Transcript
  • P2P Lending: Opportunity & how to invest

    Ropemaker Place, 25 Ropemaker Street, London EC2Y 9LY / T: +44 (0)20 3100 2000 www.liberum.com Liberum Capital Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 5912554

    11 March 2014

    Cormac Leech Research +44 (0) 20 3100 2264 [email protected]

    Karen Lucey Research +44 (0) 20 3100 2183 [email protected]

    Minh Tran Research +44 (0) 20 3100 2184 [email protected]

  • Reaching critical mass Structural advantage / sustainable model Endgame Investment opportunities Conclusions Appendix

    P2P Lending: Opportunity & how to invest

    2

  • P2P Lending: Opportunity & how to invest

    5bn of volume on top 5 platforms in 2014; P2P volumes have grown at 136% CAGR since 2009

    2005: Zopa launched in the UK;

    Lending Club - originated 1.3bn+ in 2013

    Strong UK govt backing for P2P: committed to lend 75m via P2P

    P2P Gross Annual Volume bn

    Source: Lending Club, Prosper, Funding Circle, Zopa, RateSetter, Liberum

    0.0

    1.0

    2.0

    3.0

    4.0

    5.0

    6.0

    2009 2010 2011 2012 2013 2014e

    Prosper Lending Club Funding Circle Ratesetter Zopa

    UK Govt lending via P2P m

    Source: Lending Club, Prosper, Funding Circle, Zopa, RateSetter, Liberum

    0

    10

    20

    30

    40

    50

    60

    70

    MarketInvoice Zopa Funding Cirlce

    CAGR: 136%

    3

  • P2P Lending: Opportunity & how to invest

    P2P lending is a global phenomenon: largest markets US, China and UK

    * Estimate based on historic and Celent forecast

    $2.4bn

    = 2013 annual gross volume

    $1.4bn

    $1.9bn*

    $

    4

    http://www.communitylend.com/public/indexhttp://www.kiva.org/https://www.microplace.com/http://lendinghub.com.au/index.phphttps://www.rainfin.com/http://www.pretp2p.com/indexhttps://www.fundingcircle.com/http://www.ppdai.com/http://english.creditease.cn/index.htmlhttp://i-lend.in/
  • P2P Lending: Opportunity & how to invest

    P2P awareness rising everywhere; up by 70% since start of 2012

    Peer to Peer Lending Google Trend

    Source: Google Trends

    Lending Club Google Trend

    Source: Google Trends

    Prosper Loans Google Trend

    Source: Google Trends

    Zopa Google Trends

    Source: Google Trends

    RateSetter Google Trends

    Source: Google Trends

    FundingCircle Google Trends

    Source: Google Trends

    0

    100

    2012 2013 20140

    100

    2012 2013 20140

    100

    2012 2013 2014

    0

    100

    2012 2013 20140

    100

    2012 2013 20140

    100

    Jan-12 Jan-13 Jan-14

    5

  • Reaching critical mass Structural advantage / sustainable model Endgame Investment opportunities Conclusions Appendix

    P2P Lending: Opportunity & how to invest

    6

  • P2P Lending: Opportunity & how to invest

    No efficiency gains in banking since 1900

    Unit cost of financial intermediation relatively constant for the last 30 years at just under 2%

    No economies of scale suggests an oligopoly

    Net US revenues of financial intermediaries as % intermediated assets (i.e. unit cost of intermediation)

    Source: Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation; Philippon Thomas, http://bit.ly/1gRuAEB

    Source: Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation; Philippon Thomas, http://bit.ly/1gRuAEB

    Net US revenues of financial intermediaries as % US GDP

    Finance share of GDP is at a historical high- surprising vs. similar intermediation sectors

    7

    http://bit.ly/1gRuAEBhttp://bit.ly/1gRuAEB
  • P2P Lending: Opportunity & how to invest

    Productivity gains in Wholesale & Retail trade but not Finance; inefficient banks cost UK est. 30bn annually

    Wholesale and Retail trade have become much more efficient due to IT investment. Opposite is true for the finance industry

    Internet enabled supply chain innovation has revolutionised retail and wholesale trade but not finance so far

    Financial sector currently at 9% of GDP, about 2% higher than it should be (vs. other sectors and IT investment) =>lost annual income of $325bn in the US (UK 32bn)- 10 per person / week

    US Wholesale Trade as % of GDP

    Source: Finance vs. Wal-mart: Why are Financial Services so expensive, Thomas Philippon, 2012

    Source: Finance vs. Wal-mart: Why are Financial Services so expensive, Thomas Philippon, 2012

    Source: Finance vs. Wal-mart: Why are Financial Services so expensive, Thomas Philippon, 2012

    US Retail Trade as % of GDP US Financial Intermediation as % GDP

    8

  • 39 1920 28

    29135

    270

    0

    100

    200

    300

    400

    500

    600

    700

    Bran

    ch

    FDIC

    CS/C

    ollec

    tion

    Billin

    g/Frau

    d

    Origi

    natio

    n

    G&A

    Othe

    r IT

    Marke

    ting

    Total

    OPE

    X

    OPEX

    / Tota

    l Bala

    nce O

    utstan

    ding (

    bps)

    Peer 2 PeerGovernment endorsedAttractive RatesConvenient & flexible

    425bps LowerOperating Expenses

    P2P Lending: Opportunity & how to invest

    P2P is the Walmart / Ryanair of financial intermediation; with costs 60% lower than banks.

    2013e costs as bps of outstanding loans for P2P platforms and credit card providers*

    *P2P Platforms: Lending Club, Zopa, RateSetter, Funding Circle Source: Liberum

    Cost base comparison 2015e: Banks vs. Lending Club (costs as % loans outstanding)

    Source: McKinsey / Lending Club

    In 2013e, P2P platform costs were 420bps of loan balances vs. 695bps for comparable banking business; 40% more efficient

    Over time, economies of scale will further increase P2Ps relative efficiency

    Lending Club expects to be 60% more efficient than the equivalent banking business, on costs as % of loan balances, by 2015e

    P2P has no expensive branches/ legacy systems/ expensive regulatory capital to service

    220

    10170

    10030 30

    35100

    695

    0

    100

    200

    300

    400

    500

    600

    700

    Bran

    ch

    FDIC

    CS/C

    ollec

    tion

    Origi

    natio

    n

    G&A

    Othe

    r IT

    Marke

    ting

    Total

    OPE

    X

    OPEX

    / Tot

    al Ba

    lance

    Out

    stand

    ing (b

    ps)

    BanksCost inefficienciesHigh marginsRestrictive lending

    0100200300400500600700800

    Bank avg P2P ex prosper

    9

  • P2P Lending: Opportunity & how to invest

    Basic recap: revenue fee structure for P2P Platforms

    During the Loan

    Platform revenue from borrower: Upfront 2-5% of principal.

    Platform revenue from lenders: Annual fee of typically 1% of loan balances (details vary slightly by platform)

    Borrower Lender

    Platforms

    Principal +

    Interest

    Principal +

    Interest

    Annual Fee of

    1%

    At Start of Loan

    Lender Borrower

    Platforms

    Principal Principal

    Upfront fee 2-5%

    10

  • P2P Lending: Opportunity & how to invest

    P2P just as competitive in high or low interest rate environment ; 50%+ lower fee structure remains

    Current low interest rate environment viewed by some as temporarily enabling P2P to thrive. However

    With BoE base rates at 0.5% banks : Charge borrowers 7.0% Pay term depositors 2.8% Banks earn rate gap of 4.2%

    P2P platform fees: only 2.0%

    With higher rates P2P price advantage remains

    When BoE rates normalise to 4.0% banks: Charge borrowers 10.5% Pay term depositors 6.3% Banks earn rate gap of 4.2%

    P2P platform fees: only 2.0%

    BASE RATE= 0.5%: P2P rates vs. bank rates

    Source: Liberum

    BASE RATE= 4.0%: P2P rates vs. bank rates

    Source: Liberum

    0%

    2%

    4%

    6%

    8%

    10%

    12%

    Banks P2P PlatfomsTotal Cust. Cost Central Bank Rate Term Deposit Rate Borrowers Rate

    P2P benefit to lenders

    P2P benefit to borrowers

    0%

    2%

    4%

    6%

    8%

    10%

    12%

    Banks P2P PlatfomsTotal Cust. Cost Central Bank Rate Term Deposit Rate Borrowers Rate

    P2P benefit to lenders

    P2P benefit to borrowers

    P2P price advantage is independent of BoE rates

    11

  • P2P Lending: Opportunity & how to invest

    Current P2P rates are meaningfully better for savers & borrowers

    For US Consumer Finance borrowers: P2P offers rates 1-25% lower Particularly for more credit worthy

    customers

    For UK borrowers: Consumer Finance borrowers, P2P platforms offer loan rates 1.1% lower than typical bank rates.

    US: Bank deposit rates vs. P2P net yields

    Note: 3y expected net yields. Source: Prosper, Lending Club, Liberum

    UK: Deposit rates vs. P2P net yields

    Note: 3y expected net yields. Source: Zopa, Funding Circle, RateSetter

    UK: Bank loan rates vs. P2P loan rates

    Note 3y loan rates. Source:Zopa, & RateSetter, moneysupermarket.com,

    US: Bank loan rates vs. P2P loan rates

    Note: 3y loan rates. Source: Prosper, Lending Club loan rates, bankrate.com

    0.0%

    2.0%

    4.0%

    6.0%

    8.0%

    10.0%

    12.0%

    2 year CD 5 year CD S&PCorporateBond BBB

    5 yr

    Prosper LendingClub

    0.0%

    1.0%

    2.0%

    3.0%

    4.0%

    5.0%

    6.0%

    0.0%

    10.0%

    20.0%

    30.0%

    40.0%

    Prosper LendingClub

    PeoplesUnitedBank

    NationalBank

    Arizona

    BMHarrisBank

    CitizensBank

    AvantCreditCorp

    For US savers: Prosper and Lending Club offer savers a c. 6-9% yield pickup compared to US deposit accounts.

    For UK savers: UK P2P platforms offer savers a 3% pick up vs. cash ISA rates.

    0.0%

    2.0%

    4.0%

    6.0%

    8.0%

    10.0%

    12

  • P2P Lending: Opportunity & how to invest

    Credit risk is manageable, driving relatively stable returns despite some margin erosion

    Prosper and Lending Club provide

    the highest net yields due to their higher risk appetite: 9.3% and 6.9% respectively

    We expect RateSetter will gradually increase their risk appetite somewhat to potentially broaden available net yields

    Since 2010 Trustbuddy has delivered an average annualised net yield of 13.8%

    Lending Club gross & net yields by cohort

    Note: Maturity weighted. Source: Liberum, Lending Club

    Prosper gross & net yields by cohort

    Note: Maturity weighted. Source: Liberum, Prosper

    RateSetter gross & net yields by cohort

    Note: Maturity weighted. Source: Liberum, RateSetter

    Trustbuddy net yields by cohort

    Source: Liberum, Trustbuddy

    0.0%

    5.0%

    10.0%

    15.0%

    20.0%

    25.0%

    2H09 1H10 2H10 1H11 2H11 1H12 2H12

    Net Yield Fee Loan Losses

    0.0%

    5.0%

    10.0%

    15.0%

    20.0%

    2H09 1H10 2H10 1H11 2H11 1H12 2H12

    Net Yield Fee Loan Losses

    0.0%

    2.0%

    4.0%

    6.0%

    8.0%

    10.0%

    12.0%

    2H10 1H11 2H11 1H12 2H12

    Net Yield Fee Loan Losses

    0.0%

    5.0%

    10.0%

    15.0%

    20.0%

    25.0%

    2010 2011 2012 2013

    Net Yield

    13

  • P2P Lending: Opportunity & how to invest

    Post financial crisis credit card delinquencies declining

    Post the financial crisis we see there has been a marked improvement in consumer finance credit quality

    Credit card delinquency trends relevant for US P2P lending as debt consolidation is a main use of the funds

    Lending Club 83% of loans used to consolidate debt

    Prosper 52% of loans used to consolidate debt Source: Bloomberg Source: Bloomberg

    US Credit Card delinquency 90 days +

    Source: Bloomberg

    Federal Reserve US Delinquency Rates for All Banks Credit Cards

    Capital One 30 day Credit Card delinquency

    0.00

    0.50

    1.00

    1.50

    2.00

    2.50

    3.00

    3.50

    2007 2009 2011 20130.00

    1.00

    2.00

    3.00

    4.00

    5.00

    6.00

    2007 2009 2011 2013

    UK Credit Card delinquency 90 days +

    Source: Bloomberg

    0.00

    1.00

    2.00

    3.00

    4.00

    5.00

    6.00

    7.00

    8.00

    2007 2009 2011 20130.00

    1.00

    2.00

    3.00

    4.00

    5.00

    6.00

    7.00

    2007 2009 2011 2013

    14

  • P2P Lending: Opportunity & how to invest

    Regulation still embryonic and uneven by geography

    Selected regulatory comments

    US: P2P lending in the US is subject to SEC regulation and other state and federal regulation. In the US, P2P loan notes are SEC registered securities. Prosper and Lending Club use Webbank to issue registered securities

    UK: FCA to start regulating P2P platforms from the April 2014. Platforms that currently operate in the UK market are licensed by the OFT and require a Consumer Credit Licence

    Germany: Platforms need to use a bank; rates are capped at 2x average rate

    France: Need Credit License which takes 12-18months (Key advantage for Pret du Union, since it creates a barrier to entry). Regulated by the French Central Bank.

    Italy: Need to operate with banking/financial institution licence . Regulated by the Bank of Italy. Rates are capped.

    Key issues regulation and / or the market place need to address:

    Calculation of historic returns on apples to apples basis by cohort Client fund segregation and disclosure Adequate platform credit risk assessment for loans on platform Rigorous IT system KPI reviews

    15

  • P2P Lending: Opportunity & how to invest

    P2P sceptics highlight some valid issues...

    What key issues do critics flag? Our view

    Platforms should risk some of own capital e.g. Wellesley & CO model

    Link CEOs compensation to 3 year credit performance

    Zopa actually has more customer contact than many banks where processes are fully automated

    Terms and conditions are clearly explained in lending process for both Zopa and RateSetter.

    Liquidity run impossible ; loans match funded

    Platforms need to ensure i) credit processes are robust & ii) clear terms and conditions

    Margins already much lower than banks; longer term economies of scale will compensate

    P2P too small to matter currently (c 1% share) Longer term, easy to fix via increased capital

    requirements or increased platform skin in the game

    16

  • P2P Lending: Opportunity & how to invest

    but even banks starting to invest in P2P sector

    Barclays acquires 49% of South African P2P Platform RainFin (5th March 2014) RainFin launched their platform in July 2012. Offers unsecured consumer loans, ranging

    up to 1 year. 1st year they loaned $0.35m; Average net return to lender 10.2%.

    Barclays Africas investment will allow RainFin to develop their corporate product range that will include supply chain finance, enterprise development funding, fixed asset purchases and mid-sized corporate debt products.

    Westpac buys into Society One (6th March 2014) SocietyOne: founded in August 2012 has lent more than $4 million; currently offers

    unsecured consumer and business loans ranging from $5,000-$30,000.

    Reinventure Group, the new Westpac-funded venture capital manager, has invested $5 million in Australias first P2P lender Society One.

    Santander partners with Funding Circle, (19th July 2013) Funding Circle: founded in 2010 has lent more than 233million; currently offers

    unsecured business loans ranging from 5,000-1,000,000.

    Santander have partnered with Funding Circle to help finance loans passing on leads to Funding Circle that they are unable to finance.

    South Africa

    Australia

    UK

    17

  • P2P Lending: Opportunity & how to invest

    UK P2P lending will accelerate sharply once ISA-able and SIPP-able

    Current total ISA outstanding balances bn, potential P2P market size if ISA eligible, bn

    Source: Bank of England, Zopa, Funding Circle, RateSetter

    P2P most likely to become ISA-able in the UK later this year

    Using ZOPA as an example: After tax return for top 45% tax

    rate payer is 2.5% currently vs. 2.8% in a cash -ISA.

    Once ISA-able the tax free return increases to 4.6% which is 65% higher than the highest cash ISA currently on offer.

    If P2P was to take 10% of the total cash and equity ISA market, UK gross P2P balances would increase 48x to 44bn.

    Best cash ISA rate vs. i) Zopa yield net of tax and ii) Zopa yield if ISA- able

    * 45% Tax rate Source: Zopa, moneysuperamrket.com, Liberum

    Bn Bn

    0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%

    Cash ISA rate Zopa Net Yield post tax* Zopa Net Yield via ISA

    0

    100

    200

    300

    400

    500

    Total ISA P2P LoansOutstanding

    P2P Loans10% ofMarket

    Stock Cash

    4737%

    0

    10

    20

    30

    40

    50

    P2P Loans Outstanding P2P Loans10% of Market

    4737%

    18

  • Reaching critical mass Structural advantage / sustainable model End game Investment opportunities Conclusions Appendix

    P2P Lending: Opportunity & how to invest

    19

  • P2P Lending: Opportunity & how to invest

    P2P end game by 2024: 25-50% share of consumer finance and SME

    Growth projections: annual gross volume CAGRs of leading 5 platforms 2014 to 2024e:

    base case: 48% bull case: 59%.

    Base case: leading P2P platforms will originate 267bn by 2024e; 25% of the gross volumes in UK & US consumer and UK SME market.

    Bull case: leading P2P platforms will originate 535bn by 2024e; 50% of the gross volumes in UK & US consumer and UK SME market.

    2024 P2P platform revenue pool likely to be at least 12-25bn by 2024 (for just UK and US consumer finance and UK SME)

    P2P gross loan volume, base case bn

    Source: Lending Club, Prosper, Funding Circle, Zopa, RateSetter, Liberum

    -

    50

    100

    150

    200

    250

    300

    2009 2010 2011 2012 2013 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e

    Prosper Lending Club Funding Circle Ratesetter Zopa

    P2P as % annual gross lending in US & UK consumer & UK SME bn

    Source: Liberum, Bank of England, Federal Reserve Flow of Funds.

    -

    200

    400

    600

    800

    1,000

    1,200

    2014e 2024eBase

    2024eBull

    Bank P2P Total

    99% 75%1% 25% 50%

    50%Implied CAGR 48%

    Implied CAGR 59%

    20

  • P2P Lending: Opportunity & how to invest

    Other financial disintermediation besides P2P

    Retail FX Transferwise cost advantage vs. banks (indexed to 100)

    Source: Transferwise, Halifax, HSBC

    Xoom cost advantage vs. banks (indexed to 100)

    Source: Xoom, Western Union, Citi, Bank of America

    Square Reader

    Source: Squareup.com

    Google wallet, Tap and Pay payment technology

    Source: door4co.uk

    Square threatens the banks point of sale revenue stream. Processed $20bn last year.

    Digital wallets: Apple and Google each creating their own versions

    Money transfer disruption: Xoom transfers money across borders: 69% cheaper than banks

    P2P Retail FX disruption: Transferwise is 90% cheaper for customers

    Merchants can request a Square reader for free.

    After receiving the reader, the merchant can downloadthe Square app and sign up for an account.

    Customers simply pay by swipingtheir credit card on the Squarereader, as they would any othercredit card reader. No signup is

    required for them.

    The Square reader takes the credit cardinformation, and the merchants smartphone transmits this information to the

    processor for payment.

    0

    10

    20

    30

    40

    50

    60

    70

    80

    90

    100

    Avg Bank transfer cost Xoom

    69%

    0102030405060708090

    100

    Avg Bank FX cost TransferWise

    90%

    21

  • P2P Lending: Opportunity & how to invest

    P2P clearly negative for overall bank sector: weve seen this movie before!

    Rates of Adoption of New Technologies

    Source: The New York Times, 2008.

    0

    10

    20

    30

    40

    50

    60

    70

    80

    90

    100

    1900 1915 1930 1945 1960 1975 1990 2005Pe

    rcen

    t of U

    .S. H

    ouse

    hold

    sELECTRICITY TELEPHONE COLOR TV CELLPHONE INTERNET

    Retail banks are dinosaurs, Bill Gates, October 1994 The banking middle men may in time become the surplus links in the chain, Andrew Haldane, Executive Director Bank of England, March 2012 Banking is very digitisable Lending Clubs peer-to-peer model is changing personal lending, Peter Sands CEO Standard Chartered, June 2013

    HMV Share Price (Music)

    Source: Bloomberg

    Border Share Price $ (Books)

    Source: Bloomberg Source: L

    Sun Time Share Price $ (Newspapers)

    Source: Bloomberg

    0

    5

    10

    15

    20

    25

    30

    35

    40

    1995 1998 2001 2004 2007 20100

    5

    10

    15

    20

    25

    1994 1997 2000 2003 2006 20090

    50

    100

    150

    200

    250

    300

    2002 2005 2008 2011

    22

  • Reaching critical mass Structural advantage / sustainable model Endgame Investment opportunities Conclusions Appendix

    P2P Lending: Opportunity & how to invest

    23

  • P2P Lending: Opportunity & how to invest

    For institutional and High Net Worth investors: P2P loans offer attractive returns / useful diversification

    P2P expected net yield compares favorably with other asset classes

    New asset class = valuable diversification.

    Attractive risk adjusted returns: 4.4x P2P Sharpe ratio for Lending Club loans originated in 2009/10 vs 1.1x for FTSE all Share over same time period.

    Distribution of Lending Club monthly returns, from inception to December 2013

    * Assumes investment in every loan from inception to December 2013 (Dashed line average monthly return 0.56%) Source: Lending Club, Liberum

    P2P yields vs. other asset classes

    Source: Prosper, Lending Club, Bloomberg, Liberum

    -1.5%

    -1.0%

    -0.5%

    0.0%

    0.5%

    1.0%

    1.5%

    Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13

    0.0%

    2.0%

    4.0%

    6.0%

    8.0%

    10.0%

    12.0%

    3y gilt yield IG 3y bond yield Commercial RealEstate*

    Equities Levered Active P2PPortfolio

    24

  • -0.1

    0.0

    0.1

    0.2

    0.3

    0.4

    2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

    Income Revenues

    -1.0

    -

    1.0

    2.0

    3.0

    4.0

    2009 2011 2013 2015 2017 2019

    Income Revenues

    P2P Lending: Opportunity & how to invest

    DCF analysis suggests equity of P2P platforms is still significantly undervalued

    Lending Club rumored to IPO in Q2 2014

    Most recently valued at $2.3bn or 12.0x 2014 revenues.

    Our DCF valuation $6.2bn (15% cost of equity)

    Trades on c 4.9x 2014e revenues and 13.5x 2015e EPS.

    Since July 2011 TBDY has appreciated by c400%.

    Only listed P2P platform globally Liberum research estimates a DCF

    fair value of $462m (15% cost of equity) vs. a current diluted market cap of $137m

    Lending Club revenue and net income

    Source: Lending Club, Liberum

    Current valuation as a multiple of revenues

    Source: Liberum

    Trustbuddy revenue and net income

    Source: Trustbuddy, Liberum

    DCF $6.2bn

    DCF $0.5bn

    $Bn

    $Bn

    0.0x

    5.0x

    10.0x

    15.0x

    Lending Club Trustbuddy

    25

  • P2P Lending: Opportunity & how to invest

    Liberum active in raising P2P equity and lending capital

    Sale of business founded by Liberum to Marshall Wace, Oct 2013.

    18.3m raise; 9.3m sell down which was put on the platform as lending capital, along with an additional 3.0m of loan capital; 6.2m new equity

    Transaction at SEK1.1 per share, post money valuation SEK359m, Nov 2013. Current market cap SEK 846m, fully diluted.

    15m private placement equity raise, Jan 2014.

    Liberum AltFi Index - establishing a range of data on the UK P2P / Alternative Finance sector, Dec 2013.

    26

    Trustbuddy

    Zopa

    Marshall Wace Exchange Associates

    AltFi

  • Reaching critical mass Structural advantage / sustainable model Endgame Investment opportunities Conclusions Appendix

    P2P Lending: Opportunity & how to invest

    27

  • P2P Lending: Opportunity & how to invest

    3 key conclusions

    1. P2P sector is the Walmart / Ryanair of financial intermediation : costs 60% lower than banks; will help save the UK est. 2% of GDP or 30bn per annum ($280bn for US) as savers and borrowers connect more efficiently.

    2. ISA-ability of P2P will drive sharp acceleration in UK P2P lending: not unreasonable to expect 48x growth in UK gross P2P balances within 5-10 years to c 45bn.

    3. BUY P2P equity & debt and prepare to SHORT banks. P2P offers at least 5-10x equity upside by 2024 with sector market of $100-200bn+ ; likely to start negatively impacting bank valuations within 5 years as investors start to extrapolate P2Ps growth trends.

    28

  • Reaching critical mass Structural advantage / sustainable model Endgame Investment opportunities Conclusions Appendix

    P2P Lending: Opportunity & how to invest

    29

  • Platform Characteristics

    P2P Lending: Opportunity & how to invest

    Summary main platforms

    m Total/Avg

    Inception Date 2006 2007 2010 2005 2010

    Location US US UK UK UK

    Loan Type Consumer Consumer SME Consumer Consumer

    Cumulative lending to 2013 508 2,068 200 442 151 3,369

    Gross Volume 2013 m 228 1330 130 189 96 1,973

    Dec 13 monthly volume 38 154 15 14 12 233

    YoY volume growth 2013 139% 191% 164% 109% 194% 175%

    Loan term 3yr or 5 yr 3yr or 5yr 6m, 1-5yr 2,3,4, or 5yr 6mths - 5 yrs

    Loan amortising? Yes Yes Yes Yes Yes

    Avg gross yield 2H09-2H12 19.8% 13.2% 8.9% 7.4% 7.3% 13.0%

    Avg annual default 2H09-12 9.5% 5.50% 2.4% 1.0% 1.8% 5.2%

    Fee to borrower upfront 2 5% 1.1-5% 2-5% NA N.A

    Fee charged to lender 1% per annum 1% of borrower payments 1% per annum 1% per annum 10% of Interest 1.0% per annum

    Avg net yield 2H09-2H12 9.3% 6.9% 5.7% 5.4% 6.6% 7.3%1

    Lending Model Description Fixed rate auction Fixed rate auction Floored auction Fixed rate Fixed rate

    Source: Liberum

    30

  • 0.0%

    5.0%

    10.0%

    15.0%

    20.0%

    25.0%

    30.0%

    2010 2011 2012

    Gross Yield Charge Off Net Yield

    0.0%

    0.5%

    1.0%

    1.5%

    2.0%

    2.5%

    3.0%

    3.5%

    4.0%

    4.5%

    Springleaf AAA SoFi Springleaf BBB

    P2P Lending: Opportunity & how to invest

    Securitization / P2P backed debt market is being developed

    Institution Size Leverage Yield Oct-13 Eaglewood $53m 03:01 Private Dec-13 Sofi $152m 09:01 3.78%

    Source: Liberum

    Securitization Deals to date

    Source: Springleaf, Sofi

    The Sofi transaction closed in December marked the first time a P2P lender has completed a public securitization.

    $152m of Senior Notes backed by post graduate student loans.

    Rated Single A by DBRS. Sold to top tier institutional

    investors.

    Sofi transaction followed smaller private deals by Eaglewood and Insikt.

    Springleaf originate and service personal loans (secured and unsecured) in the US useful comparator for P2P assets.

    Their consumer business segment is considered to be non-prime or sub-prime.

    As illustrated: the charge off has been trending down over recent years.

    Springleaf vs. Sofi Yields Springleaf yields for Consumer Segment

    Source: Springleaf

    31

  • P2P Lending: Opportunity & how to invest

    P2P levered portfolio: 35% RoE; @ 50%+ discount to equivalent bank businesses

    RoTCE of Barclaycard vs. P2P portfolio levered (9.3x)

    Source: Liberum

    P2P is more profitable than Barclaycard:

    an active unlevered P2P portfolio would have an RoTCE of 7.3% vs. 5.2% for Barclaycard unlevered.

    At the same 9.3x leverage ratio a P2P portfolio would have an RoE of 34.5% vs. 31.8% for Barclaycard

    P2P loan portfolios are 50-67% cheaper than equivalent bank companies

    Capital One trades on 1.5x tangible book; Barclaycard standalone would likely trade on 3.0x tangible book.

    Investors can buy P2P portfolios at 1.0x book value.

    Source: Barclays, Liberum

    RoTCE of Barclaycard vs. P2P portfolio unlevered

    0.0%2.0%4.0%6.0%8.0%

    10.0%12.0%14.0%16.0%18.0%20.0%

    Barclaycard Unlevered P2P Portfolio Unlevered

    15.0%17.0%19.0%21.0%23.0%25.0%27.0%29.0%31.0%33.0%35.0%

    Barclaycard Levered P2P Portfolio Levered

    32

  • P2P Lending: Opportunity & how to invest

    Key risks for P2P equity investors

    Litigation / Investor redress risk Prosper Marketplace Inc and a number of executive officers were the subject of a class action lawsuit, brought by those who purchased loan notes on Prosper platform during the period January 1 2006 to October 14 2008 (Hellum V Prosper Marketplace, Inc). The lawsuit claimed that the Prosper platform offered and sold unqualified and unregistered securities.

    Reputation / Fraud/ risk from the failure or fraud of one significant platforms could reduce lender inflows.

    Credit Cycle deterioration China P2P lending market $940m in 2012. Of the 1000 platforms operating in China 58 went bankrupt in Q4 2013- symptomatic of China macro problems rather than P2P model issues.

    Competition (Google, Amazon, Facebook) Facebook launched an app, a form of peer to peer lending between friends. The Agree It app which is freely downloadable, will earn revenues through advertising rather than charging users a fee. More broadly Google own a 8% stake in Lending Club and are widely anticipated to get more involved in P2P (similarly for Amazon and EBAY etc).

    33

  • P2P Lending: Opportunity & how to invest

    Liberum in numbers

    Liberum is 100% staff owned with 155 employees, with offices in London and New York

    Liberums Research team core 18 sectors 80% of the FTSE 100

    Liberum Currently have 71 corporate clients with an average market cap of over 233m

    11bn raised by Liberum and syndicates over the past 6 years

    34

  • Disclaimer

    P2P Lending: Opportunity & how to invest

    This material is the commercial property of Liberum and may not be disclosed or distributed to any third party without the express permission of Liberum. You shall not remove or modify any disclaimer or copyright or trademark notice contained in any Material. If you have received this material in error, please immediately notify the sender and destroy the material. This Material is for information only and it should not be regarded as an offer to sell or a solicitation of an offer to buy. It is based on current public information and/or from sources which Liberum believes to be reliable, but the accuracy, completeness, timeliness or correct sequencing of the information included herein cannot be guaranteed. Neither Liberum nor any source will be liable for the accuracy of, or availability of, such information or will have any duty to verify, correct, complete or update any material. Neither Liberum nor any source will be liable for any loss, cost, claim or damage (including direct, indirect or consequential damages or lost profits) arising out of or otherwise relating to any material or the use or access to or unavailability of any material. Any information or opinions contained herein are subject to change without notice. Unless stated otherwise, this material is not investment research or a research recommendation for the purposes of FCA rules or a research report under U.S. securities laws. It is provided on the understanding that Liberum is not acting in a fiduciary capacity and it is not a personal recommendation to you. The securities referred to may not be suitable for you and this material should not be relied upon in substitution for the exercise of independent judgement. Liberum and/or its officers, directors and employees may have or take positions in securities of companies mentioned in this communication (or in any related investment) and may from time to time dispose of any such positions. Liberum may act as a market maker in the securities of companies discussed in this communication (or in any related investments), may sell them or buy them from customers on a principal basis, and may also provide corporate finance or underwriting services for or relating to those companies, for which it is remunerated. United Kingdom and the rest of Europe: This material has been prepared and issued by Liberum. Liberum is a trading name of Liberum Capital Limited, who are authorised and regulated by the Financial Conduct Authority (FCA) and a member of the London Stock Exchange. Ropemaker Place, Level 12, 25 Ropemaker Street, London EC2Y 9LY.Tel +44 (0)20 3100 2000 Fax +44 (0)20 3100 2299 United States: This communication is distributed to US institutional investors by Liberum Inc, which is a member of FINRA & SIPC. 441 Lexington Avenue (15th Floor), New York, NY 10017, Tel +1 212 596 4800 Fax +1 212 596 4898.

    35

    P2P Lending: Opportunity & how to investReaching critical massStructural advantage / sustainable model EndgameInvestment opportunitiesConclusionsAppendix5bn of volume on top 5 platforms in 2014; P2P volumes have grown at 136% CAGR since 2009 P2P lending is a global phenomenon: largest markets US, China and UK P2P awareness rising everywhere; up by 70% since start of 2012Reaching critical massStructural advantage / sustainable model EndgameInvestment opportunitiesConclusionsAppendixNo efficiency gains in banking since 1900Productivity gains in Wholesale & Retail trade but not Finance; inefficient banks cost UK est. 30bn annuallyP2P is the Walmart / Ryanair of financial intermediation; with costs 60% lower than banks. Basic recap: revenue fee structure for P2P Platforms P2P just as competitive in high or low interest rate environment ; 50%+ lower fee structure remainsCurrent P2P rates are meaningfully better for savers & borrowersCredit risk is manageable, driving relatively stable returns despite some margin erosionPost financial crisis credit card delinquencies declining Regulation still embryonic and uneven by geography P2P sceptics highlight some valid issues... but even banks starting to invest in P2P sectorUK P2P lending will accelerate sharply once ISA-able and SIPP-ableReaching critical massStructural advantage / sustainable model End gameInvestment opportunitiesConclusionsAppendixP2P end game by 2024: 25-50% share of consumer finance and SMEOther financial disintermediation besides P2PP2P clearly negative for overall bank sector: weve seen this movie before!Reaching critical massStructural advantage / sustainable model EndgameInvestment opportunitiesConclusionsAppendixFor institutional and High Net Worth investors: P2P loans offer attractive returns / useful diversificationDCF analysis suggests equity of P2P platforms is still significantly undervalued Liberum active in raising P2P equity and lending capitalReaching critical massStructural advantage / sustainable model EndgameInvestment opportunitiesConclusionsAppendix3 key conclusionsReaching critical massStructural advantage / sustainable model EndgameInvestment opportunitiesConclusionsAppendixSummary main platformsSecuritization / P2P backed debt market is being developedP2P levered portfolio: 35% RoE; @ 50%+ discount to equivalent bank businesses Key risks for P2P equity investors Liberum in numbersDisclaimer

Recommended