1/6/17

Hi All,

I'm in the process of writing a few stock pitches for applications to Mutual Funds/Hedge Funds in the UK. I'm applying to a range of long/short funds with varied investment thesis.

One of my pitches is for a P2P lending fund, (P2P Global Investments). It's a bit of a left field choice pitching a closed-end fund I'm aware but I want to show something from a different asset class and it's a decent method of exposure. Some extracts from the work are below, there's also some other sections on risk, p2p lending and and overview on the company.

Recommendation
"I recommend a long investment into the FTSE 250 listed company P2P Global Investments, hereby referred to as P2PGI, which currently trades at PS7.99 per share, a significant 21% discount to NAV. P2PGI's returns have been stunted by volatile forex markets, investor uncertainty in the sector and a cash "drag" on the portfolio, downward pressure I believe will reverse in 2017. This represents an opportunity to profit from a convergence of NAV and share price and gain access to quality, high-yielding P2P credit. "

Investment Thesis

Market View: P2PGI trades at a large discount to NAV due to concerns about the credit quality of P2P assets sparked by recent sector scandal and negative press.
My View: Credit quality is strong among P2PGI loan pools, a comparative analysis with other consumer credit is provided. Downward NAV pressure is a miss-pricing of asset value.

A peer comparison is provided in Fig 1.2 of the P2PGI loan pool vs other securitizations of P2P loans and alternative sources of mid-yielding loans. P2PGI's loan pool provides a diversified offering of exposure to P2P assets. The FICO to WTD AVG coupon of P2PGI's assets is similar to other loans being offered to the market and target delinquency figures are attractive. P2PGI's access to these assets at a high discount to NAV makes an attractive investment.

P2PGI CHAI 2016-PM1 SCLP 2016-5 Sierra Timeshare 2016-2 Foundation Finance trust 2016-1

Company Multiple Prosper SoFi Wyndham Worldwide Foundation Finance
Type Mixed Consumer P2P Consumer P2P Real-Estate Time Share Home Improvements
Number of Loans 114,852 23,659 7,259 18,507 31,204
Average Loan size PS10,900 PS10,796 PS27,898 PS18,235 PS5,346
Weighted Average Term (months) 42 43 68 113 104
Weighted Average FICO (US Loans Only) 709 704 734 721 700
Weighted Average Coupon 11.81% 13.57% 9.64% 13.83% 13.23%
Current Target Average Delinquency 2-4% 2-6% 0-2% 18.90% 7.85%

Fig 1.2 Peer Comparison of P2PGI asset pool to other pools or P2P assets

Market View: P2PGI have returned poor dividends and will continue to do so.
My View: Snapshot analysis of P2PGI financial position as of 30th June 2016 highlights "cash" drag due to the exceptional forex environment, release of this will boost dividend yields.

Exceptional events have placed significant a cash "drag" on the P2PGI fund, with 6.22% of total assets pledged as collateral and a further 7.75% in cash and cash equivalent investments. P2PGI have pledged to diversify cash investments into loan in new geographical locations and asset classes. Results of this will boost investor returns in 2017 with a greater exposure to high-yielding loans.

30 June 2016 (PS) As percentage of Total Assets (%)

Cash pledged as collateral 73,026,326 6.22%
Cash and cash equivalents 90,909,841 7.75%
Total cash "drag" assets 163,936,167 13.97%
Total assets 1,173,253,419 100%
Fig 1.3 extracts key metrics on the financial position of P2PGI, as consolidated 30th June.

Market View: P2P investing is uncertain and presents significant regulatory risk.
My View: Regulatory & Legal scrutiny is expected in a new sector, markets have overreacted and miss-priced the value of P2P assets.

P2PGI received FCA approval to invest into P2P assets permanently providing further confidence to investors. Requirements include auditing, details surrounding approved persons and the company's complaints procedure. Within the UK the FCA now regulates multiple P2P lenders, of which P2PGI invests, and the P2P Finance association, a self-regulating body with members including Ratesetter and Zopa, aims to provide transparency to consumers.

Legal uncertainty around US Usury laws, laws which prohibit lending above a certain rate, has caused concern amongst investors. Banks receive exemption from these rules and have the ability to export their states rules to the borrowers state. Rulings, (ie. Madden vs Midland Funding LLC, 2015), have previously went against lenders, stating that no such exemption exists for P2P lending platforms. Thorough research yields that, despite 2nd circuit cases going against P2P lenders the Solicitor General's support for P2P lending in clear stating 2nd circuit rulings as "incorrect" and that lenders represent an important function in the US credit system.

Any feedback or comments would be good. A few questions of my own are..

What other valuation methods could I include? Cash-flow, income and assets are available but not at a granular loan-to-loan level.
Is pitching a return of share price to NAV as a profitable investment too unusual for anyone to take interest?

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1/9/17

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