Hedge Funds Move into P2P Lending

It's been awhile since I've done a WSO CDO update and a few of you have asked me about it, so when I saw this article about hedge funds and family offices moving into P2P lending with big money I figured it was as good a time as any to do an update. But first, the hedge fund stuff.

It's no surprise to anyone familiar with peer-to-peer lending that institutional players would get involved at some point once the investment strategy proved out. Beaumont Financial Partners of Boston has committed $1 million to Lending Club investing, and based on their anticipated return of 6-7% they're only buying the cream of the crop. In my experience, that type of return comes from A1 and maybe some A2-rated notes, so very low risk as far as P2P lending goes.

Another interesting development is that they made the investment through LC Advisors, the division of Lending Club set up to handle accounts for institutional players. LC Advisors currently has $85 million AUM. If these numbers sound really small to you, it's because they are. But P2P lending is still in its infancy, and is just learning to crawl at this point. If you have any doubt that crowdfunding of all types is the wave of the future, I'd direct you to the JOBS Act. P2P lending alone is quickly approaching the $1 billion mark.

As for our little CDO, we made some big changes in the first quarter of 2012. First and foremost, we shed three of our ten notes. One of them was paid in full. It was an A2 rated note paying 5.79%, so having it pay off early actually improves the nominal ROR on the rest of the portfolio. The other two notes were sold for a slight profit when they were late (or missed) a payment. This has been my strategy throughout all my different LC portfolios. Here's the current breakdown:

As you can see, we're making 11.93% on this portfolio, so it's not too shabby.

I also decided to give Lending Club a shot at picking some notes for me. This isn't a long-term strategy for me (I'm way too anal to let somebody else choose my investments), I just wanted to compare Lending Club's results against my own. So far that portfolio is earning 12.73% and there haven't been any delinquencies or defaults, but keep in mind it is a very small part of my overall P2P investment. More curiosity than anything else.

Finally, my primary portfolio is posting a 14.17% NAR, and to date (18 months in) I still haven't had any delinquencies or defaults. I prune a note or two each month and sell them on the secondary market when they're late on a payment, and I generally sell them at a break even or single-digit profit after fees. I'd really like to have some data on what happens to them after the sale so I could determine whether it pays to be a little more lenient, but as it stands I'm not comfortable giving second chances and I expect to be paid on time. For those curious, I add to the portfolio each week.

If you have any questions, hit me with them in the comments.

WSO Elite Modeling Package

  • 6 courses to mastery: Excel, Financial Statement, LBO, M&A, Valuation and DCF
  • Elite instructors from top BB investment banks and private equity megafunds
  • Includes Company DB + Video Library Access (1 year)
Start Discussion

Total Avg Compensation

June 2021 Investment Banking

  • Director/MD (9) $911
  • Vice President (35) $364
  • Associates (202) $234
  • 2nd Year Analyst (115) $151
  • Intern/Summer Associate (97) $145
  • 3rd+ Year Analyst (27) $145
  • 1st Year Analyst (420) $131
  • Intern/Summer Analyst (338) $82