Analysis

P2P lending investments were profitable during the 2008 crisis

Val Katayev  is one of the biggest and earliest individual investors on p2p lending platforms. He started investing in 2006 and is among the few investors to have covered the entire lifecycle of p2p investments. He was invested during the financial crisis of 2008 and surprisingly his net return was positive even during the tumultuous time. He chronicled his journey in a popular Techcrunch article (http://techcrunch.com/2015/11/09/p2p-lending-is-profitable-even-in-a-recession/ ).  Katayev has more than 100 million dollars of tech exits and profits from ventures ranging from adtech to music to data analytics. Currently, he is the largest investor in the funds of the combined entity.

Yield has been scarce in fixed income market and with the world economy again diving into an ocean of uncertainty. While it looks like p2p is the only bright spot for yield hungry investors, perceived uncertainties of p2p investments during recessions make investors over-cautious at this time. Prime Meridian Capital Management (PMCM) (http://www.pmifunds.com/) started with Prime Meridian Income Fund (PMIF) for accredited investors in 2012.  The fund manager was founded by Don Davis, an industry veteran in alternative investments. The company merged with Poise Lending in December 2015, an investment manager led by serial tech entrepreneur Val Katayev and Don Davis.

Background

Val had sold two of his companies in 2013 and was looking to invest a huge sum directly as a lender in Prosper. He had seen and benefitted from the superior performance during the 2008 recession and was convinced with the p2p lending model. Prosper advised him to invest through a fund manager for better structuring. He connected with Davis, who had less than 10 million$ AUM at the time and Val became his largest client, holding 50% of the AUM at one time. Even now he is the biggest investor in the fund. Last year he launched a new leveraged fund- Poise Lending, a Joint Venture between Prime Meridian and him. In December last year, they decided to merge the funds for a cleaner structure. Now PMCM has over 120 million dollars of assets under management and announced 200 million dollars in capital commitments from institutional players.  This aggressive growth was aided by the fact that the company had more than 4 years of operational performance under its belt with no drawdowns in even a single month.  The overall trend for marketplace lending also boosted the fund, with the Orchard US Consumer Marketplace Lending Index outperforming the Barclays Aggregate Bond Index and S&P 500 with a 6.24% aggregate return as compared to 0.55% and 1.38% return respectively.  The company has now four funds, the flagship PMIF(no leverage), Small Business Lending Fund(no leverage), Poise Lending Fund (leveraged up to 70% ratio) and a newly launched Real Estate lending fund.

Process and Workings of the Fund

The fund manager has relationships and access to all the major platforms but intentionally focuses on the more established, seasoned players in the space such as Lending Club, Prosper, and Funding Circle. A legitimate question for a p2p managed fund is why the investor should invest in a fund versus directly investing on the platform. In an interview with Lending-Times.com, Val explained that Liquidity, Diversification, Barriers for pursuing advanced strategies and Reduced Cash Drag are the primary reasons for investing via a dedicated fund.  Investors can be diversified via a fund and can utilize leverage and other strategies not usually available for individual investors. Also, a large sum requires significant time for full deployment thus reducing yields for the investor. For better corporate governance, the company has appointed BDO as it auditor which also performs look through testing to verify the accuracy of the information reported by the platforms. Initially, the fund catered mainly to High Net Worth Individuals and Tech Execs, but family offices and institutions are now the leading investors. Even foreign investors looking for stable returns are investing in PMCM funds.

P2P in a Recession and the Future

P2P lending space is becoming extremely competitive. Marketplace lenders have achieved massive scale and have started partnering banks and other major financial institutions for debt financing on the platform. Deals like OnDeck-J.P. Morgan are a case in point. PMCM gets preferential access due to its history with marketplace lenders which can be leveraged for better diversification and other advanced strategies, which might not be available for a newbie fund. This creates a valuable moat for the company.

There are many analysts prophesying the death of p2p lending, equating it with the sub-prime lending crisis. The funds primarily invest  in loans personally guaranteed by prime borrowers. The Techcrunch article by Val also explored the correlation of prime consumer lending and credit card debt, and according to his analysis, Fed Reserve data shows that Credit Cards have never had a negative quarter in the past 30 years. Even during the peak of 2008 crisis when the default rate jumped to 11%, the gross interest was 15% translating to a 4% spread. PMCM regularly monitors and stress tests the funds with the objective of maintaining profitability during a recession. The success of PMCM in generating stable returns and the growing interest of institutions indicate that the p2p fund management space is only going to grow in the future. With a first mover’s advantage, PMCM is poised to become the bellwether for the industry.

 

About the author

George Popescu

Serial entrepreneur.

George sold and exited his most successful company, Boston Technologies (BT) group, in 2014. BT was a technology, market maker, high-frequency trading and inter-broker broker-dealer in the FX Spot, precious metals and CFDs space company. George was the Founder and CEO and he boot-strapped from $0 to a $20+ million in revenue without any equity investment. BT has been #1 fastest growing company in Boston in 2011 according to the Boston Business Journal and the only company being in top 10 fastest in 2012-13 as it was #5 in 2012. BT has been on the Inc. 500/5000 list of fastest growing companies in the US for 4 years in a row ( #143, #373, #897 and #1270). After the company sale in July 2014 until February 2015 George was Head-of-Strategy for Currency Mountain ( www.currencymountain.com ), a USD 100 million+ holding company focused on retail and medium institutional currencies, precious metals, stocks, fixed income and commodities businesses.

• Over the last 10 years, George founded 10 companies in online lending, craft beer brewery, exotic sports car rental space, hedge funds, peer-reviewed scientific journal ( Journal of Cellular and Molecular medicine…) and more. George advised 30+ early stage start-ups in different fields. George was also a mentor at MIT’s Venture Mentoring Services and Techstar Fintech in NY.

• Previously George obtained 3 Master's Degrees: a Master's of Science from MIT working on 3D printing, a Master’s in Electrical Engineering and Computer Science from Supelec, France and a Master's in Nanosciences from Paris XI University. Previously he worked as a visiting scientist at MIT in Bio-engineering for 2 years. George had 3 undergrad majors: Maths, Physics and Chemistry. His scientific career led to about 10 publications and patents.

• On the business side, Boston Business Journal has named me in the top 40 under 40 in 2012 in recognition of his business achievements.

• George is originally from Romania and grew up in Paris, France.

Add Comment

Click here to post a comment

Your email address will not be published. Required fields are marked *

Testimonials

default image

"Your daily letter is great!" , Ram , Founder and CEO, PeerIQ

default image

"Hi George - just want to tell you that you are doing a great work with Lending Times;-) Brgds, Kasper" , Kasper, Partner and Co-founder at Dansk Faktura Børs A/S

default image

"I've been following your newsletter for some time now and have been very impressed with the content." Charlie,Co-Founder | Bolstr

default image

"Hey George, I must say I really enjoy your site. It has inspired me to do some changes at our platform and we are the biggest consumer lender in Sweden." , Ludwig, CEO @ Savelend Sweden AB

default image

"Your daily email is very useful. It gives quick update on what's going in the market. Thank you very much for all that info." Yann Murciano, Head of Base Metals Trading at Morgan Stanley

Our daily p2p news digest