value/ minimising risk
5
2013 2014 2015e
020406080
100120140160180200
China US UK EU ex UK2013 2014 2015e
020406080
100120140160180200
China US UK EU ex UK
China US UK EU ex UK
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
11.5%
2.2% 1.7%
0.1%
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
• Chinese loans shorter maturity - Based on loans outstanding China’s is less pronounced at 68% of total
• 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
Source: Liberum, WDZJ, AltFi Data, company data, Bank of England, FDIC, Federal Reserve, ECB, OECD
Source: Liberum, WDZJ, AltFi Data, company data, Bloomberg
Global outstanding balances Online Direct Lending $bn
Source: Liberum, WDZJ, AltFi Data, company data
Global volumes Online Direct Lending $bn
Source: Liberum, WDZJ, AltFi Data, company data
CAGR:207%
CAGR:286%
Online direct lending annual volumes as % addressable market (2015 addressable market green box $trillion)
Online direct lending volumes as % GDP
$1.4tn $1.1tn $0.2tn $1.3tn
China US UK EU ex UK
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6% 1.50%
0.13% 0.14%0.01%
6
2011 2012 2013 2014 2015e
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Smava Auxmoney* Pret D'Union Bondora ZencapGeldvoorelkaar*
2011 2012 2013 2014 2015e
0
1
2
3
4
5
Zopa Funding Circle RateSetter LendInvestMarket Invoice Wellesley & Co. Other
2011 2012 2013 2014 2015e
0
5
10
15
20
25
Lending Club Prosper SOFI Ondeck Avant Other SME ODL2013 2014 2015e
020406080
100120140160180200
Hongling LuFax PPMoney Weidai Wzdai Other
US Online Direct Lending $bn
Regional growth rates: Continental Europe now growing c 2x as fast as UK and US, … from a much lower base
Direct Lending: Finding value/ minimising risk
• Chinese market highly fragmented: top5 platforms only 20% of volumes (vs. c80% in UK).
• Regionally China growing fastest – but set to slow given already high market penetration.
• US & UK volume growth has slowed from c190% YoY in 2013 to c 100% YoY in 2015e
• Europe ex UK accelerating: 200% in 2015e vs. 140% in 2014e off a low base
Source: Company data
UK Online Direct Lending $bn
Source: Altfi data, Liberum
EU ex UK Online Direct Lending $bn
Source: Altfi data, Liberum
2015e CAGR
115%
206%83%
296%
China Online Direct Lending $bn
2013: only total market data available Source: WDZJ
Direct Lending: Finding value/ minimising risk
7
SME Consumer Invoice Factoring BuyToLet
0.0%5.0%
10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%50.0%
2015e 2025e
Invoice Factor-ing
SME Consumer BuyToLet
0
20
40
60
80
100
120
140
2015e 2025e
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
• Zopa reacceleration: volumes in 2015e: 120% YoY growth (vs 45% in 2014)
• By 2025, UK direct lending could reach $100bn excluding invoice factoring- for comparability
UK Online Direct Lending annual volume by segment$bn
Source: ABFA Association; Bank of England; Liberum forecasts
UK Online Direct Lending Annual volumes$bn 2011-2025e
Source: Liberum forecasts
UK Online Direct Lending Annual volumes$bn 2011-2015e
Source: AltFi Data, Liberum forecasts
$91bn
UK direct lending share of addressable market % (2015 addressable total annual lending green box $billion)
Source: ABFA Association; Bank of England; Liberum forecasts
$104bn
$475bn
$48bn
2011 2012 2013 2014 2015e
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Market Invoice Funding Circle Zopa RateSetter LendInvestWellesley & Co. Other
0
50
100
150
200
250
Market Invoice Funding Circle Zopa RateSetter LendInvestWellesley & Co. Other
Direct Lending: Finding value/ minimising risk
8
4Q14 1Q15 2Q15 3Q15
30%
35%
40%
45%
50%
55%
60%
Believe P2P more risky than equities4Q14 1Q15 2Q15 3Q15
0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%1.8%2.0%
% of non pension capital invested in P2P
4Q14 1Q15 2Q15 3Q15
0%
2%
4%
6%
8%
10%
12%
Have already loaned Lend when ISA-able
4Q14 1Q15 2Q15 3Q15
0%
10%
20%
30%
40%
50%
60%
Would consider lending via P2P Know what P2P is
4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15
0
20
40
60
80
100
120
140
0
2
4
6
8
10
12
14
16
Lender accounts ('000s) lhs
Amount per account(£'000s) rhs
UK Consumer survey: awareness of P2P surprisingly static; ISA-ability to drive c50% increase in number of investors • P2P awareness is static at best over last
12months – more marketing/ new aggregator products required…
• Short term c50% boost in active investors once becomes ISA-able
• Over 50% of population think P2P riskier than equities!
• P2PFA data shows 87% CAGR in amount per lender account but only 22% CAGR in number of lender accounts
UK consumer survey: % of survey population aware of P2P and % who would consider investing in P2P
Source: ResearchNow, Liberum estimates
UK consumer survey: % survey population who are already lending and % who will lend once ISA-able
Source: ResearchNow, Liberum analysis
UK consumer survey: Estimated capital invested in P2P (non pension assets)
Source: ResearchNow, Liberum estimates
UK consumer survey: % of UK population who think P2P lending riskier than equities
Source: ResearchNow, Liberum analysis
UK P2PFA* number of lender accounts; £ amount per lender account
Source: UK P2P Finance Association; Liberum analysis
Amount per lender A/CCAGR 87%
Number lender A/CsCAGR 22%
Direct Lending: Finding value/ minimising risk
9
0
50
100
150
200
250
300
Smava Auxmoney*Pret D'Union BondoraZencap ComunitaeGeldvoorelkaar* OtherTotal UK ex market invoice
Consumer SME
0%
5%
10%
15%
20%
25%
30%
2015e 2025e
EU ex UK direct lending share of addressable market % (2015 addressable annual lending total green box $billion)
Consumer SME
0
20
40
60
80
100
120
140
160
2015e 2025e
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*
(*ex UK invoice factoring for comparability)
EU ex UK Online Direct Lending Annual volumes 2011-2015e $bn
Source: AltFi Data, Liberum forecasts
EU ex UK Online Direct Lending Annual volumes 2011-2025e $bn vs. UK total ex market invoice
Source: Liberum forecasts
Forecasted EU ex UK direct lending annual volume by segment$bn
Source: AltFi data, Liberum forecasts
$600bn
$672bn
Source: ECB, OECD, Liberum forecasts
2011 2012 2013 2014 2015e
0.00.20.40.60.81.01.21.41.6
Smava Auxmoney* Pret D'Union Bondora Zencap
Comunitae Geldvoorelkaar* Other
Direct Lending: Finding value/ minimising risk
Bo
ndora
Weid
ai
Wzd
ai
Hong
ling
Ma
rket In
voice
Onde
ck
Av
ant
Com
unita
e
Ze
nca
p
PP
Mone
y
Geld
voore
lkaa
r*
LendIn
ve
st
Lendin
g C
lub
Fu
ndin
g C
ircle
Pre
t D'U
nio
n
Pro
sper
Au
xm
oney*
LuFax
Rate
Sette
r
Welle
sley &
Co.
Zo
pa
Sm
ava
SO
FI
0.0%2.0%4.0%6.0%8.0%
10.0%12.0%14.0%16.0%18.0%
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: 5.5-8.8% (solid bars)
• Available net yields of largest platforms widely intermingled by region
Platform net yields swapped into USD (expected seasoned returns)
Source: Company data, Liberum estimates
China
US
UK
EU ex UK
Average expected net yield (seasoned) of largest 5-y platforms in each region: local currency (dotted) and swapped into USD (solid)
Source: Company data, Liberum estimates
UK: Liberum AltFi Returns Index
Source: AltFi Data
10
China US UK EU ex UK
0%
2%
4%
6%
8%
10%
12%
4.0
4.5
5.0
5.5
6.0
6.5
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
Source: Federal reserve data, Liberum seasoning adjustments
UK Credit card effective yields net of loan losses
Source: Bank of England data, Liberum seasoning adjustments
11
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
0%2%4%6%8%
10%12%14%16%18%20%
Net yield Loan lossesAvg net yield
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
0%2%4%6%8%
10%12%14%16%18%20%
Net yield Loan lossesAvg net yield
Direct Lending: Finding value/ minimising risk
12
2008 2009 2010 2011 2012 2013 2014 2015
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
US UK
2009 2010 2011 2012 2013 2014 2015
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
US High Yield EU High yieldEU Avg US Avg
2008 2009 2010 2011 2012 2013 2014 2015
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
US UK
2008 2009 2010 2011 2012 2013 2014 2015
0.0
2.0
4.0
6.0
8.0
10.0
12.0
US UK
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
• 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…
US & Europe High Yield Credit Spreads (bps)
Source: Liberum
US & UK Unemployment rate (%) trending lower
Source: Liberum
-66%
US & UK 5y real govt. yields
Source: Liberum
US & UK 30day card delinquencies
Source: Liberum
-83%
Direct Lending: Finding value/ minimising risk
13
Current TTC Stress
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Net yield Loan lossesCurrent TTC Stress
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Net yield Loan losses
Current TTC Stress
-2.0%0.0%2.0%4.0%6.0%8.0%
10.0%12.0%14.0%
Net yieldLoan losses
Lending Club Funding Circle Zopa
-1.0%
1.0%3.0%
5.0%7.0%
9.0%11.0%
13.0%
Current Stress scenario
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
Source: Liberum
UK personal loan return scenarios
Source: Liberum
UK SME loan return scenarios
Source: Liberum
Estimated current and stress annual returns for selected platforms
Source: Liberum estimates
Direct Lending: Finding value/ minimising risk
14
2005 2006 2007 2008 2009 2010 2011 2012
0.0%
5.0%
10.0%
15.0%
Net yield
Servicing cost
Loan losses
Average net yield
2006 2007 2008 2009 2010 2011 2012
0.0%
5.0%
10.0%
15.0%
Net yield
Servicing cost
Loan losses
Average net yield
2005 2006 2007 2008 2009 2010 2011 2012
0.0%
5.0%
10.0%
15.0%
Net yield
Servicing cost
Loan losses
Average net yield
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
Source: ZOPA data
Zopa annual returns by cohort % A* credit grade
Source: ZOPA data
Zopa annual returns by cohort % B credit grade
Source: ZOPA data
Zopa annual returns by cohort % C1 credit grade
Source: ZOPA data
2005 2006 2007 2008 2009 2010 2011 2012
0.0%
5.0%
10.0%
15.0%
Net yield
Servicing cost
Loan losses
Average net yield
Direct Lending: Finding value/ minimising risk
15
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 avg A-grade net yield (2009-12) vs. equivalent gross yield Zopa loans
Source: Liberum; AltFi data
Lending Club avg B-grade Net Yield (2009-12) vs. equivalent gross yield zopa loans
Source: Liberum ; AltFi data
Gross yield Net yield Loan loss2009Lending Club 8.8% 6.2% 2.5%Zopa 8.8% 7.3% 1.5%2010Lending Club 7.2% 6.0% 1.20%Zopa 7.2% 6.9% 0.28%2011Lending Club 7.2% 5.3% 2.0%Zopa 7.2% 6.6% 0.6%2012Lending Club 7.7% 5.3% 2.4%Zopa 7.7% 7.0% 0.7%Avg 2009-12 cohortsLending Club 7.7% 5.7% 2.0%Zopa 7.7% 6.9% 0.8%
Source: Liberum analysis, Lending Club data, AltFi Data
Lending Club A grade loans: gross and net yields vs. equivalent gross yield Zopa loans for 2009-2012 cohorts
Gross yield Net yield Loan loss2009Lending Club 10.8% 7.1% 3.7%Zopa 10.8% 7.2% 3.5%2010Lending Club 10.8% 7.1% 3.72%Zopa 10.8% 7.1% 3.67%2011Lending Club 11.2% 7.5% 3.7%Zopa 11.2% 8.4% 2.7%2012Lending Club 12.2% 7.7% 4.5%Zopa 12.2% 8.1% 4.1%Avg 2009-12 cohortsLending Club 11.2% 7.3% 3.9%Zopa 11.2% 7.7% 3.5%
Source: Liberum analysis, Lending Club data, AltFi Data
Lending Club B grade loans: gross and net yields vs. equivalent gross yield Zopa loans for 2009-2012 cohorts
Lending Club Zopa
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Net yield Loan loss
Lending Club Zopa
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Net yield Loan loss
Direct Lending: Finding value/ minimising risk
16
ZOPA (equivalent LC A-grade)
Lending Club A grade US Credit cards UK Credit cards UK Personal loans
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Net yield Loan losses
US Credit cards ZOPA (equivalent LC A-grade)
UK Credit cards Lending Club A grade UK Personal loans
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Net yield Loan losses
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)
…But MPL loans perform better:
• 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
1. Loan data average of 2012 and 20132.Lending Club and Zopa data are average of 2009-2012 cohorts.Source: Federal Reserve, Bank of England, Lending Club, Zopa, Liberum analysis
Source: Federal Reserve, Bank of England, Lending Club, Zopa, Liberum Analysis
Net yields and loans losses of bank originated loans1 vs. Lending Club Grade A loans2 and Zopa equivalents2 - all USD swapped
Net yields and loans losses after scaling to align gross yields, with losses correspondingly scaled
Direct Lending: Finding value/ minimising risk
17
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
Net yield Loan losses1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
1Q15
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Net Yield Charge off
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)
S&P500 total annual returns %
Source: Bloomberg
UK commercial property total annual returns %
Source: IPD
0.4x
1.8x
Sharperatio*
0.5x
0.5x
US Credit card loan effective annual returns net of servicing fees %
Source: Liberum
UK personal loan effective annual returns net of servicing fees %
Source: Liberum
*Sharpe ratio= (annual net return less 3m Libor) / (standard deviation of annual returns)
Direct Lending: Finding value/ minimising risk
18
Back-testing: levered Direct Lending returns equal / exceed S&P returns with much lower volatility
• For return vs. volatility ratios use 2 year time periods to make ‘apples to apples’ comparison
• 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).
• 200% debt/ equity leverage modest by standards of securitisation market
• Banks index a notable laggard
• 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
Sharpe ratio and back testing approach
Source: Liberum
0% 5% 10% 15% 20% 25% 30%
0%
2%
4%
6%
8%
10%
12%
Property S&P 500 US Credit Card US Credit Card leveredStandard Deviation annualised
Annual re
tunrs
Direct Lending- proxy1 vs. S&P 500 total return index
Annual returns vs. standard deviation
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
1. Uses Credit Card Data as proxy for Direct Lending; 1% servicing fee Source: Liberum, Federal Reserve, Bloomberg
1. Levered: 200% Debt/ Equity at Libor+2.3%; Mgmt fee of 0.7% assets; 10% perf fee. Source: Liberum, IPD, Federal Reserve, Bloomberg
Levered1 Direct Lending- proxy vs. S&P 500 total return index
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
0
100
200
300
400
500
600
700
P2P-proxy S&P500
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
0100200300400500600700800900
Levered P2P S&P500P2P ex perf fees Banks
Direct Lending: Finding value/ minimising risk
19
Niche lending segments offer the best risk/ reward lending opportunities
Near prime Auto Financing
Using starter interrupt technology and GPS technology on car collateral to improve credit performance (e.g. Car Finance Company)
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
Property Bridge Financing
Providing timely secured financing to property entrepreneurs while they arrange longer term cheaper financing
• Niche platforms’ higher returns potentially make them M&A targets
Big picture trends: size; growth; risk/ reward Accessing Interest incomeEquity investment strategiesSector risks and opportunity
Direct Lending: Finding value/ minimising risk
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)
• Ranger Direct Lending (ticker RDL) is a listed fund focused primarily on US secured Online Direct Lending platforms. 100% US asset mix; 84% secured
Gross yield net servic-
ing
Loan losses Net yield Leverage impact
Equity in-vestments
Mgmt & Operating
Fees
Perfor-mance Fee
Profit Dividend
0%2%4%6%8%
10%12%14%16%18%
14.9%
3.8%
11.6%2.7%
1.8%1.4%
12.3% 12.8%
Gross yield net servic-
ing
Loan losses Net yield Leverage impact
Equity in-vestments
Mgmt & Operating
Fees
Perfor-mance Fee
Profit Dividend
0%2%4%6%8%
10%12%14%16%18%
10.3%
4.2% 0.4%
2.1%
2.0%1.6%
8.2%9.3% 9.3%
Source: Bloomberg / analyst reports
P2PGI Total NAV Return Breakdown
Ranger (US SME) Total NAV Return Breakdown
‘For Illustrative purposes only’
‘For Illustrative purposes only’
21
Direct Lending: Finding value/ minimising risk
Ranger Di-rect Lend-ing Fund
Real Estate Credit In-vestments
P2P GI Victory Park
GLI Finance SQN Asset Finance Income
UK Mort-gages Ltd
Starwood European
Real Estate Finance
Sequoia Economic Infrastruc-ture Fund
ICG Longbow
GCP In-frastruc-ture In-vest-ments
0%
2%
4%
6%
8%
10%
12%
Average target Return NAV - ODL Funds
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
Source: Bloomberg/ Other
Target NAV Return ‘For Illustrative purposes only’
22
Direct Lending: Finding value/ minimising risk
23
Retail capital channels into Direct Lending are evolving… Preliminary
2015e2014
Description
Example
Inception Date
Pros / cons for Platforms
Pros / cons for Investors
Classic P2PDiversified Closed-End
Investment TrustDedicated trusts for
larger platforms
1-stop-shop P2P portal/ Offering convenient structured products
Pros: Lost cost
Cons: Time intensive
2005
e.g. Zopae.g. P2PGI / Ranger
Direct Lending
P2P platform directly connecting with lenders
Listed Investment trust lending via multiple
platforms
e.g. LendInvest/ Funding Circle / Direct Money
Dedicated listed Investment trust lending passively via
one platform
Under development
Under development
Single account / product for retail investors
Pros: Relatively low churn of lending capital
Cons: Only likely to attract early adopters/ sophisticatedinvestors
Pros: Diversified access
Cons: Higher costs
Pros: Increased access to funding especially for
early stage platforms
Cons: Funding can be easily diverted to other platforms offering better
returns
Pros: Efficient access; accessible via brokerage account
Cons: Less diversification
Pros: Scalable permanentcapital
Cons: More difficult to attract capital
initially for less established platforms – due to relative illiquidity
Pros: Convenience; diversified low cost, structured solutions
Cons: Unavailablevia security broker
Pros: Access to broaderretail mass market;equity ownership ofportal
Cons: More fluid funding than dedicated trust–
contingent onperformance
Currently topical
Direct Lending: Finding value/ minimising risk
Big picture trends: size; growth; risk/ reward Accessing Interest incomeEquity investment strategiesSector risks and opportunity
24
25
Direct Lending: Finding value/ minimising risk
At least 4 key drivers underpinning sector long term sustainability…
• Ongoing unbundling of credit info ecosystem
• Enhanced credit data via FinTech innovation
• Online Direct lenders (ODLs) are c60% more efficient
vs. traditional lenders
a. ODL reduces systemic risk since no single point of
failure
b. In addition, ODL enables government to channel
credit where it is most needed (e.g. SME – British
Business Bank, NTMA in Ireland)
• ODLs are using technology to drive convenience and
better user experience=> better Net Promoter
Scores
Online credit data as good/ better than bank
data
60% relative cost efficiency for smaller
loan amounts
Improved User Experience
Government support for ODL sector
1
2
3
4
78%64%
43%21% 9%
Average net promoter score (NPS) – 1Q2015
Systemic Risk Comparison: Traditional Banking vs. MPL
Government agencies already using MPL
Reserve Requirements
Branch Infrastructure
Customer Acquisition
Origination
Underwriting
Servicing
Customer AcquisitionUnderwritingOriginationServicing
Operating expense: ~2%
Technology and business model drive cost down
Traditional LenderOperating expense: 5-
7%
a
b
Direct Lending: Finding value/ minimising risk
26
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
• Direct Lending now accessing equity capital from mainstream asset managers
*Estimated forward revenues over the next 12 months at time of transaction
Source: Company data / press reports; Liberum estimates
Investors Investors
InvestorsInvestors
Paul Forster
Date Apr 15
Amount raised $150m
Est. post money Val.
$1bn
Est. Price/Revenue*
23.3x
Date Mar 15
Amount raised $31m
Est. post money Val.
$230m
Est. Price/Revenue*
7.7x
Date Aug 15
Amount raised $9m
Est. post money Val.
N/A
Est. Price/Revenue N/A
Date Jun 15
Amount raised $34m
Est. post money Val.
N/A
Est. Price/Revenue N/A
Direct Lending: Finding value/ minimising risk
27
Significant equity value creation: Average IRR from Series A: 143% with valuation 0.8x run rate loan originations
A (Aug 07) B (Mar 09) C (Apr 10) D (Aug 11) E (Jun 12) F (Apr 14) IPO (Dec 14)
Curr. (Oct 15)
02468
101214161820
01,0002,0003,0004,0005,0006,0007,0008,0009,000
0.0 0.4 0.81.8
3.5
14.2 15.014.5
Share Price $ (LHS) Valuation m$ (RHS) Run rate loan origination m$ (RHS)
IRR: 74%IRR to IPO: 90%
A (Apr 11) B (Mar 12) C (Oct 13) D (Jul 14) E (Apr 15)
0100200300400500600700800900
1,000
0
200
400
600
800
1,000
1,200
14 50122
307
521
Share Price $ (LHS) Valuation m$ (RHS) Run rate loan origination m$ (RHS)
IRR: 147%
A (Jan 06) B (Jan 07) C (Aug 11) C 1 (May 13) D (Mar 14) E (Apr 14) IPO (Dec 14) Current (Oct 15)
0
5
10
15
20
25
30
02004006008001,0001,2001,4001,6001,8002,000
0.4 1.5 2.1 2.85.2
14.7
20.0
9.0
Share Price $ (LHS) Valuation m$ (RHS) Run rate loan origination m$ (RHS)
IRR: 39%IRR to IPO: 57%
A (Jan 13) B (Sep 13) C (May 14) D (Apr 15)
0
5
10
15
20
25
30
35
40
05001,0001,5002,0002,5003,0003,5004,0004,500
1.43.0
14.3
34.5
Share Price $ (LHS) Valuation m$ (RHS) Run rate loan origination m$ (RHS)
IRR: 311%
Lending Club Prosper
Funding Circle OnDeck
Direct Lending: Finding value/ minimising risk
28
Substantial growth for LC and ONDK still expected despite share price declines
Lending Club DCF: what’s implied in current share price?$bn
Source: Liberum preliminary estimates (not under coverage)
OnDeck DCF: what’s implied in current share price?$bn
Source: Liberum preliminary estimates (not under coverage)
Lending Club share price IPO to date, $
Source: Bloomberg
On Deck Capital share price IPO to date, $
Source: Bloomberg
• LC and ONDK share prices under some pressure post IPO
• Reverse engineering current valuation suggests market still expecting 22-32% revenue CAGR over next 10 years
2015e
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
-0.2 -
0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8
Revenue Net Income
DCF$0.6b
n
2015e
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
(1.0)
-
1.0
2.0
3.0
4.0
5.0
6.0
Revenue Net Income
DCF$5.5b
n
0
5
10
15
20
25
30
0
5
10
15
20
25
30
Direct Lending: Finding value/ minimising risk
29
Equity opportunity to anticipate institutional lending capital – particularly in non-P2P direct lending
• 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
• 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
Estimated US 2015e Volume by Category with Examples of each Lender Type
*Estimated US annual SME & Consumer 2015 volume $bn; Source: NFIB, FDIC, Company data, NFIB, Liberum estimates
• 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
‘For Illustrative purposes only’Segmenting direct lending landscape Institutional lending capital as valuation catalyst
Source: Liberum analysis
DL: $71bn*
ODL: $27bn
MPL: $20bn
P2P: $16bn
VolumeValuatio
n
Frequent opportunities to access equity beforeInstitutional lending capital deployed
Potential impact of institution
al loan capital
Time
Direct Lending: Finding value/ minimising risk
30
*Selected businesses Liberum have sourced funding for or invested in
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, high-growth 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
• Partner with investors to source equity and loan investment opportunities and raise funds
• Sponsor the benchmark Liberum AltFi Indices
Direct Lending: Finding value/ minimising risk
Big picture trends: size; growth; risk/ reward Accessing Interest incomeEquity investment strategiesSector risks and opportunity
31
Direct Lending: Finding value/ minimising risk
32
Regulatory Priorities: fraud risk, fee transparency and management incentive alignment
Fraud minimisation via
central data repository
• Marketplace lenders typically take no credit risk
• 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
Management incentive alignment
Fee transparency
• Retail investors often use the rate offered as risk proxy
• Currently possible for ODL platform to transform a high borrower APR into a low investor net return via large opaque fee margin
• Retail investors may take more risk than intended /have less protection in stress scenario
• Potential solution: require clear statement of annualised platform fees.
Fraud prevention / detection platform• Risk of capital being misappropriated/ loan risk not matching description/ collateral not matching contract
• 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
Regulator data
repository
Cashflow information & other contract info
ODL lenderLender Borrower
Annual lender returns pre and post fees %
Alignment of management incentives with lender returns
Gross yield less credit losses
Fees Net yield
Lender returns
Management compensation
More aligned payoffCurrent management payoff
Direct Lending: Finding value/ minimising risk
33
Future retail banking impact? MPL loans may become increasingly like ‘cash’ as liquidity & connectivity improvesFuture Central Bank engagement with MPL
• 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
MPL liquidity will become approx as good as deposits• 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
*With govt/ institutional liquidity backstop
Potential future asset liquidity categories
P2P Platforms / Funds
Attractive returns: e.g. 5-10% pa
P2P Platforms / Funds
Returns: 5-10% pa
Rapid Loan repayments imply significant structural liquidity
Future MPL linkages with payment fintech
M0: Cash
M4 bank deposits
‘M5’ MPL loans*
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
35
Disclaimer
Direct Lending: Finding value/ minimising risk
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