The Market Place Lending (MPL) investment opportunity 17 November 2014 Cormac Leech Research +44 (0) 20 3100 2264 [email protected] Minh Tran Research +44 (0) 20 3100 2184 [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 The Market Place Lending (MPL) investment opportunity How big? How risky? How much alpha? Why is MPL sustainable? Key risks How to invest? Conclusions 2 The Market Place Lending (MPL) investment opportunity MPL yields offer attractive returns, with $40bn+ of deployment capacity by 2016e in US & UK • $40bn of deployment by 2016: From 2014 to 2016, we estimate UK UK: MPL 3y potential yield and annual volume 2014-16e US: MPL 3y potential yield and annual volume change 2014-16e change annual deployment will increase from 2016 2016 10.0% $2bn to $7bn and US deployment will total UK 10.0% total US volume: volume: increase at from $6bn to $33bn $7bn $33bn 9.0% 9.0% Equities • US strong growth,120% CAGR, but 8.0% 8.0% margin compression: yield margin Property 7.0% compression likely as competition 7.0% increases 5y Junk Bonds 6.0% 6.0% 5.0% • UK slightly slower growth, 90% 5.0% CAGR, but yield expansion: yields 4.0% 4.0% likely to rise as platforms increase credit risk. Arrival of institutional 3.0% 3.0% Non Investment Grade 2y Bonds capital supports higher credit risk 2yr Cash ISA appetite. 2.0% 2.0% 1.0% 1.0% $bn annual volume $bn annual volume 0.0% 0.0% 0.0 0.5 1.0 1.5 2.0 2.5 - 5 10 15 20 25 Zopa RateSetter Prosper $m Lending Club $m Funding Circle LendInvest Wellesley & C o. Assetz Thincats Source: MPL companies, Liberum, Moneysupermarket, Bloomberg, IPD 3 The Market Place Lending (MPL) investment opportunity Consumer finance MPL – likely to be surprisingly resilient through the cycle in UK & US… • Zopa performed well through Zopa Net Yield All UK Consumer Loans Net Yield under £5,000 financial crisis: net yield has 14.0% 14.0% averaged 7.0% since 2005 and 12.0% 12.0% remained above 4.5% even during 10.0% 2008 global financial crisis 10.0% 8.0% 8.0% 6.0% 6.0% • UK overall : Overall UK consumer 4.0% 4.0% finance loans show similar consistent 2.0% 2.0% returns over time averaging 8.9% 0.0% 0.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005 2006 2007 2008 2009 2010 2011 2012 2013 Adj Net Yield Adj Annualized Default Net Yield Writeoff Average Net Yield Average Net Yield • US overall: Likewise for US credit card data Source: Zopa Source: Bank of England, Liberum US Credit Card Net Yields 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Net Yield Charge off Average Net Yield Source: Federal Reserve, Liberum 4 The Market Place Lending (MPL) investment opportunity MPL SME finance/ property lending data set more limited…. but still encouraging for ‘Through The Cycle’ returns • LendInvest: 7 year track record with LendInvest Loans: Annual Gross, LLPs, Net Yields Funding Circle Loans: Gross, LLPs, Net yields* by Cohort annual avg returns of 10.0% with 16.0% 16.0% zero loan losses 14.0% 14.0% 12.0% 12.0% 10.0% 10.0% • Funding Circle: 5 year average net 8.0% 8.0% yield of only 4.0% but with signs of 6.0% 6.0% improvement more recently. Funding 4.0% 4.0% Circle has yet to go through a 2.0% 2.0% recession- Credit model relatively 0.0% 0.0% 2008 2009 2010 2011 2012 2013 2014 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 unproven. Net Yield Loan Losses Average Net Yields Net Yield Loan losses Average Net Yield Source: LendInvest Note: Projected loss basis Source: Funding Circle data, Liberum estimates • For the UK overall, corporate lending has generated average UK Non Financial Corporate Lending annual net yields US SME Annual Loan Writeoffs- SBA returns of 4.6% but was more impacted by the aftermath of the 9.0% 9.0% 8.0% financial crisis both in terms of lower 8.0% 7.0% 7.0% gross yields and high writeoffs.. 6.0% 6.0% 5.0% 5.0% 4.0% 4.0% 3.0% 3.0% 2.0% 2.0% 1.0% 1.0% 0.0% 0.0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 SBA Average Net Yield Write Off Average Net Yield Charge-Off Rate Source: SBA, Liberum Source: Bank of England, Liberum 5 The Market Place Lending (MPL) investment opportunity MPL yields 2-5% ‘more than ‘expected’ based on wholesale ABS market data SpringLeaf asset net yields and ratio charge-offs to OnDeck asset net yields and ratio charge-offs to gross Zopa asset net yields and ratio charge-offs to gross yields gross yields yields 30% 16.0 60% 16.0 12.0% 16.0 14.0 14.0 14.0 25% 50% 10.0% 12.0 12.0 12.0 20% 40% 8.0% 10.0 10.0 10.0 15% 8.0 30% 8.0 6.0% 8.0 6.0 6.0 6.0 10% 20% 4.0% 4.0 4.0 4.0 5% 10% 2.0% 2.0 2.0 2.0 0% - 0% - 0.0% - 2010 2011 2012 2013 2009 2010 2011 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Charge Off Loan losses Adj Annualized Default Net Yield Net yield Adj Net Yield Ratio gross yield to charge offs (RHS) Ratio gross yield to charge offs(RHS) Ratio gross yield to charge offs (RHS) Source: Springleaf, Liberum Source: Ondeck, Liberum Source: Zopa, Liberum SpringLeaf Funding Trust – estimated cost of capital OnDeck – estimated cost of capital • Low WACCS: We estimate SpringLeaf and Ondeck loans have $m Amount Rate $m Amount Rate Class A Notes 500 2.4% Class A Notes 157 3.2% average costs of capital of 4-5% - Class B Notes 40 3.5% Class B Notes 18 6.9% Class C Notes 19 4.5% Total 175 3.5% based on recent securitisations. Class D Notes 33 5.0% Equity 8 30% Sub total 592 2.7% Total implied cost capital 183 4.7% • High quality yields: The ratio of Equity 52 20.0% Total implied cost capital 644 4.1% gross yield to chargeoffs is 5.2x for Springleaf and 4.1x for Ondeck. • Zopa WACC likely below 3%: avg MPL net yields should be c5% based on ABS ratio of gross yield to chargeoffs is market 8.0x (much better than Spring leaf or OnDeck). Source: Springleaf, Bloomberg, Liberum Source: Ondeck, Bloomberg, Liberum 6 The Market Place Lending (MPL) investment opportunity Market Place Lending (MPL) – bigger story than just P2P 7 The Market Place Lending (MPL) investment opportunity How big? How risky? How much alpha? Why is MPL sustainable? Key risks How to invest? Conclusions 8 The Market Place Lending (MPL) investment opportunity Traditional banking- 12th Century solution to ‘Market for Lemons’* problem! Timeline: Banking 1100 to present Start of online commerce Knights Templar est. European wide/ Mideast banking until the 14th The Federal Financial crisis that Washington Mutual century. Scottish parliament The first savings Reserve Act created led to the failure and collapses, at the est. the Bank of bank of Paris was the Federal Reserve bail-out of a number time the largest bank Scotland. est. System. of the worlds biggest failure in history. banks. Paypal Founded 1100 1695 1818 1913 1986 1998 2007 2008 1397 1694 1880 1930 1989 2005 2012 Berners-Lee The Medici Bank of Scottish parliament The Rothschild invents Zopa was founded. Run on Northern Banks start to close Florence established est. the Bank of family establishes Internet. Rock. branches. & operates until Scotland. European wide 1494. banking. Banking: a pre-internet solution to i) network needs and ii) information requirements in financial services *The Market for "Lemons": Quality Uncertainty and the Market Mechanism. http://www.iei.liu.se/nek/730g83/artiklar/1.328833/AkerlofMarketforLemons.pdf 9 The Market Place Lending (MPL) investment opportunity Traditional banking model…. increasingly anachronistic… “Banking may be on the cusp of …the Timelines: Banking / AltFi/ Crowd sharing most radical reconfiguration in centuries”, Andrew Haldane- Chief Financial crisis that led to the Washington Mutual Banks start to close Economist Bank of England, Aug 2013 Start of online commerce failure and bail-out of a number of collapses, at the time branches due to the worlds biggest banks. the largest bank shifting customer Traditional failure in history. behavior Banking 1989 2005 2007 2014 1998 – Paypal 2014 - Apple 2013- Xoom IPOs for 2014 - Square valued Founded Pay is launched Digital payments $0.5bn at $5bn sector 2005 -ZOPA Founded 2013- UK government 2014- P2PGI IPO 2014- Lending Club file Berners-Lee lends via Funding Circle IPO valuation e$5bn invents Internet. Marketplace lending sector 2014- Union Bank buys 2014- Ondeck file IPO 2006 – Lending Club loans originated by LC valuation e$1.5bn Founded 1994 - Amazon 2014 AirBnB valued 2014 - Alibaba IPOs founded $10bn Crowd sharing in for $168bn other industries as ‘lemons’* 2014 - UBER 1995 – valued $18bn problem solved.