News

May 12th 2016, Daily News Digest

  • Cirrix Capital, managed by Arcadia Funds named as fund in Lending Club questions. And more details.
  • Blackstone is pulling out of marketplace lending, focuses on buy to rent loans and securitization.
  • Jamie Dimon: funding not secure in tough times.
  • Broader discussion of conflict of interest in fintech startups with examples.
  • Main reasons why VCs invest in fintech companies, interesting list !
  • During this time, Yirendai stock is up 200%. Mind boggling.
  • Board room control of SocietyOne in Australia and implications.
  • Harmoney, NZ, increases lender rates by 174% to strive for profitability. Maybe everybody else should do the same.

 

United States

LendingClub’s Ties to Fund Under Fire, (Wall Street Journal), Rated: AAA

Then-CEO Renaud Laplanche advocated the investment in Cirrix Capital LP, a key customer for LendingClub’s loans, at a time Cirrix had been suffering some of its worst performance in years, according to the people and documents reviewed by The Wall Street Journal.

The CEO urged the company to invest in part because it would allow Cirrix to buy more LendingClub loans, the people said. The company put $10 million into Cirrix by April 1, and Mr. Laplanche added $4 million of his own.

LendingClub director John Mack, a former Morgan Stanley CEO, also held a stake in Cirrix. Mr. Mack remains on LendingClub’s board.

“Was there a reason for anyone to even doubt that the loans were being divided up fairly?” said Brian Weinstein, chief investment officer of Blue Elephant Capital Management, which invests in online loans. “You don’t want investors to ever even ask that question.”

LendingClub began as a marketplace where people looking to borrow money could connect with others eager to lend it for a decent return. As it expanded, it increasingly turned to professional investors. It now sells around half of the loans it arranges over its site to money managers and other institutions.

Cirrix, and the firm that manages its funds, Arcadia Funds LLC, were an important part of that change in funding strategy. At an industry conference in April, LendingClub director Dan Ciporin said the start of the relationship with Arcadia in 2012 was a pivotal moment for the burgeoning business.

“That is really the point in time when I think we all knew we had not just a product but actually an industry,” Mr. Ciporin said. “The capital floodgates at that point in time opened wide.”

In a June 2015 letter to investors reviewed by The Wall Street Journal, Arcadia said Cirrix was the “only investor with access to all LendingClub programs—public and private—including small business program.”

Cirrix is allowed to buy loans from other online platforms, but so far has bought them only from LendingClub, Arcadia said. The fund had never suffered a losing month in the 34 months following its launch in September 2012, according to the documents reviewed by the Journal. In 2013 and 2014, Cirrix had returns of 15% and 16%, respectively.

But that changed at the beginning of the year. Markets around the world fell sharply, and LendingClub raised the rates for its loans, fearing potential consumer defaults. That hurt the prices of the existing loans already owned by Cirrix.

Cirrix lost 3% in January, following a loss of about 1% in December, according to the documents and a person familiar with the matter.

In March, Mr. Laplanche wanted to deepen the company’s relationship with Cirrix and proposed that the board consider an investment in the firm, people familiar with the matter said. Through the use of leverage, a $10 million investment from LendingClub would enable Cirrix to purchase several times that amount in the company’s loans, one of the people said.

Arcadia, a registered investment adviser with $700 million in assets under management as of March 31, said in a statement that no current or former employee of LendingClub has an ownership stake in Arcadia.

Based in Burlington, Mass., Arcadia is owned by four general partners: Andrew Hallowell, its chief executive, as well as managing directors Brent Clark, Jonathan Green and Anson Stookey. The four partners either haven’t responded to requests for comment or couldn’t be reached.

In the June 2015 letter to investors, Arcadia said Cirrix was backed by senior credit facilities from Silicon Valley Bank and Wells Fargo & Co.

LendingClub learned of the pre-existing investments in Cirrix by Messrs. Laplanche and Mack and disclosed them in its April proxy statement without naming the fund. According to the proxy, Mr. Laplanche, Mr. Mack and LendingClub together owned 31% of the fund as of April 1.

Mr. Hallowell had informed a member of LendingClub’s in-house legal team of Mr. Mack’s investment in Cirrix, according to a person familiar with the matter. In a March 18, 2015, email, the LendingClub employee acknowledged the disclosure and told Mr. Hallowell the company would include it in subsequent SEC filings, the person said.

A week and a half after the proxy was filed, LendingClub’s board requested Mr. Laplanche’s resignation. The company cited irregularities in a loan sale LendingClub was pursuing with an investor later identified as Jefferies LLC, in addition to the lack of timely disclosure over the fund investment.

Blackstone Is Pulling the Plug on Online Consumer Loans, (Bloomberg Tech), Rated: AAA

Seven months after Blackstone Group LP said it planned to expand into online consumer lending, the firm is pulling back. Blackstone is aborting its foray into an industry that was going to rewrite the rules of banking, yet is now facing scrutiny after a scandal at LendingClub.

“The excitement that came with the rapid growth of marketplace lending is gone,” said Isaac Boltansky, an analyst in Washington with Compass Point Research & Trading. “What’s left is operational uncertainty, investor frustration and increased regulatory scrutiny.”

New York-based Blackstone, which manages more than $100 billion in real estate assets, started B2R in 2013 to finance investors in the growing market for single-family home rentals, where the private equity firm was the biggest landlord. B2R said in October it had bought the domain name Lending.com and was venturing into helping finance the purchase of consumer products from autos to air conditioners. Now B2R has replaced its leadership, let go a total of about 60 workers and shifted its focus back to financing homes, according to the people with knowledge of the matter who asked not to be named because the information is private.

Hogg, who led B2R’s push into online loans, left the firm last month, the people said. Many of B2R’s executives, who had worked with Hogg at American Express Co., recently left the company as well. Steve McClellan, president of Finance of America Holdings LLC, a Blackstone company involved in mortgage lending, now runs B2R, according to people familiar with the firm.

Blackstone, headed by Chairman and CEO Stephen Schwarzman, still makes loans to landlords through B2R and packages them into a new kind of debt securities — home-rental bonds.

Dimon Says Online Lenders’ Funding Not Secure in Tough Times, (Bloomberg), Rated: AAA

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said marketplace lenders might find that sources of funding evaporate during a downturn.

“If they have to borrow in the marketplace with individuals, hedge funds or securitized markets, they won’t be there in tough times,” Dimon, who leads the biggest U.S. bank by assets, said Wednesday in an interview on CNBC.

“And that’s their problem. Not the other side of it. You saw that in January and February, you saw a lot of them looking for diversified sources of funding.”

“Some of these online lenders are quite good at what they’re doing,” Dimon said. “They’re quite good in Silicon Valley not just with technology, but also making it simpler for the customer. Going online and getting a loan in 15 minutes as opposed to 15 days through a bank.”

Separately, Dimon, 60, said that economic conditions had improved from the start of the year.

Fintech conflicts of interest may hurt start-ups, (CNBC), Rated: AAA

“There are definitely eye-catching conflicts of interests on boards with far too much regularity,” said Class V Group partner Lise Buyer, who consults with pre-initial public offering start-ups. “I do think that sitting on multiple boards in the same industry does raise issues. People too often look the other way, but it’s not always black and white.”

On top of his role at other fintech start-ups, ex-Morgan Stanley CEO John Mack serves on LendingClub’s board of directors. Like Laplanche, Mack also has a stake in Cirrix Capital, according to a Bloomberg report. He’s also an investor in PeerIQ, a start-up that tracks and evaluates securitized marketplace loans.

PeerIQ says Mack is not on the company’s board. The start-up declined to identify any of the members of its board of directors when asked to comment, and none are listed on its website. A representative for the company declined to say whether Mack disclosed to PeerIQ that he owned a stake in Cirrix Capital.

PeerIQ also counts Victory Park Capital among its backers. Victory Park has been an investor in numerous online lenders’ debt financings — which support loans issued by start-ups — and separately in the equity of the start-ups. A representative for PeerIQ said Victory Park does not have a board seat with the company.

While its director slate remains closely guarded information at PeerIQ, other start-ups are more transparent. Kabbage, which lists its directors online, does not count anyone from Victory Park among its board. Among other companies backed by Victory Park are Avant and CommonBond. However, according to a source familiar with the firm’s investments, Victory Park holds no director roles at any of the fintech start-ups.

“To earn your keep as a director and to fulfill your fiduciary obligations, you keep away from obligations that create a conflict of loyalty or time commitment,” said Erik Gordon, clinical assistant professor at the University of Michigan’s Ross School of Business. “You fully disclose any relationship that might create a conflict of interest.”

“There is going to be a slowdown in the growth of the lending space,” said Schwark Satyavolu, a general partner at Trinity Ventures who is focused on fintech investing. “The dampening of access to capital isn’t purely due to compliance issues,” he added, saying the industry is experiencing a “tightening of access to capital.”

BRIEF-Jefferies says had no shares in Lending Club as of March 31, (Reuters), Rated: A

Jefferies Group

* Dissolved its share stake in Lending Club and had no shares in Lending Club as of march 31 – sec filing

* As of Dec 31, Jefferies held a 51,856 shares stake in Lending Club – sec filing Source text for quarter ended March 31

Investment in Marketplace Lenders Has Crashed Since the Start of 2016, (Bloomberg), Rated: AAA

main reasons for Fintech funding

The fall in funding also comes after many marketplace lenders had already tapped  investors in 2015, thus potentially reducing the need for new funding this year. SoFi, which specializes in student loans, raised a whopping $1 billion late in the year, for instance.

However, there’s a risk that the negative sentiment doesn’t turn around as quickly as some marketplace lenders need it to. This could lead to some in the industry taking lower valuations or harsher terms as venture capitalists continue to take a closer look at the potential pitfalls of these businesses.

Treasury Department Has 3 Big Worries About Online Marketplace Lending, (Forbes), Rated: A

Although the 42-page document released by Treasury provided plenty of words of encouragement for future growth of the industry, increased regulatory attention is clearly coming. Upon reading the document, I believe three key areas of focus have emerged:

  • The use of new data and modeling techniques, although an innovation, can also be a risk. Treasury is concerned about the potential disparate impact and fair lending violations.
  • The new platforms might have servicing and collections infrastructure gaps, which could prove particularly challenging during a credit cycle.
  • Small business lending requires more protections and safeguards in light of some troubling current industry practices.

Online Firms Say Lending Club Woes Will Lead to ‘Higher Bar’, (Barron’s), Rated: A

Brendan Ross, president of Direct Lending Investments, which operates a fund made up of online small business loans:  Lending Club’s response to this issue is illustrative of the sector’s commitment to complete transparency. No one lost any money here, and yet their CEO and founder is gone. It’s a strong statement and should be applauded. The fact that Lending Club mis-sold a small batch of loans does not change the attractiveness of these loans as an asset class. They still offer much higher yields than traditional fixed income investments, with low volatility. In addition to total transparency, investors should be looking at the degree to which the lender’s interests are aligned with theirs. That’s why we increasingly structure our agreements with the lenders we work with in a way that ensures there is no incentive for them to make bad loans, because the default risk is all on them.

Mitch Wasterlain, founder of Capfundr, an online real estate investing firm: Online investing, and the use of technology to disintermediate banks and brokers, are here to stay. Ironically Lending Club’s problems do not stem from its use of technology or from accessing individual brokers. It’s more reminiscent of the subprime problem where the business is dependent on selling assets to institutional investors and securitizers whose appetite can be very fickle. When demand for the assets dries up the machine is clogged and it puts enormous pressure on the originator to get production out the door by any means possible.The key difference is in the business model. In a more traditional fund management model such as CAPFUNDR’s, you make money by attracting assets under management, and you can only do this by building trust over a period of time. You don’t have the same pressure to churn your assets to generate gains on sale.

Cracks are appearing in fintech lenders, (Financial Times), Rated: A

The lenders meanwhile are trying to channel more funds to loans themselves by managing money — SoFi has set up its own hedge fund while Lending Club has an investment arm called LC Advisors. OnDeck Capital, an online lender to small businesses, is retaining more of the loans it makes on its balance sheet in response to the financial squeeze.

Raising retail deposits and holding on to loans; what financial industry does that remind you of? Oh yes, banking. Some of the antiquated methods of lending money demonstrate their value when the credit cycle returns.

Yirendai Is Up 200% but Watch Out for Risky Loans, (Barron’s), Rated:AAA

Comment: Please see our article on Yirendai’s stock as well.

Shares in peer-to-peer lending platform Yirendai are up more than 200% over the past three months but investors should be wary given the number of high-risk loans going sour. Yirendai (ticker: YRD ), which is China’s fifth largest and only listed peer-to-peer (P2P) lending platform, brokers loans between individual lenders and borrowers.

Yirendai delivered stellar March quarter earnings on Wednesday, but a deeper look at the numbers underscores concerns about the risky loans it helps broker. Earnings of $0.34 a share exceeded analyst expectations for $0.15 a share, while a 187% rise in revenues was underpinned by a 110% increase in a number of loans brokered. However, the speedy growth in Yirendai’s business is mostly underwritten by high-risk D-class loans, the lowest grade on the company’s A-to-D credit scale. D-class loans, which were introduced in late 2014, accounted for 84% of total lending in the March quarter.

While P2P platforms aren’t responsible for covering bad loans, Yirendai’s business model is more similar to the U.K.’s RateSetter rather than the U.S.’ LendingClub (LC) in that it has a provision fund to compensate lenders for losses on bad loans.

Yirendai’s provision fund could be strained if the speedy growth in D-class loans continues. Jiang says D-class loans carry a charge-off rate of 10% to 11%, which is “well beyond” the capacity of the provision fund, which is equal to 7% of Yirendai’s loans.

For a sounder way to play the growth of fintech in China, investors way want to consider Internet giants Tencent ( 700.HK ) and Alibaba ( BABA ), which have a diversified portfolio of fintech ventures backed by solid core businesses.

China

China Update: Guidelines, Not Rules Quite Yet for Alternative Finance, (Crowdfund Insider), Rated: A

Ezubao, perhaps the best-known debacle, collapsed having fleeced billions from investors. Senior executives were promptly hauled away by Chinese police.  Allegedly 95% of the offers were considered fake.

Ten ministries of the Chinese State Council jointly issued a set of guidelines for the internet finance industry in July 2015. These guidelines broadly covered the industry, including businesses involved in marketplace lending, equity or project crowdfunding, online investment fund sales, and online insurance sales. The overall tone of these guidelines was supportive of the industry but offered few specifics on how these businesses should be regulated.

The industry’s development trajectory will be impacted by the final regulations to be issued by the CBRC, hopefully in the next couple of months before the summer ends. Once the rules take effect, if unchanged from the draft rules, the platforms will have 18 months to fully comply. I imagine it will take longer for regulators to determine how to effectively enforce the rules, so there will continue to be stragglers on the compliance front.

 

Australia

 

SocietyOne shifts from edgy start-up to $100m lender, (The Australian Business Review), Rated: AAA

An ASIC search has revealed the stranglehold of the so-called media consortium (News Corp, Kerry Stokes and James Packer’s media-free Consolidated Press Holdings) over SocOne after the recent $25 million Series C capital raising.

The consortium, through its vehicle S. One Holding, holds a commanding 37 per cent stake, with the News and Stokes interests believed to be dominant in the S. One Holding structure.

Not only that but Westpac’s in-house venture capital fund, Reinventure, speaks for a further 17 per cent of SocOne.

Put the two together and you have majority control if it were ever to come to that.

SocOne is no longer an edgy start-up. The transformation in the company since the media consortium picked up its initial, 25 per cent stake in December 2014 has been entirely predictable. Since March 2014, SocOne has raised more than $55m from institutional and individual shareholders.

The holding of each founder, Matt and Greg Symons, is now comfortably below 5 per cent.

They remain directors on a seven-person board chaired by ex-Pacific Equity Partners managing director Anthony Kerwick, but their ability to control events has been ceded to the media con­sortium. That control was exercised in early March when the former senior Westpac executive Jason Yetton took over as chief executive from Matt Symons.

The company edged past $100m in loans in April, with $30m written in the March quarter.

New Zealand

P2P lender Harmoney changes key fee after earlier reducing borrowers fees amid the backdrop of a Commerce Commission review, (Interest), Rated: AAA

Peer-to-peer lender Harmoney has announced potentially substantial increases in its fee structure for lenders, effective from June 13.

The changes follow the restructuring of fees to borrowers in December 2015, at which time the company significantly reduced the Platform Fee for all borrowers. See here for previous articles about Harmoney. “At that time we significantly reduced the Borrower Platform Fee, adjusting interest rates so, on average, borrowers paid around the same amount overall,” Harmoney told its investors.

For new loans made from June 13, 2016, Harmoney has removed its Service Fee (1.25% of the principal and interest payments collected on each repayment, including any repayment as a result of a rewritten loan). Instead, a Lender Fee will be charged only on interest, and is charged on a sliding scale that recognizes the amount lenders have invested through the platform – the greater the lending, the lower the fees.

According to the example, Harmoney itself gives of the new lending fee structure, somebody investing $15,000 for 36 months would potentially see their service fee paid increased by over 174% (its a nearly $1000 increase according to the example), assuming returns were as Harmoney outlines.

Harmoney founder and joint CEO Neil Roberts said that the changes were being made “in order to ensure the sustainability and longevity of the platform and maintain the value we deliver to Lenders and Borrowers”.

Roberts said the Harmoney platform was delivering returns to retail lenders that exceeded those originally targeted. “Retail lenders are enjoying an average Realised Annual Return (RAR) of 13.05%.”

Roberts said the new fee structure” will allow Harmoney to continue to invest in growth, which will drive more loan value for all lenders”. In “just 20 months” of operation, he said, Harmoney has:

  • raised $30 million in working capital and invested substantially in the platform infrastructure and improvements;
  • assessed more than $2 billion in loan applications;
  • facilitated $250 million in lending;
  • paid $20 million in interest to Lenders;
  • processed more than 7,500,000 transactions.

United Kingdom

 

Lending Club’s woes raise questions for Britain’s peer-to-peer lenders, (Telegraph), Rated: A

When banks ran into serious trouble in the financial crisis, the old institutions typically slashed lending, particularly to small businesses and to individuals with poor credit histories.

Britain’s P2P firms have a better record of publishing details of their loans for investors to examine, but the sector still faces questions on its future.

UK peer-to-peer lenders talk up-regulation after Lending Club ruckus, (India Times), Rated: A

Policymakers are keen to see P2P and other parts of the fledgling “fintech” sector create jobs and take on the banks that have long dominated consumer and business lending.

Britain’s government even launched an “Innovative Finance” savings product last month that allowed investors to put money into P2P lending tax-free.

For now, the FCA says it is struggling to keep up with the number of applications from P2P lenders and is currently plowing through more than 80. Even the big players such as Ratesetter and Funding Circle are still operating under interim permission until they obtain full authorisation later this year.

But RateSetter’s Lewis, also a board member of the Peer-to-Peer Finance Association (P2PFA) trade body, said breakneck growth in new loans had slowed to 5-10 percent a month as regulation beds in.

He said this would make “big consolidation” inevitable as smaller platforms struggle to find business.

 

 

Author: George Popescu

George Popescu

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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