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.
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.