What are the advantages of a “pure tech” company where everything is automated? Regulation makes it a product, like a hedge fund (except for some paperwork). On the one side, machine learning. On the other, automating everything from onboarding new clients to calculating value allocation. That pure tech company exists; it’s name is Lending Robot.
What’s a Lending Robot?
The company has seven full-time employees and 6,500 clients ($120m AUM) who have been happy with their 2016 return average of 9% net, and more, after fees.
A few of their clients wanted to move into a less comfortable space and diversify more. The best individual investing is cheap and transparent, but not diversified. Flexibility lets people decide their own risk tolerance and time horizon.
Others wanted to build a portfolio of different loans, both consumer and business. Without a fund, that’s hard to do because funds are expensive and opaque. Liquidity is almost vintage, Lending Robot founder and CEO Emmanuel Marot said. “It’s like in 1920, you have to write a letter 45 days before the quarter to ask for funds.” But a fund is a one-stop solution that gives access to many platforms unavailable to the individual investor.
Technology provides the solution for both ends of the spectrum. Like a fund, money goes to Lending Robot, which acts as an institutional investor across four platforms: Lending Club, Prosper, Funding Circle, and Lending Home. The added real estate provides a high return, but is stable. Many investors like this because when you look for the default cycle, it isn’t the same for consumer and business credit, or real estate.
How Lending Robot’s Contracts Are Smarter
The Lending Robot Series has two sliders: conservative vs aggressive and short term vs long term. This provides four options based off where the sliders are allocated. People can mix it up and everything is automated with a time unit of one week. Books are published every Wednesday and new units of ownership are allocated.
Lending Robot publishes every loan and all the data for each loan, including credit scores.
“Not only do we display that,” Marot said, “but we publish it in a way that cannot be tampered with using blockchain technology. We create a hash code, a fingerprint, and that hash code is put at the top of the next Wednesday book. So we create a chain of documents that can’t be changed because if we change one character, the codes won’t change. And we notarize the hash code signature via a blockchain system, Ethereum.”
Essentially, this system creates a smart contract between Lending Robot and the investor.
Liquidity Without Volatility
Lending Robot seeks to provide more liquidity than what is available without increasing volatility.
“Reselling depends on other people,” Marot said. “To cash out in the usual way, you write a letter. In our case, you have a switch: invest or cash out. When you cash out, you receive in priority loan payments coming from investments.”
Lending Robot allocates 33% to 100% of cash flow payment from loans to investors in order to cash out. The time period varies.
“Just the time required to cash out is usually between 2-3 weeks for $200 thousand,” Marot said. “Best case scenario is one week. The worst case scenario could take 3-5 years.”
Marot said it could be 12 months with Lending Home.
The company also can use new money to cash out old investors who want out by allowing new investors to buy units from the old investors. But even if no new money comes in, cash-out can be achieved with the payments. Lending Robot charges a 1% management fee, no performance fees, and no redemption or other fees.
The Technology Behind Lending Robot
“With Lending Home, we work via API,” Marot said, “They have different APIs, and in this case, we are the investors. As a fund, we can access platforms that don’t have APIs for people to manage somebody else’s money. For Funding Circle, the minimum is a $50 thousand investment if you go direct. Via your fund, you can get exposure even if you don’t have $50 thousand.”
The allocation between platforms is accomplished with algorithms and statistical analysis. Instead of naming the platform for your investment, you name your investment style and the algorithm assigns it. For instance, you could say “conservative and short term.” The platform also wires money in and out automatically. Lending Robot can adjust cash out from one platform and put it on a second one.
“It’s stable right now,” Marot said. “There’s a tiny decrease in performance on Lending Club. Prosper seems stable.”
The change of credit bureau at Prosper, however, affected the company recently.
“We are in the process of training our algorithms to start using those new data points and parameters,” Marot said. “There will be a slight effect. It will take a couple of days of work. Funding Circle North America default was not great compared to the UK, so it’s too soon to tell.”
Marot sees the industry growing. Prosper is originating more loans than ever while some of the small players are going belly up.
“People in the middle are doing great,” he said. “SoFi and Lending Home are doing great.”
When asked why they were not working with SoFi yet, Marot said, “The problem with SoFi is that it’s long term. If we really want to provide good liquidity, we need shorter terms.”
To invest in the Lending Robot Series, investors have to be accredited.
“The minimum is a $100 thousand investment, so that’s not for everybody,” Marot said. “For the ones who can, they have no reason not to move (from a managed account to the fund). Even if the fees are more expensive (1% vs .045% today), we actually improved our models and have a more sophisticated loan selection. Using the best performance algorithms on the managed accounts is not our priority.”
What is Lending Robot’s priority is adding new platforms.
“Ideally, we are going to register as a 1940 Act company and be accessible to everybody,” Marot said. “It’s a long-term endeavor, maybe two years out. It takes $800 thousand to set up a 40 Act company, but if that gets you $80mil in AUM, that’s worth it. We still need to operate the company.”
Read a more in-depth analysis of Lending Robot.
Authors:
Written with Nicki Jacoby.
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