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P2P Lending: Prosper

Given recent peer-to-peer lending IPOs, what is the proper valuation of Prosper Marketplace, Inc.?

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P2P Lending: Prosper

  1. 1. Prosper Marketplace, Inc. Valuation March, 2015 Alex Davidov, Allen Miller, Michael Mongiardini, Patrick Montague, Connor Wilson
  2. 2. 2 Prosper Marketplace, Inc.  Investment Thesis – We are valuing Prosper at $1.507 billion for its current funding round. – The peer-to-peer lending market is growing rapidly, likely to reach $300bn+ by 2025 in loan originations. – However, Prosper possesses few competitive advantages, which are eroding over time. – In addition, more and more competitors, especially those with a vertical focus, are entering the market, slowing growth and driving down margins. – As a result, we would only recommend buying Prosper at or below the $1.51bn current value.
  3. 3.  Prosper Marketplace – Peer-to-peer lending marketplace to originate and service borrower loans and notes in the United States. The open and low cost nature of its platform allows both lenders and borrowers to realize competitive rates/returns. – A la retail, online P2P lending marketplaces utilize technology to vastly lower costs of financial intermediation: – As a result, Prosper can offer both higher yields to lenders and lower rates to borrowers, agnostic of interest rate environment.  Growth – Industry analysts* predict CAGR 48-59% in annual loan volume (originations)  Revenue From Borrowers: Origination Fees (typically, 2-5% of principal) From Lenders: Annual Servicing Fees and/or Refi Fees (typically, annual fees = 1% of loan balance) 3 Service Description
  4. 4. U.S. Peer-to-Peer Lending Market Analysis U.S. P2P Market Analysis $3.2 trillion Total Consumer Credit Outstanding     $880 billion Revolving Consumer Credit Outstanding     65.60% % of eligible U.S. population (FICO > 650)     $577 billion Total Addressable Market       $7 billion Current Market Size       1.2% of total addressable market   ~ $306 billion 2025 Market Size Headwinds to Growth: - 77% of Loans used for Refinancing Debt - Dodd-Frank and risk-retention concerns - Lending Clubs' slowing growth - Historical default risk is misleading 4
  5. 5. 5 Competitive Landscape Lending Marketplaces – Generalist P2P Lending Platforms (Lending Club, Prosper) – Vertically focused lending marketplaces (SoFi/Commonbond in Edu; OnDeck in SMB Credit) Traditional Lenders (banks, etc.) - Still control 99% of consumer lending Source: Foundation Capital Marketplace Lending Whitepaper, 2014
  6. 6. Low to Moderate competitive advantages but future unclear Government Regulation Scale Customer Captivity Cost SEC Filing Fixed Costs Network Effects Switching Cost Search Costs Proprietary Technology Special Resources Early On (2006 – 2010) High Low Mid High High Mid Low Low Low Mid Low Low Low Low Present (2010 ->) Mid Low Mid Mid Mid Mid Low Mid Low Mid Mid Mid Low Low • While Prosper has distanced itself from most other P2P lending marketplaces, it lags Lending Club in terms strength of network effects and customer captivity. • Emerging vertical-focused P2P lending marketplaces (e.g. Sofi in student lending and OnDeck in SMB lending) threaten to weaken Prosper’s network effects and customer captivity. 6
  7. 7. 7 Valuation