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This document discusses peer-to-peer (P2P) lending and opportunities for investing in the sector. It notes that P2P lending volumes have grown 136% annually since 2009 and reached £5 billion across the top 5 platforms in 2014. P2P lending offers borrowers lower rates and investors higher returns compared to traditional banks due to much lower operating costs for platforms. While regulation of P2P is still developing, the sector is seen as having significant long-term potential for disrupting traditional banking through greater efficiency. The document examines performance data from several P2P platforms and notes some risks and criticisms of the industry but overall presents an optimistic view of investment opportunities.

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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 cormac.leech@liberum.com Karen Lucey Research +44 (0) 20 3100 2183 karen.lucey@liberum.com Minh Tran Research +44 (0) 20 3100 2184 minh.tran@liberum.com
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
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 2014 0 100 2012 2013 2014 0 100 2012 2013 2014 0 100 2012 2013 2014 0 100 2012 2013 2014 0 100 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
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 19 20 28 29 135 270 0 100 200 300 400 500 600 700 Branch FDIC CS/Collection Billing/Fraud Origination G&A Other IT Marketing TotalOPEX OPEX/TotalBalanceOutstanding(bps) Peer 2 Peer Government endorsed Attractive Rates Convenient & flexible 425bps Lower Operating 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 P2P’s 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 10 170 100 30 30 35 100 695 0 100 200 300 400 500 600 700 Branch FDIC CS/Collection… Origination G&A Other IT Marketing TotalOPEX OPEX/TotalBalanceOutstanding(bps) Banks Cost inefficiencies High margins Restrictive lending 0 100 200 300 400 500 600 700 800 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) BorrowerLender Platforms Principal + Interest Principal + Interest Annual Fee of 1% At Start of Loan Lender Borrower Platforms PrincipalPrincipal 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 Platfoms Total 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 Platfoms Total 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&P Corporate Bond BBB 5 yr Prosper Lending Club 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 Lending Club Peoples United Bank National Bank Arizona BM Harris Bank Citizens Bank Avant Credit Corp • 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 2013 0.00 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 2013 0.00 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 CEO’s 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 Africa’s 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 Australia’s 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 Loans Outstanding P2P Loans10% of Market 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 2024e Base 2024e Bull 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 download the Square app and sign up for an account. Customers simply pay by swiping their credit card on the Square reader, as they would any other credit card reader. No signup is required for them. The Square reader takes the credit card information, and the merchant’s smart phone 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% 0 10 20 30 40 50 60 70 80 90 100 Avg Bank FX cost TransferWise 90% 21
P2P Lending: Opportunity & how to invest P2P clearly negative for overall bank sector: we’ve 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 2005 PercentofU.S.Households ELECTRICITY 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 Club’s 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: BloombergSource: L Sun Time Share Price $ (Newspapers) Source: Bloomberg 0 5 10 15 20 25 30 35 40 1995 1998 2001 2004 2007 2010 0 5 10 15 20 25 1994 1997 2000 2003 2006 2009 0 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 Real Estate* Equities Levered Active P2P Portfolio 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 P2P’s 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 YieldsSpringleaf 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 • Liberum’s 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

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P2p liberum alt f

  • 1.
    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 cormac.leech@liberum.com Karen Lucey Research +44 (0) 20 3100 2183 karen.lucey@liberum.com Minh Tran Research +44 (0) 20 3100 2184 minh.tran@liberum.com
  • 2.
    Reaching critical mass Structuraladvantage / sustainable model Endgame Investment opportunities Conclusions Appendix P2P Lending: Opportunity & how to invest 2
  • 3.
    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
  • 4.
    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
  • 5.
    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 2014 0 100 2012 2013 2014 0 100 2012 2013 2014 0 100 2012 2013 2014 0 100 2012 2013 2014 0 100 Jan-12 Jan-13 Jan-14 5
  • 6.
    Reaching critical mass Structuraladvantage / sustainable model Endgame Investment opportunities Conclusions Appendix P2P Lending: Opportunity & how to invest 6
  • 7.
    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
  • 8.
    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
  • 9.
    39 19 20 28 29 135 270 0 100 200 300 400 500 600 700 Branch FDIC CS/Collection Billing/Fraud Origination G&A Other IT Marketing TotalOPEX OPEX/TotalBalanceOutstanding(bps) Peer2 Peer Government endorsed Attractive Rates Convenient & flexible 425bps Lower Operating 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 P2P’s 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 10 170 100 30 30 35 100 695 0 100 200 300 400 500 600 700 Branch FDIC CS/Collection… Origination G&A Other IT Marketing TotalOPEX OPEX/TotalBalanceOutstanding(bps) Banks Cost inefficiencies High margins Restrictive lending 0 100 200 300 400 500 600 700 800 Bank avg P2P ex prosper 9
  • 10.
    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) BorrowerLender Platforms Principal + Interest Principal + Interest Annual Fee of 1% At Start of Loan Lender Borrower Platforms PrincipalPrincipal Upfront fee 2-5% 10
  • 11.
    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 Platfoms Total 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 Platfoms Total 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
  • 12.
    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&P Corporate Bond BBB 5 yr Prosper Lending Club 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 Lending Club Peoples United Bank National Bank Arizona BM Harris Bank Citizens Bank Avant Credit Corp • 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
  • 13.
    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
  • 14.
    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 2013 0.00 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 2013 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 2007 2009 2011 2013 14
  • 15.
    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
  • 16.
    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 CEO’s 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
  • 17.
    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 Africa’s 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 Australia’s 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
  • 18.
    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 Loans Outstanding P2P Loans10% of Market Stock Cash 4737% 0 10 20 30 40 50 P2P Loans Outstanding P2P Loans10% of Market 4737% 18
  • 19.
    Reaching critical mass Structuraladvantage / sustainable model End game Investment opportunities Conclusions Appendix P2P Lending: Opportunity & how to invest 19
  • 20.
    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 2024e Base 2024e Bull Bank P2P Total 99% 75%1% 25% 50% 50%Implied CAGR 48% Implied CAGR 59% 20
  • 21.
    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 download the Square app and sign up for an account. Customers simply pay by swiping their credit card on the Square reader, as they would any other credit card reader. No signup is required for them. The Square reader takes the credit card information, and the merchant’s smart phone 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% 0 10 20 30 40 50 60 70 80 90 100 Avg Bank FX cost TransferWise 90% 21
  • 22.
    P2P Lending: Opportunity& how to invest P2P clearly negative for overall bank sector: we’ve 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 2005 PercentofU.S.Households ELECTRICITY 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 Club’s 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: BloombergSource: L Sun Time Share Price $ (Newspapers) Source: Bloomberg 0 5 10 15 20 25 30 35 40 1995 1998 2001 2004 2007 2010 0 5 10 15 20 25 1994 1997 2000 2003 2006 2009 0 50 100 150 200 250 300 2002 2005 2008 2011 22
  • 23.
    Reaching critical mass Structuraladvantage / sustainable model Endgame Investment opportunities Conclusions Appendix P2P Lending: Opportunity & how to invest 23
  • 24.
    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 Real Estate* Equities Levered Active P2P Portfolio 24
  • 25.
    -0.1 0.0 0.1 0.2 0.3 0.4 2011 2012 20132014 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
  • 26.
    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
  • 27.
    Reaching critical mass Structuraladvantage / sustainable model Endgame Investment opportunities Conclusions Appendix P2P Lending: Opportunity & how to invest 27
  • 28.
    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 P2P’s growth trends. 28
  • 29.
    Reaching critical mass Structuraladvantage / sustainable model Endgame Investment opportunities Conclusions Appendix P2P Lending: Opportunity & how to invest 29
  • 30.
    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
  • 31.
    0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 2010 2011 2012 GrossYield 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 YieldsSpringleaf yields for Consumer Segment Source: Springleaf 31
  • 32.
    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
  • 33.
    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
  • 34.
    P2P Lending: Opportunity& how to invest Liberum in numbers • Liberum is 100% staff owned with 155 employees, with offices in London and New York • Liberum’s 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
  • 35.
    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