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The New Institutional Asset Class: Debt Crowdfunding

The New Institutional Asset Class: Debt Crowdfunding

By David Drake

David Drake hosted a New Financing event for the entertainment industry at the Players Club NYC

David Drake hosted a New Financing event for the entertainment industry at the Players Club NYC

 

Institutional investors are still licking their wounds after the real estate market crashed and burned during the last global financial crisis. Some say we got into this financial mess because people were buying houses using their credit cards. However, there is a new asset class emerging from the global financial crisis (GFC):  Debt crowdfunding.

 

Even Mark Zuckerberg is buying his first residence with his MasterCard.  As one of the world’s wealthiest people, he certainly can afford to pay for it with cash.  But without new laws to limit the number of houses that we can buy using credit, we are destined to see another financial crisis in the near future. Unless you are Seth Rogen and you wish to buy one new house for your mother and another for your brother, you don’t really need to buy more than one house with your American Express.

Institutional investors need to find other types of debt in which to invest their billions. And consumer debt is the name of the game.  One company already is leading the way: Lending Club.  

 

Lending Club

 

Lending Club offers a platform where members directly invest in and borrow from each other.   

 

Capitalizing on peer lending, Lending Club simplifies the borrowing and lending system, and in so doing, reducing the operational cost.   This results in better rates for both the borrower and the lender.  The club promises openness and transparency while keeping privacy protected;  no personal or financial information is divulged.

 

Investors

 

For investors, the club recognizes that maintaining a tight credit policy is critical.  It knows that investors rely on Lending Club to do the risk management for them.  The club thoroughly reviews the credit histories of potential borrowers, assuring investors higher returns (5% to 18+%) on a monthly basis.  To date, the club has paid $157,673,675 in interest to its investors.  

 

Borrowers

For borrowers, the draw is lower rates (6.78% vs. the national average of 11.06%).   Lending Club has logged more than $1.8 billion in funded loans, up from $780 million last year. Eight out of 10 Lending Club borrowers (79.56%) use their loans to consolidate debt or pay off their credit cards.  

 

The average FICO credit score of a Lending Club borrower is 706, and the average loan is $13,076. If you have a FICO score of 660 or less, your loan application will be denied.  And even if you have a higher FICO score, you need to pass more than 180 tests that are analyzed very carefully by Lending Club’s proprietary risk management software.

 

Lending Club is shaking up the financial industry and making the marketplace less volatile, profoundly transforming the way people think of credit and investments.

 

Prospects for the Financial Industry

Just this month, Google invested an additional $125 million in Lending Club, bringing the company’s valuation to $1.55 billion.  

The United States now has $2.7 trillion in consumer debt, consisting of credit card receivables, auto loans, and student loans.  Of this, the market being addressed by Lending Club is only $300 billion, the unsecured credit card receivables market.  

 

Obviously, it is impossible for one company to capture even just 1% of this massive market.   But even a 0.1% market share equals $2.7 billion, which means this company is going to skyrocket after its IPO in 2014.

 

Assuming a 10% margin, Lending Club is set to earn $270 million in profits annually. And its market keeps getting bigger and bigger, as more and more people enroll in colleges, buy houses, get new cars, etc.  

 

If you can build a Lending Club clone, now is the time to do it. Every VC in the world will invest in your startup.  

 

Lending Club has disrupted the financial marketplace just the way eBay shook up the retail space.  They are projected to have $2 billion in loans transacted in 2013.   Back in 1998, eBay went public and nobody built an eBay clone.  In 2012, eBay’s global commerce volume reached $175 billion.  

 

David Drake is an early-stage equity expert and the founder and chairman ofLDJ Capital, a New York City private equity firm, andThe Soho Loft, a financial media company helping  funds and firms advertise to investors, QIBs and family offices in compliance with the new SEC law 506 (c). He writes regularly for Forbes and Thomson Reuters. You can reach him directly at David@LDJCapital.com.

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