Direct Lending: Finding value/ minimising risk 20 October 2015
Cormac Leech +44 (0) 20 3100 2264 [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* : 100x growth in 5 years • P2P volumes have grown at 151% $m CAGR since 2010 25,000
CAGR:151%
20,000
15,000
10,000
5,000
- 2010 2011 2012 2013 2014 2015e
Lending Club SOFI Prosper Avant Ondeck Zopa Funding Circle RateSetter
Source: AltFi Data, Co mpan y w ebs ites *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
$4.4bn $1.5bn $22.7bn
$157.0bn
Source: www.WDZJ.com, AltFi Data, Co mpan y w ebs ites
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 Global volumes Online Direct Lending $bn Global outstanding balances Online Direct Lending $bn 2015e annual ODL volumes 200 200 CAGR: 180 CAGR: 180 207% 286% 160 160 • Chinese loans shorter maturity - Based 140 140 on loans outstanding China’s share is less 120 120 pronounced at 68% 100 100 80 80 60 60 40 40 20 20 0 0 2013 2014 2015e 2013 2014 2015e
China US UK EU ex UK China US UK 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 Online direct lending volumes as % GDP (2015 addressable market green box $trillion)
• Continental Europe significantly less 14.0% 1.6% $1.4tn $1.1tn $0.2tn $1.3tn 1.5% developed: Relative to addressable 11.5% 1.4% opportunity, ODL in continental Europe is 12.0% 1.2% c 15x less developed than US & UK and 10.0% 1.0% 100x behind China 8.0% 0.8% • Primarily due to relatively tight 6.0% regulation 0.6% 4.0% 0.4% 2.2% 1.7% 2.0% 0.2% 0.13% 0.14% 0.1% 0.01% 0.0% 0.0% China US UK EU ex UK China US UK EU ex UK
Source: Liberum, WDZJ, AltFi Data, company data, Bank of England, FDIC, Federal Source: Liberum, WDZJ, AltFi Data, company data, Bloomberg Reserve, ECB, OECD 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 2015e US Online Direct Lending $bn CAGR • Chinese market highly fragmented: 180 25.0 top5 platforms only 20% of volumes (vs. 160 296% 115% c80% in UK). 140 20.0 120 15.0 100 80 • Regionally China growing fastest – but 10.0 set to slow given already high market 60 40 5.0 penetration. 20
0 0.0 2013 2014 2015e 2011 2012 2013 2014 2015
• US & UK volume growth has slowed Hongling LuFax PPMoney Weidai Wzdai Other Lending Club Prosper SOFI Ondeck Avant Other SME ODL
from c190% YoY in 2013 to c 100% YoY 2013: only total market data available Source: Company data in 2015e Source: WDZJ UK Online Direct Lending $bn EU ex UK Online Direct Lending $bn
• Europe ex UK accelerating: c 200% 5.0 1.6 4.5 83% 1.4 206% growth in 2015e vs. 140% in 2014e 4.0 1.2 3.5 (albeit off a low base) 3.0 1.0 2.5 0.8 2.0 0.6 1.5 0.4 1.0 0.5 0.2 - - 2011 2012 2013 2014 2015e 2011 2012 2013 2014 2015e
Zopa Funding Circle RateSetter LendInvest Smava Auxmoney* Pret D'Union Bondora
Market Invoice Wellesley & Co. Other Zencap Geldvoorelkaar* Comunitae Other
Source: Altfi data, Liberum 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 Online Direct Lending Annual volumes UK Online Direct Lending Annual volumes $bn 2011-2015e $bn 2011-2025e
4.5 250 4.0 0.5 • UK concentrated market: Top 6 UK 0.4 3.5 200 0.4 platforms account for 88% of total 3.0 150 2.5 0.8 volume 0.3 2.0 0.2 0.2 0.9 100 1.5 0.5 1.0 0.4 0.9 50 0.5 0.4 • Rapid growth: Already seen 13x 0.4 0.0 0.3 0 increase in volumes from 2012-15e 2011 2013 2015e 2011 2013 2015e 2017e 2019e 2021e 2023e 2025e
Market Invoice Funding Circle Zopa Market Invoice Funding Circle Zopa RateSetter LendInvest Wellesley & Co. RateSetter LendInvest Wellesley & Co. • Zopa reacceleration: volumes in 2015e: Other Other 120% YoY growth (vs 45% in 2014) Source: AltFi Data, Liberum forecasts Source: Liberum forecasts
UK Online Direct Lending annual volume by segment UK direct lending share of addressable market % (2015 $bn addressable total annual lending green box $billion) • By 2025, UK direct lending could reach 140 50% $100bn (excluding invoice factoring) 45% 120 $91bn $104bn $475bn $48bn 40% 100 35% 30% 80 25% 60 20% 15% 40 10% 20 5%
0 0% Invoice Factoring SME Consumer BuyToLet SME Consumer Invoice BuyToLet Factoring 2015e 2025e 2015e 2025e
Source: ABFA Association; Bank of England; Liberum forecasts Source: ABFA Association; Bank of England; Liberum forecasts
7 Direct Lending: Finding value/ minimising risk
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 UK consumer survey: % of survey population aware of P2P and UK consumer survey: % survey population who are already 12months – more marketing/ new aggregator % who would consider investing in P2P lending and % who will lend once ISA-able products required… 50% 12% 45% 10% • Short term c50% boost in active investors once 40% 35% becomes ISA-able 8% 30% • Over 50% of population think P2P riskier than 25% 6% 20% 4% equities! 15% 10% 2% 5% 0% 0% • P2PFA data shows 87% CAGR in amount per 4Q14 1Q15 2Q15 3Q15 4Q14 1Q15 2Q15 3Q15 lender account but only 22% CAGR in Know what P2P is Would consider lending via P2P Have already loaned Lend when ISA-able number of lender accounts Source: ResearchNow, Liber um estimates Source: ResearchNow, Liber um an alys is
UK P2PFA* number of lender accounts; £ amount per lender UK consumer survey: Estimated capital invested in P2P (non UK consumer survey: % of UK population who think P2P account pension assets) lending riskier than equities Number lender Amount per 140 16 2.0% 60% A/Cs lender A/C 1.8% 120 CAGR 22% CAGR 87% 14 55% 12 1.6% 100 1.4% 10 50% 80 1.2% 8 60 1.0% 45% 6 0.8% 40 40% 4 0.6% 20 2 0.4% 35% - 0 0.2% 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 0.0% 30% 4Q14 1Q15 2Q15 3Q15 4Q14 1Q15 2Q15 3Q15 Lender accounts ('000s) lhs
Amount per account(£'000s) RHS % of non pension capital invested in P2P Believe P2P more risky than equities
Source: UK P2P Finance Association; Liberum analysis Source: ResearchNow, Liber um estimates Source: ResearchNow, Liber um an alys is
8 Direct Lending: Finding value/ minimising risk
EU ex UK: Larger addressable market in Continental Europe – volumes set to overtake UK by 2020
• EU ex UK 2015e volumes: est. $1.5bn EU ex UK Online Direct Lending Annual volumes 2011-2015e EU ex UK Online Direct Lending Annual volumes 2011-2025e $bn $bn vs. UK total ex market invoice
1.6 300 1.4 • Smava (45% of total) on track to 250 1.2 200 originate c $650m in 2015e, sources 1.0 liquidity from banks 0.8 150 0.6 100 0.4 50 0.2 • Accelerating growth: Faster 2015e - 0 volume growth in 2015e for both 2011 2012 2013 2014 2015e 2011 2013 2015e 2017e 2019e 2021e 2023e 2025e Smava Auxmoney* Pret D'Union Smava Auxmoney* Auxmoney (c 500%) and Pret D’Union (c Pret D'Union Bondora 160%) Bondora Zencap Comunitae Zencap Comunitae Geldvoorelkaar* Other Geldvoorelkaar* Other Total UK ex market invoice Source: AltFi Data, Liberum forecasts Source: Liberum forecasts • Regionally EU ex UK has largest Forecasted EU ex UK direct lending annual volume by segment EU ex UK direct lending share of addressable market % (2015 growth potential: 5.2x bigger $bn addressable annual lending total green box $billion) addressable market than UK but UK 180 30% 2015e ODL volumes are c2.7x larger* 160 $600bn $672bn 25% 140
120 20% 100 (*ex UK invoice factoring for 15% comparability) 80 60 10% 40 5% 20 - 0% Consumer SME Consumer SME
2015e 2025e 2015e 2025e
Source: AltFi data, Liberum forecasts Source: ECB, OECD, Liberum forecasts
9 Direct Lending: Finding value/ minimising risk
Yields: Regional avg in relatively tight range of 5.5-8.8% swapped into USD (China an outlier for now)
• In local currency regional averages vary Average expected net yield (seasoned) of largest 5 platforms in each region: local currency (dotted) and swapped into USD (solid) from 4.6-10.8% (dotted bars) 12% • Converted to USD, ranger is tighter: 5.5- 8.8% (solid bars) 10% • Available net yields of largest platforms 8% widely intermingled by region 6%
4%
2% UK: Liberum AltFi Returns Index 0% China US UK EU ex UK 6.5
Source: Company data, Liberum estimates 6.0
Platform net yields swapped into USD (expected seasoned returns) 5.5
18.0% 5.0 16.0% 14.0% 12.0% 4.5 10.0% 8.0% 4.0 6.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 4.0% 2.0% Source: AltFi Data Funding Circle Funding Bondora Wellesley & Co. Lending Club Lending Auxmoney* Geldvoorelkaar* Hongling Market Invoice Market PretD'Union Comunitae LendInvest Avant Prosper PPMoney Ondeck
0.0% Weidai Wzdai LuFax Zopa Zencap RateSetter Smava SOFI
China US UK
EU ex UK Source: Company data, Liberum estimates
10 Direct Lending: Finding value/ minimising risk
How risky is consumer debt? Credit cards receivables: consistently positive net returns for last 20+ years
US credit cards: US Credit card effective yields net of loan losses • Solid returns: Avg net yield achieved on 20% US credit cards net of loan losses: 8.2% 18% • Stable losses: Peak losses 1.9x average 16% 14% losses 12% 10% • Consistently positive returns: No year 8% with negative returns in at least 20 years 6% 4% 2% 0% 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Net yield Loan losses Avg net yield
Source: Federal reserve data, Liberum seasoning adjustments
Similarly for UK credit cards: UK Credit card effective yields net of loan losses
• Avg net yield achieved on UK credit 20% cards net loan losses: 6.4% 18% 16% • Peak losses 1.6x average 14% 12% • No year with negative returns in at 10% least 16 years 8% 6% 4% 2% 0% 1999 2001 2003 2005 2007 2009 2011 2013 2015
Net yield Loan losses 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 & US & UK Unemployment rate (%) trending lower US & UK 5y real govt. yields UK 12.0 • Real interest rates are expected to close to 5.0% 4.0% zero / negative for next 5 years 10.0 3.0% 8.0 2.0%
6.0 1.0%
0.0% 4.0 -1.0% 2.0 -2.0%
0.0 -3.0% 2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015
US UK US UK
Source: Liberum Source: Liberum
• UK credit card delinquencies down c83% US & UK 30day card delinquencies US & Europe High Yield Credit Spreads (bps) from 2009 peak 9.0% 1,800 • High yield credit spreads down 66% from 8.0% 1,600 7.0% 1,400 2009 peak – although relatively sharp 6.0% 1,200 jump in spreads recently… 5.0% 1,000 -66% 4.0% -83% 800 3.0%
2.0% 600
1.0% 400 0.0% 200 2008 2009 2010 2011 2012 2013 2014 2015 - US UK 2009 2010 2011 2012 2013 2014 2015
US High Yield EU High yield
EU Avg US Avg
Source: Liberum Source: Liberum
12 Direct Lending: Finding value/ minimising risk
ODL annual returns unlikely to go significantly negative in stressed conditions
• Normalising loan losses to TTC levels US credit card return scenarios UK personal loan return scenarios suggests yields would decline c1% • Even under fairly aggressive stress case 14.0% 14.0% assumptions UK consumer and SME net 12.0% 12.0% yields stay at/ above zero 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 Stress Current TTC Stress
Net yield Loan losses Net yield 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% 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% -2.0% Current TTC Stress Lending Club Funding Circle Zopa
Net yield Loan losses Current Stress scenario
Source: Liberum 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 Zopa annual returns by cohort % all credit grades Zopa annual returns by cohort % A* credit grade Lenders to have operated through the 14.0% 14.0% financial crisis 12.0% 12.0% 10.0% 10.0%
• The worst annual cohort, 2008, had 8.0% 8.0% annualised loan losses of 2.3% and an 6.0% 6.0% average net yield of 5.9%; the worst 4.0% 4.0% credit grade (C1) had loan losses of 4.3% 2.0% 2.0% 0.0% 0.0% and a net yield of 5.6% 2005 2006 2007 2008 2009 2010 2011 2012 2005 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 Source: ZOPA data
Zopa annual returns by cohort % B credit grade Zopa annual returns by cohort % C1 credit grade
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% 2005 2006 2007 2008 2009 2010 2011 2012 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 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 Lending Club A grade loans: gross and net yields vs. equivalent Lending Club avgA-grade net yield (2009-12) vs. equivalent reward than US: Comparing Zopa loans gross yield Zopa loans for 2009-2012 cohorts gross yield Zopa loans Gross yield Net yield Loan loss 12% of equal gross yield (USD swapped) to 2009 Lending Club 8.8% 6.2% 2.5% 10% Lending Club ‘A grade’ and ‘B grade’ Zopa 8.8% 7.3% 1.5% 2010 8% loans shows that equivalent Zopa loans Lending Club 7.2% 6.0% 1.20% yields an extra 0.4-1.2% of net yield vs. Zopa 7.2% 6.9% 0.28% 2011 6% Lending Club Lending Club 7.2% 5.3% 2.0% Zopa 7.2% 6.6% 0.6% 4% 2012 Lending Club 7.7% 5.3% 2.4% 2% th Zopa 7.7% 7.0% 0.7% • Extra 1/5 of net return at prime end: Avg 2009-12 cohorts 0% Lending Club 7.7% 5.7% 2.0% Lending Club Zopa The difference is most pronounced for the Zopa 7.7% 6.9% 0.8% Lending Club ‘A grade’ category with Net yield Loan loss Source: Liberum analysis, Lending Club data, AltFi Data Zopa offering proportionately 1/5th more Source: Liberum; AltFi da ta yield Lending Club B grade loans: gross and net yields vs. equivalent Lending Club avgB-grade Net Yield (2009-12) vs. equivalent gross yield Zopa loans for 2009-2012 cohorts gross yield zopa loans Gross yield Net yield Loan loss 12% • 2009-2012 cohorts used (as fully 2009 matured) Lending Club 10.8% 7.1% 3.7% Zopa 10.8% 7.2% 3.5% 10% 2010 Lending Club 10.8% 7.1% 3.72% 8% Zopa 10.8% 7.1% 3.67% 2011 6% Lending Club 11.2% 7.5% 3.7% Zopa 11.2% 8.4% 2.7% 4% 2012 Lending Club 12.2% 7.7% 4.5% Zopa 12.2% 8.1% 4.1% 2% Avg 2009-12 cohorts Lending Club 11.2% 7.3% 3.9% 0% Zopa 11.2% 7.7% 3.5% Lending Club Zopa
Net yield Loan loss Source: Liberum analysis, Lending Club data, AltFi Data 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
1 2 2 • Bank originated credit assets look Net yields and loans losses of bank originated loans vs. Lending Club Grade A loans and Zopa equivalents - all USD swapped attractive (e.g. US credit card net yields) 14%
12%
10%
8%
6%
4%
2%
0% US Credit cards ZOPA (equivalent LC A-grade) UK Credit cards Lending Club A grade UK Personal loans
Net yield 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%
12% • After risk-normalising, P2P loans 10% generate 1.6% more yield for loans with avg gross yield of 7.7% 8% 6% • …Suggests we can conservatively 4% backtest the performance of P2P based 2% on historical bank loan performance 0% data ZOPA (equivalent LC A-grade) Lending Club A grade US Credit cards UK Credit cards UK Personal loans
Net yield 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 US Credit card loan effective annual returns net of servicingSharpe fees UK personal loan effective annual returns net of servicing fees % % assets and UK personal loans than for ratio* 16.0% 18.0% S&P 1.8x 14.0% 16.0% 0.5x
12.0% 14.0% • S&P and commercial property had 10.0% 12.0% 10.0% 8.0% negative returns of -37% and -23% in 8.0% 6.0% 2008 6.0% 4.0% 4.0% 2.0% • Direct lending no negative annual 2.0% 0.0% returns over last 20 years 0.0% 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Net Yield Charge off Avg net yield Net yield Loan losses Avg net yield
Source: Liberum Source: Liberum
S&P500 total annual returns % UK commercial property total annual returns %
50% 25% 0.4x 0.5x 40% 20%
30% 15%
20% 10%
10% 5%
0% 0%
-10% -5% -20% -10% -30% -15% -40% -20% -50% -25% *Sharpe ratio= (annual net return less 3m 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Libor) / (standard deviation of annual 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 returns) Source: Bloomberg Source: IPD
17 Direct Lending: Finding value/ minimising risk
Back-testing: levered Direct Lending returns equal / exceed S&P returns with much lower volatility
• For return vs. volatility ratios use 2 year Sharpe ratio and back testing approach Annual returns vs. standard deviation
time periods to make ‘apples to apples’ • Sharpe ratio: avg excess annual return over 3m Libor comparison as % of annual standard deviation 12% 10% • Need to use 2 year time periods to measure standard deviation to make P2P loans comparable with 8%
• Unlevered, Direct Lending proxy Equities and Property. (c 2/3rds of 3y loans repaid by 6% underperforms S&P500 over last 20 years month 24) 4% Annual retunrs Annual but has no negative years and much • For unlevered P2P returns (bottom left chart) we 2% lower volatility assume no management fees 0% • For P2P levered fund (bottom right chart): assume 0% 5% 10% 15% 20% 25% 30% 0.7% mgmt expense and 10% performance fee Standard Deviation annualised • A 200% debt/equity Levered Direct Property S&P 500 US Credit Card US Credit Card levered Lending portfolio matches the S&P with Source: Liberum 1. Levered: 200% Debt/ Equity at Libor+2.3%; Mgmt fee of 0.7% assets; 10 % perf fee. no drawdowns and much lower Source: Liberum, IPD, Federal Reserve, Bloomberg
1 1 volatility (net of mgmt and performance Direct Lending- proxy vs. S&P 500 total return index Levered Direct Lending- proxy vs. S&P 500 total return index fees). 900 • 200% leverage modest by standards of 700 800 securitisation market 600 700
500 600
400 500 • Banks equity index: a notable laggard 400 300 with much more volatility. 300 200 200
100 100
0 - 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Levered P2P S&P500 P2P-proxy S&P500 P2P ex perf fees Banks 1. Uses Credit Card Data as proxy for Direct Lending; 1% servicing fee 1.Levered: 200% Debt/ Equity leverage ; Mgmt fee of 0.7% of assets; with and without Source: Liberum, Federal Reserve, Bloomberg 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 Providing timely secured financing to property entrepreneurs while Financing they arrange longer term cheaper financing
Insurance Premium Lending against insurance premiums with premium payment Finance recoverable if loan repayments not made
Lending against life insurance for Improving quality of late-stage life terminally ill
Near prime Auto Using starter interrupt technology and GPS technology on car collateral Financing 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 P2PGI Total NAV Return Breakdown ‘For Illustrative purposes only’ focused on P2P platforms globally 18% • 61% of funds are invested in US (56% 16% 14% 0.4% Consumer; 6% SME); 27% in Europe 4.2% 12% (16% Consumer; 11% SME) 2.0% 10% 10.3% 1.6% 9.3% 9.3% 8% 2.1% 8.2% 6% 4% 2% 0% Gross yield net Loan losses Net yield Leverage impact Equity Mgmt & Performance Fee Profit Dividend servicing investments Operating Fees
• Ranger Direct Lending (ticker RDL) Ranger (US SME) Total NAV Return Breakdown ‘For Illustrative purposes only’
is a listed fund focused primarily on US 18% 3.8% secured Online Direct Lending 16% 0.0% 14% platforms. 100% US asset mix; 84% 14.9% 1.8% 12% 1.4% 12.8% 2.7% 12.3% secured 11.6% 10%
8%
6%
4%
2%
0% Gross yield net Loan losses Net yield Leverage impact Equity investmentsMgmt & Operating Performance Fee Profit Dividend servicing Fees
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: Target NAV Return ‘For Illustrative purposes only’ 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
22 Direct Lending: Finding value/ minimising risk
Retail capital channels into Direct Lending are evolving… Currently topical Preliminary
1-stop-shop P2P portal/ Diversified Closed-End Dedicated trusts for larger Classic P2P Offering convenient structured Investment Trust platforms products
Dedicated listed Investment trust P2P platform directly connecting Listed Investment trust lending Single account / product for Description lending passively via one with lenders via multiple platforms retail investors platform
e.g. P2PGI / Ranger Direct e.g. LendInvest/ Funding Example e.g. Zopa Under development Lending Circle / Direct Money
Inception Date 2005 2014 2015e Under development
Pros: Convenience; Pros: Efficient access; diversified low cost, Pros / cons for Pros: Low cost Pros: Diversified access accessible via structured solutions Investors Cons: Time intensive Cons: Higher costs brokerage account Cons: Unavailable Cons: Less diversification via security broker
Pros: Access to broader Pros: Increased access to Pros: Scalable permanent Pros: Relatively low churn retail mass market; funding especially for capital of lending capital equity ownership of early stage platforms Cons: More difficult to Pros / cons for Cons: Only likely to attract portal Cons: Funding can be attract capital initially Platforms early adopters/ Cons: More fluid funding easily diverted to for less established sophisticated than dedicated trust– other platforms platforms – due to investors contingent on offering better returns relative illiquidity 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/ • Ongoing unbundling of credit info ecosystem better than bank data • Enhanced credit data via FinTech innovation
Traditional Lender 2 Operating expense: 5-7% Reserve Requirements • Online Direct lenders (ODLs) are c60% more 60% relative cost efficiency for Branch Infrastructure Operating expense: ~2% smaller loan amounts efficient vs. traditional lenders Customer Acquisition Technology and business model drive cost down Underwriting Customer Acquisition Origination Underwriting Origination Servicing Servicing
3 Average net promoter score (NPS) – 1Q2015 78% • ODLs are using technology to drive 64% 43% Improved User Experience convenience and better user experience=> 21% 9% better Net Promoter Scores Lending Club Credit Unions Community Regional Banks Credit cards Banks
a. ODL reduces systemic risk since no single a Systemic Risk Comparison: Traditional Banking vs. MPL 4 point of failure Government support for ODL b. In addition, ODL enables government to sector 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 Date Apr 15 Date Mar 15 multiple, a c20% discount to Lending Club valuation multiple (9.2x) Amount raised $150m Amount raised $31m • Funding Circle valued at over $1bn on Est. post money Val. $1bn Est. post money Val. $230m relatively high revenue multiple – due Est. Price/Revenue* 23.3x Est. Price/Revenue* 7.7x to US/ global opportunity Investors Investors
• Direct Lending now accessing equity Date Jun 15 Date Aug 15 capital from mainstream asset Amount raised $34m Amount raised $9m managers 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 26 Direct Lending: Finding value/ minimising risk
Significant equity value creation: Average IRR from Series A: 143%; valuation of c 0.8x run rate loan originations
Lending Club Prosper
IRR: 74% IRR: 311% IRR to IPO: 90% 40 4,500 20 9,000 34.5 4,000 18 8,000 35 14.2 15.0 16 3,500 14.5 7,000 30 14 6,000 3,000 25 12 5,000 2,500 10 20 4,000 2,000 8 14.3 15 3,000 1,500 6 3.5 2,000 10 4 1.8 1,000 0.8 3.0 2 0.0 0.4 1,000 5 1.4 500 0 0 A (Aug 07) B ( Mar 0 9 ) C ( A p r 1 0 ) D (Aug 11) E (Jun 12) F (Apr 14) IPO (Dec 14) Cu r r en t ( O ct 1 5 ) 0 0 A (Jan 13) B ( Sep 1 3 ) C ( May 1 4 ) D (Apr 15) Share Price $ (LHS) Valuation m$ (RHS) Run rate loan origination m$ (RHS) Share Price $ (LHS) Valuation m$ (RHS) Run rate loan origination m$ (RHS)
Funding Circle OnDeck
IRR: 147% IRR: 39% 1,000 1,200 IRR to IPO: 57% 30 2,000 900 1,800 1,000 800 25 20.0 1,600 700 1,400 800 20 521 600 1,200 14.7 500 600 15 1,000 400 800 307 9.0 400 10 300 5.2 600 122 200 2.8 400 200 5 2.1 50 0.4 1.5 100 14 200 0 - 0 - A (Jan 06) B ( Jan 0 7 ) C ( A u g 1 1 ) C 1 ( May 1 3 ) D (Mar 14) E (Apr 14) IPO (Dec 14) Cu r r en t ( O ct 1 5 ) A (Apr 11) B ( Mar 1 2 ) C ( O ct 1 3 ) D (Jul 14) E (Apr 15)
Share Price $ (LHS) Valuation m$ (RHS) Run rate loan origination m$ (RHS) Share Price $ (LHS) Valuation m$ (RHS) 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
Lending Club share price IPO to date, $ Lending Club DCF: what’s implied in current share price? • LC and ONDK share prices $bn under some pressure post 30 6.0 IPO DCF 25 5.0 $5.5bn • Reverse engineering current 4.0 valuation suggests market 20 3.0 still expecting 22-32% 15 2.0 revenue CAGR over next 10 10 1.0 years 5 -
0 (1.0) Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 2015e 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
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 DCF 25 1.4 $0.6bn 1.2 20 1.0
15 0.8 0.6 10 0.4 0.2 5 - -0.2 0 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 2015e 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Revenue Net Income
Source: Bloomberg 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
Estimated US 2015e Volume by Category with Examples of each Lender Type ‘For Illustrative purposes only’
DL: $71bn* Volume Valuation
ODL: $27bn
MPL: $20bn
P2P: $16bn
Potential impact of institutional loan capital Frequent opportunities to access equity before Institutional lending capital deployed *Estimated US annual SME & Consumer 2015 volume $bn ; Source: NFIB, FDIC, Company data, NFIB, Liberum estimates Source: Liberum analysis Time • Direct Lending (DL): All non-bank lending executed both offline and online • Origination run rate vs. equity valuation: Platform revenue and valuation are closely linked to volumes (approximately linear relationship) • Online Direct Lending (ODL): Smaller loan size direct lending to SMEs and consumers where the majority of the borrower interaction and underwriting is online • 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, high- growth AltFi businesses • AltFi Focus on online direct and marketplace lending and equity crowdfunding • 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
*Selected businesses Liberum have sourced funding for or invested in
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 Fraud prevention / detection platform description/ collateral not matching contract Fraud minimisation • In contrast to other Fintech products (e.g. P2P FX and Payments) – Lender ODL lender Borrower payments for P2P lenders are extended over time => ponzi scheme via central data risk is higher repository Cashflow information & other contract info • Potential solution: Regulator-managed data repository that
automatically monitors and cross references all loans to individual Regulator data bank statements – funded by a small sector levy repository
Annual lender returns pre and post fees % • 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 Fee transparency • Retail investors may take more risk than intended /have less protection in stress scenario • Potential solution: require clear statement of annualisedplatform
fees. Gross yield less credit losses Fees Net yield
Alignment of management incentives with lender returns
Management compensation • Marketplace lenders typically take no credit risk Management • Potential incentive to prioritise short –term growth over credit quality incentive alignment • Potential solution: portion of staff performance compensation should Lender returns be continuously deferred until loans have been fully repaid
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 sufficient scale > e.g. 25% of • Central bank MPL liquidity : Central banks should provide Consumer and SME lending unlimited sector liquidity at discount for performing MPLs • Targeted monetary policy: MPL will enable government to target • Bagehot: “In a financial crisis, central banks should lend freely components of the economy e.g. SME credit by region and industry against good collateral at a penalty rate” rd • MPL may become part of money supply mgmt:central banks could • Inherent structural liquidity: due to amortisation flowback e.g. 1/3 buy / sell pools of MPL loans (via ABS market) as part of their open of 3yr loans are repaid annually. market operations • 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 P2P Platforms / Funds Attractive returns: e.g. 5- M4 bank deposits Returns: 5-10% pa 10% pa
M0: Cash
Rapid Loan repayments imply significant structural liquidity
*With govt/ institutional li q ui d i ty b acks t op 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.
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