Analysis

Marketplace Lending as a Service

We all have heard of SaaS(Software as a service) and the disruption they have caused in the enterprise software market, but a European Fintech company has now come up with a new variant- MPLaaS(Marketplace Lending as a Service) to upend the balance sheet lending market. Moscow-based Blackmoon Financial Group (https://blackmoonfg.com/)is a technology infrastructure company engaged in screening, pricing and analyzing a huge amount of data on alternative loans for the purpose of reselling. The company acts as a tech intermediary between large investors in fixed income and alternative lenders. Blackmoon allows balance sheet lenders to access alternative revenue stream by selling their loans to marketplace investors at a premium.

The Company commenced its operations in August 2014. The seed round was USD 1M provided by Flint Capital and Angel investors. Oleg Seydak is the founder and C.E.O. of Blackmoon. Earlier he was a partner in Flint Capital. Sergei is another co-founder, who is now the Chief investment officer and was earlier an employee in Flint Capital. The founding team is rounded by a tech superstar- Ilya Perekopsky; co-founder of VK.com (The largest Social Network in CIS countries). Blackmoon presently has 2 offices, a technology development center in Moscow and a legal and compliance office in Limassol, Cyprus with a total of 17 people of which 10 are developers and data scientist, 2 legal and 2 in the investment team. The company is presently connected with 8 platforms: 2 in Poland, 1 in Latvia, 1 in Czech Republic, 1 in Russia, 1 in Finland, 1 in Estonia and 1 in Georgia. They are presently working on integration with a new platform in the Czech Republic. Blackmoon describes itself as a technology company. Most of the company’s seed funding has been invested in developing screening and integration technology with originators.

Problems of Balance Sheet Financing:

Flint Capital extensively invested in alternative lenders in America and Europe. It was experienced by Oleg that the portfolio companies always faced scarcity of funds to expand. They were operating as Balance Sheet financers. But Balance Sheet Lending is highly risky for investors because they were forced to play a blind game having little control and fully trusting the originator and their algorithms which have conflicts of interests. Investors faced challenges to calculating the risk factors involved in the underlying loan book.

Composite Model of Lending

 There are two major options available in the financial world: marketplace lending and balance sheet lending. There is normally more transparency involved in marketplace lending but the returns are lower for the originator whereas the balance sheet lending is somewhat riskier for investors  but the returns are higher for the originator. But every investor aspires for greater returns with an adequate security of funds. And thus there comes into picture the composite model of lending which is a mixture of both types of lending. However, switching from one form of lending to the alternate or composite form involves a huge amount of work in due diligence, risk assessment, big data and legal issues.

The Solution

BlackMoon enables the transition from balance-sheet to marketplace financing through its technological infrastructure.  Blackmoon Financial Group provides a marketplace platform through its API installation to the originators and the investors. The Company presently facilitates institutional investors, who are often interested in fixed income investments at high-yield to park their funds into what was previously balance-sheet products. It provides access to originators to diversify their funding sources as per the wide range of options available. After installation of API, the required mandatory data for assessing the borrower gets transmitted from the loan originator to Blackmoon. First of all, the quantum of the loan, the risk factor involved and the risk-adjusted returns are assessed. Nothing found contrary, pricing of the loan including origination fee and service charges are calculated. Originator gets paid an origination fee plus some premium. Originator also retains a fraction of the repayments received by him as a service fee. Fair pricing is ensured based on the principle of “The Higher the Credit Rating, the Higher the Premium on the Loan”.  All purchased loans are transferred to Special Purpose Vehicles which are 100% owned by the investors. What’s more, the funding arrangements made through Special Purpose Vehicles don’t breach any capital adequacy norms, etc. since these are off-balance sheet and legalized marketplace transactions. Investors have complete control over the choice of investments made, which are set in the system according to their specific preferences. Once the investors select the criteria for the loans they want to invest in, the actual investment process is low touch or not touch where all loans are being transacted without real-time human intervention.

New Corpus of USD 100 Million

Blackmoon’s main investors to date have been mostly 3 family offices in the $10 to $15 million range as assets under management.
Target Asset Management and Blackmoon Financial Group have recently launched a USD 100 Million Fund-Target Global for investments in loans originated by EU balance sheet lenders and alternative credit funding. Investors need to invest a minimum of 125,000 Euros, with expected returns net of fees being between 12 – 13%. Target Asset Management will manage the corpus and technological backup including analytical research and monitoring of loans would be handled by Blackmoon. This fund will become fully operational before the end of April 2016. Target Asset Management was established in 2014 and currently, it is handling assets over USD 300 Million.  The Company is a specialist in alternative credit funding and is managing two P2P marketplace lending platforms – Prosper and Realty Mogul.

Criteria for Selection of Balance Sheet Lenders

To be able to partner with Blackmoon originators must have a minimum successful track-record of one year, preferably of two to three years. They must employ positive unit economics – i.e. money they collect from loans must cover costs of issuing the loans on per unit basis. The volume of originators is required to be at least USD 500k per month and should originate approximately 1000 loans per month. Blackmoon is presently looking especially for partnerships with originators in Spain, UK, and the US. On average it takes one to two months to integrate with a new originator.

Prospects of Blackmoon

At Blackmoon, returns net of fees were in the range of mid-teens for the year 2015. The visualization for future is that these returns may be in the low-teens because of competitiveness while negotiating with more mature companies based in more developed countries. But in a yield hungry financial world, even low teen rates are a godsend.  Blackmoon is approaching more loan originators since there is huge demand from investors because of attractive returns. Blackmoon has the required infrastructure to serve the investors in most of the countries and in various currencies of their interest. The founders’ pedigree and links in the Fintech space augur well for the company & tie-ups with funds like Target will create a lucrative business niche for the company to expand. Blackmoon is certainly in the reckoning to become a unique alternative lending player in the International Fintech market.

Author: George Popescu and Heena Dhir

 

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.

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