Direct Lending: Finding value/ minimising risk Ropemaker Place, 25 Ropemaker Street, London EC2Y 9LY / T: +44 (0)20 3100 2000 Liberum Capital

Direct Lending: Finding value/ minimising risk

Ropemaker Place, 25 Ropemaker Street,London EC2Y 9LY / T: +44 (0)20 3100 2000www.liberum.com

Liberum Capital Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 5912554

20 October 2015

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

Marin Cauvas Investment Banking+44 (0) 20 3100 [email protected]


Big picture trends: size; growth; risk/ rewardAccessing Interest incomeEquity investment perspectiveSector issues / opportunity

2


$23bn of volume via 8 of the leading US & UK Online Direct Lending (ODL) platforms in 2015e*

• P2P volumes have grown at 151% CAGR since 2010

2010 2011 2012 2013 2014 2015e

0

5,000

10,000

15,000

20,000

25,000

Lending Club SOFI Prosper Avant Ondeck Zopa Funding Circle RateSetter

*Where data publicly availableSource: AltFi Data, Company websites

CAGR:151%

3

$m


4

Source: www.WDZJ.com, AltFi Data, Company websites

ODL is a global phenomenon- largest markets: China, US, and UK

$ = 2015e annual gross volume

$22.7bn

$4.4bn$1.5bn

$157.0bn

http://www.wdzj.com/

https://www.rainfin.com/

http://www.pretp2p.com/index







http://english.creditease.cn/index.html











http://www.i-lend.in/

























































5

2013 2014 2015e

020406080

100120140160180200

China US UK EU ex UK2013 2014 2015e

020406080

100120140160180200

China US UK EU ex UK


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

11.5%

2.2% 1.7%

0.1%

Regional volumes: Europe ex UK Direct Lending market penetration still c15x behind US&UK and 100x behind China• China dominates globally: 85% of

2015e annual ODL volumes

• Chinese loans shorter maturity - Based on loans outstanding China’s is less pronounced at 68% of total

• Continental Europe way behind: Relative to addressable opportunity, P2P in continental Europe is c 15x less developed than US & UK and 100x behind China• Most likely due to relatively tight

regulation for now

Source: Liberum, WDZJ, AltFi Data, company data, Bank of England, FDIC, Federal Reserve, ECB, OECD

Source: Liberum, WDZJ, AltFi Data, company data, Bloomberg

Global outstanding balances Online Direct Lending $bn

Source: Liberum, WDZJ, AltFi Data, company data

Global volumes Online Direct Lending $bn

Source: Liberum, WDZJ, AltFi Data, company data

CAGR:207%

CAGR:286%

Online direct lending annual volumes as % addressable market (2015 addressable market green box $trillion)

Online direct lending volumes as % GDP

$1.4tn $1.1tn $0.2tn $1.3tn


0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6% 1.50%

0.13% 0.14%0.01%

6

2011 2012 2013 2014 2015e

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Smava Auxmoney* Pret D'Union Bondora ZencapGeldvoorelkaar*

2011 2012 2013 2014 2015e

0

1

2

3

4

5

Zopa Funding Circle RateSetter LendInvestMarket Invoice Wellesley & Co. Other

2011 2012 2013 2014 2015e

0

5

10

15

20

25

Lending Club Prosper SOFI Ondeck Avant Other SME ODL2013 2014 2015e

020406080

100120140160180200

Hongling LuFax PPMoney Weidai Wzdai Other

US Online Direct Lending $bn

Regional growth rates: Continental Europe now growing c 2x as fast as UK and US, … from a much lower base


• Chinese market highly fragmented: top5 platforms only 20% of volumes (vs. c80% in UK).

• Regionally China growing fastest – but set to slow given already high market penetration.

• US & UK volume growth has slowed from c190% YoY in 2013 to c 100% YoY in 2015e

• Europe ex UK accelerating: 200% in 2015e vs. 140% in 2014e off a low base

Source: Company data

UK Online Direct Lending $bn

Source: Altfi data, Liberum

EU ex UK Online Direct Lending $bn

Source: Altfi data, Liberum

2015e CAGR

115%

206%83%

296%

China Online Direct Lending $bn

2013: only total market data available Source: WDZJ


7

SME Consumer Invoice Factoring BuyToLet

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%50.0%

2015e 2025e

Invoice Factor-ing

SME Consumer BuyToLet

0

20

40

60

80

100

120

140

2015e 2025e

UK: Online Direct Lending could account for 15-40% of annual lending by 2025 depending on segment

• UK 2015e volumes: est. $4.4bn

• UK concentrated market: Top 6 UK platforms account for 88% of the volume

• Rapid growth: Already seen 13x increase in volumes from 2012-15e

• Zopa reacceleration: volumes in 2015e: 120% YoY growth (vs 45% in 2014)

• By 2025, UK direct lending could reach $100bn excluding invoice factoring- for comparability

UK Online Direct Lending annual volume by segment$bn

Source: ABFA Association; Bank of England; Liberum forecasts

UK Online Direct Lending Annual volumes$bn 2011-2025e

Source: Liberum forecasts

UK Online Direct Lending Annual volumes$bn 2011-2015e

Source: AltFi Data, Liberum forecasts

$91bn

UK direct lending share of addressable market % (2015 addressable total annual lending green box $billion)

Source: ABFA Association; Bank of England; Liberum forecasts

$104bn

$475bn

$48bn

2011 2012 2013 2014 2015e

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Market Invoice Funding Circle Zopa RateSetter LendInvestWellesley & Co. Other

0

50

100

150

200

250

Market Invoice Funding Circle Zopa RateSetter LendInvestWellesley & Co. Other


8

4Q14 1Q15 2Q15 3Q15

30%

35%

40%

45%

50%

55%

60%

Believe P2P more risky than equities4Q14 1Q15 2Q15 3Q15

0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%1.8%2.0%

% of non pension capital invested in P2P

4Q14 1Q15 2Q15 3Q15

0%

2%

4%

6%

8%

10%

12%

Have already loaned Lend when ISA-able

4Q14 1Q15 2Q15 3Q15

0%

10%

20%

30%

40%

50%

60%

Would consider lending via P2P Know what P2P is

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15

0

20

40

60

80

100

120

140

0

2

4

6

8

10

12

14

16

Lender accounts ('000s) lhs

Amount per account(£'000s) rhs

UK Consumer survey: awareness of P2P surprisingly static; ISA-ability to drive c50% increase in number of investors • P2P awareness is static at best over last

12months – more marketing/ new aggregator products required…

• Short term c50% boost in active investors once becomes ISA-able

• Over 50% of population think P2P riskier than equities!

• P2PFA data shows 87% CAGR in amount per lender account but only 22% CAGR in number of lender accounts

UK consumer survey: % of survey population aware of P2P and % who would consider investing in P2P

Source: ResearchNow, Liberum estimates

UK consumer survey: % survey population who are already lending and % who will lend once ISA-able

Source: ResearchNow, Liberum analysis

UK consumer survey: Estimated capital invested in P2P (non pension assets)

Source: ResearchNow, Liberum estimates

UK consumer survey: % of UK population who think P2P lending riskier than equities

Source: ResearchNow, Liberum analysis

UK P2PFA* number of lender accounts; £ amount per lender account

Source: UK P2P Finance Association; Liberum analysis

Amount per lender A/CCAGR 87%

Number lender A/CsCAGR 22%


9

0

50

100

150

200

250

300

Smava Auxmoney*Pret D'Union BondoraZencap ComunitaeGeldvoorelkaar* OtherTotal UK ex market invoice

Consumer SME

0%

5%

10%

15%

20%

25%

30%

2015e 2025e

EU ex UK direct lending share of addressable market % (2015 addressable annual lending total green box $billion)

Consumer SME

0

20

40

60

80

100

120

140

160

2015e 2025e

Larger addressable market in Continental Europe – volumes set to overtake UK by 2020

• EU ex UK 2015e volumes: est. $1.5bn

• Smava (45% of total) on track to originate c $650m in 2015e, sourcing liquidity from banks

• Accelerating growth: Faster 2015e volume growth in 2015e for both Auxmoney (c 500%) and Pret D’Union (c 160%)

• Regionally EU ex UK has largest growth potential: 5.2x bigger addressable market than UK but UK 2015e ODL volumes are c2.7x larger*

(*ex UK invoice factoring for comparability)

EU ex UK Online Direct Lending Annual volumes 2011-2015e $bn

Source: AltFi Data, Liberum forecasts

EU ex UK Online Direct Lending Annual volumes 2011-2025e $bn vs. UK total ex market invoice

Source: Liberum forecasts

Forecasted EU ex UK direct lending annual volume by segment$bn

Source: AltFi data, Liberum forecasts

$600bn

$672bn

Source: ECB, OECD, Liberum forecasts

2011 2012 2013 2014 2015e

0.00.20.40.60.81.01.21.41.6

Smava Auxmoney* Pret D'Union Bondora Zencap

Comunitae Geldvoorelkaar* Other


Bo

ndora

Weid

ai

Wzd

ai

Hong

ling

Ma

rket In

voice

Onde

ck

Av

ant

Com

unita

e

Ze

nca

p

PP

Mone

y

Geld

voore

lkaa

r*

LendIn

ve

st

Lendin

g C

lub

Fu

ndin

g C

ircle

Pre

t D'U

nio

n

Pro

sper

Au

xm

oney*

LuFax

Rate

Sette

r

Welle

sley &

Co.

Zo

pa

Sm

ava

SO

FI

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%16.0%18.0%

Yields: Regional avg in relatively tight range of 5-5-6.7%swapped into USD (China an outlier for now)

• In local currency regional averages vary from 4.6-10.8% (dotted bars)

• Converted to USD, ranger is tighter: 5.5-8.8% (solid bars)

• Available net yields of largest platforms widely intermingled by region

Platform net yields swapped into USD (expected seasoned returns)

Source: Company data, Liberum estimates

China

US

UK

EU ex UK

Average expected net yield (seasoned) of largest 5-y platforms in each region: local currency (dotted) and swapped into USD (solid)

Source: Company data, Liberum estimates

UK: Liberum AltFi Returns Index

Source: AltFi Data

10


0%

2%

4%

6%

8%

10%

12%

4.0

4.5

5.0

5.5

6.0

6.5


How risky is consumer debt? Credit cards receivables: positive net returns for last 20+ years

• Solid returns: Avg net yield achieved on US credit cards net loan losses: 8.2%

• Stable losses: Peak losses 1.9x the average losses

• Consistently positive returns: No year with negative returns in 20 years (max available data)

Similarly for UK:

• Avg net yield achieved on UK credit cards net loan losses: 6.4%

• Peak losses 1.6x average

• No year with negative returns in 16 years (max available data)

US Credit card effective yields net of loan losses

Source: Federal reserve data, Liberum seasoning adjustments

UK Credit card effective yields net of loan losses

Source: Bank of England data, Liberum seasoning adjustments

11

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

0%2%4%6%8%

10%12%14%16%18%20%

Net yield Loan lossesAvg net yield

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

0%2%4%6%8%

10%12%14%16%18%20%

Net yield Loan lossesAvg net yield


12

2008 2009 2010 2011 2012 2013 2014 2015

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

US UK

2009 2010 2011 2012 2013 2014 2015

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

US High Yield EU High yieldEU Avg US Avg

2008 2009 2010 2011 2012 2013 2014 2015

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

US UK

2008 2009 2010 2011 2012 2013 2014 2015

0.0

2.0

4.0

6.0

8.0

10.0

12.0

US UK

Macro environment currently unusually benign for Direct Lending…

• Unemployment at 7 year lows in US & UK

• Real interest rates are expected to close to zero / negative for next 5 years

• UK credit card delinquencies down c83% from 2009 peak

• High yield credit spreads down 66% from 2009 peak – although relatively sharp jump in spreads recently…

US & Europe High Yield Credit Spreads (bps)

Source: Liberum

US & UK Unemployment rate (%) trending lower

Source: Liberum

-66%

US & UK 5y real govt. yields

Source: Liberum

US & UK 30day card delinquencies

Source: Liberum

-83%


13

Current TTC Stress

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Net yield Loan lossesCurrent TTC Stress

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Net yield Loan losses

Current TTC Stress

-2.0%0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%

Net yieldLoan losses

Lending Club Funding Circle Zopa

-1.0%

1.0%3.0%

5.0%7.0%

9.0%11.0%

13.0%

Current Stress scenario

Platform annual returns unlikely to go significantly negative in stressed conditions

• Normalising loan losses to TTC levels suggests yields would decline c1%

• Even under fairly aggressive stress case assumptions UK consumer and SME net yields stay above zero

US credit card return scenarios

Source: Liberum

UK personal loan return scenarios

Source: Liberum

UK SME loan return scenarios

Source: Liberum

Estimated current and stress annual returns for selected platforms

Source: Liberum estimates


14

2005 2006 2007 2008 2009 2010 2011 2012

0.0%

5.0%

10.0%

15.0%

Net yield

Servicing cost

Loan losses

Average net yield

2006 2007 2008 2009 2010 2011 2012

0.0%

5.0%

10.0%

15.0%

Net yield

Servicing cost

Loan losses

Average net yield

2005 2006 2007 2008 2009 2010 2011 2012

0.0%

5.0%

10.0%

15.0%

Net yield

Servicing cost

Loan losses

Average net yield

ZOPA returns: surprisingly resilient through global financial crisis

• ZOPA one of the few Online Direct Lenders to have operated through the financial crisis

• The worst annual cohort, 2008, had annualised loan losses of 2.26% and an average net yield of 5.9; the worst credit grade (C1) had loan losses of 4.3% and a net yield of 5.6%

Zopa annual returns by cohort % all credit grades

Source: ZOPA data

Zopa annual returns by cohort % A* credit grade

Source: ZOPA data

Zopa annual returns by cohort % B credit grade

Source: ZOPA data

Zopa annual returns by cohort % C1 credit grade

Source: ZOPA data

2005 2006 2007 2008 2009 2010 2011 2012

0.0%

5.0%

10.0%

15.0%

Net yield

Servicing cost

Loan losses

Average net yield


15

UK vs. US: equalizing gross yields, UK consumer platforms appear to generate better returns

• Anecdotally, UK offers better risk reward than US: Comparing Zopa loans of equal gross yield (USD swapped) to Lending Club ‘A grade’ and ‘B grade’ loans shows that equivalent Zopa loans yields an extra 0.4-1.2% of net yield vs. Lending Club

• Extra 1/5th net return at prime end: The difference is most pronounced for the Lending Club ‘A grade’ category with Zopa offering proportionately 1/5th more yield

• 2009-2012 cohorts used (as fully matured)

Lending Club avg A-grade net yield (2009-12) vs. equivalent gross yield Zopa loans

Source: Liberum; AltFi data

Lending Club avg B-grade Net Yield (2009-12) vs. equivalent gross yield zopa loans

Source: Liberum ; AltFi data

Gross yield Net yield Loan loss2009Lending Club 8.8% 6.2% 2.5%Zopa 8.8% 7.3% 1.5%2010Lending Club 7.2% 6.0% 1.20%Zopa 7.2% 6.9% 0.28%2011Lending Club 7.2% 5.3% 2.0%Zopa 7.2% 6.6% 0.6%2012Lending Club 7.7% 5.3% 2.4%Zopa 7.7% 7.0% 0.7%Avg 2009-12 cohortsLending Club 7.7% 5.7% 2.0%Zopa 7.7% 6.9% 0.8%

Source: Liberum analysis, Lending Club data, AltFi Data

Lending Club A grade loans: gross and net yields vs. equivalent gross yield Zopa loans for 2009-2012 cohorts

Gross yield Net yield Loan loss2009Lending Club 10.8% 7.1% 3.7%Zopa 10.8% 7.2% 3.5%2010Lending Club 10.8% 7.1% 3.72%Zopa 10.8% 7.1% 3.67%2011Lending Club 11.2% 7.5% 3.7%Zopa 11.2% 8.4% 2.7%2012Lending Club 12.2% 7.7% 4.5%Zopa 12.2% 8.1% 4.1%Avg 2009-12 cohortsLending Club 11.2% 7.3% 3.9%Zopa 11.2% 7.7% 3.5%

Source: Liberum analysis, Lending Club data, AltFi Data

Lending Club B grade loans: gross and net yields vs. equivalent gross yield Zopa loans for 2009-2012 cohorts

Lending Club Zopa

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Net yield Loan loss

Lending Club Zopa

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Net yield Loan loss


16

ZOPA (equivalent LC A-grade)

Lending Club A grade US Credit cards UK Credit cards UK Personal loans

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%


US Credit cards ZOPA (equivalent LC A-grade)

UK Credit cards Lending Club A grade UK Personal loans

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%


P2P loans (Zopa & Lending Club) are performing 1%+ better than bank originated loans with equivalent gross yield• Bank originated credit assets look

attractive (e.g. US credit card net yields)

…But MPL loans perform better:

• After risk-normalising, P2P loans generate 1.6% more yield for loans with avg gross yield of 7.7%

• …Suggests we can conservatively backtest the performance of P2P based on historical bank loan performance data

1. Loan data average of 2012 and 20132.Lending Club and Zopa data are average of 2009-2012 cohorts.Source: Federal Reserve, Bank of England, Lending Club, Zopa, Liberum analysis

Source: Federal Reserve, Bank of England, Lending Club, Zopa, Liberum Analysis

Net yields and loans losses of bank originated loans1 vs. Lending Club Grade A loans2 and Zopa equivalents2 - all USD swapped

Net yields and loans losses after scaling to align gross yields, with losses correspondingly scaled


17

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Net yield Loan losses1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

1Q15

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Net Yield Charge off

Risk/Reward for Direct Lending Proxies are attractive vs. Equities & Property

• Better Sharpe ratio for US credit card assets and UK personal loans than for S&P

• S&P and commercial property had negative returns of -37% and -23% in 2008

• Direct lending no negative annual returns over last 20 years• 50% repaid after 18 months (for 3

year amortising loans)

S&P500 total annual returns %

Source: Bloomberg

UK commercial property total annual returns %

Source: IPD

0.4x

1.8x

Sharperatio*

0.5x

0.5x

US Credit card loan effective annual returns net of servicing fees %

Source: Liberum

UK personal loan effective annual returns net of servicing fees %

Source: Liberum

*Sharpe ratio= (annual net return less 3m Libor) / (standard deviation of annual returns)


18

Back-testing: levered Direct Lending returns equal / exceed S&P returns with much lower volatility

• For return vs. volatility ratios use 2 year time periods to make ‘apples to apples’ comparison

• Unlevered, Direct Lending proxy underperforms S&P500 over last 20 years but has no negative years and much lower volatility

• A 200% Levered Direct Lending portfolio matches the S&P with no drawdowns and much lower volatility (net of mgmt and performance fees).

• 200% debt/ equity leverage modest by standards of securitisation market

• Banks index a notable laggard

• Sharpe ratio: avg excess annual return over avg 3m Libor as % of annual standard deviation

• Need to use 2 year time periods to measure standard deviation to make P2P comparable with Equities and Property. c 2/3rds repaid by month 24

• For unlevered returns we assume no management fees

• Levered fund: assume 0.7% mgmt & operating expense and 10% performance fee

Sharpe ratio and back testing approach

Source: Liberum

0% 5% 10% 15% 20% 25% 30%

0%

2%

4%

6%

8%

10%

12%

Property S&P 500 US Credit Card US Credit Card leveredStandard Deviation annualised

Annual re

tunrs

Direct Lending- proxy1 vs. S&P 500 total return index

Annual returns vs. standard deviation

1.Levered: 200% Debt/ Equity leverage ; Mgmt fee of 0.7% of assets; with and without 10% performance fee . Assumes debt financing at Libor+2.3% Source: Liberum; US KBW Banks index, Bloomberg, Federal Reserve

1. Uses Credit Card Data as proxy for Direct Lending; 1% servicing fee Source: Liberum, Federal Reserve, Bloomberg

1. Levered: 200% Debt/ Equity at Libor+2.3%; Mgmt fee of 0.7% assets; 10% perf fee. Source: Liberum, IPD, Federal Reserve, Bloomberg

Levered1 Direct Lending- proxy vs. S&P 500 total return index

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

0

100

200

300

400

500

600

700

P2P-proxy S&P500

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

0100200300400500600700800900

Levered P2P S&P500P2P ex perf fees Banks


19

Niche lending segments offer the best risk/ reward lending opportunities

Near prime Auto Financing

Using starter interrupt technology and GPS technology on car collateral to improve credit performance (e.g. Car Finance Company)

Insurance Premium Finance

Lending against insurance premiums with premium payment recoverable if loan repayments not made

Lending against life insurance for terminally ill

Improving quality of late-stage life

Property Bridge Financing

Providing timely secured financing to property entrepreneurs while they arrange longer term cheaper financing

• Niche platforms’ higher returns potentially make them M&A targets

Big picture trends: size; growth; risk/ reward Accessing Interest incomeEquity investment strategiesSector risks and opportunity


20


Both Ranger Direct Lending and P2PGI are listed vehicles focused on the Direct Lending Sector; modest leverage• P2PGI (ticker P2P) is a listed

fund focused on P2P platforms globally

• 61% of funds are invested in US (56% Consumer); 27% in Europe (16% Consumer)

• Ranger Direct Lending (ticker RDL) is a listed fund focused primarily on US secured Online Direct Lending platforms. 100% US asset mix; 84% secured

Gross yield net servic-

ing

Loan losses Net yield Leverage impact

Equity in-vestments

Mgmt & Operating

Fees

Perfor-mance Fee

Profit Dividend

0%2%4%6%8%

10%12%14%16%18%

14.9%

3.8%

11.6%2.7%

1.8%1.4%

12.3% 12.8%

Gross yield net servic-

ing

Loan losses Net yield Leverage impact

Equity in-vestments

Mgmt & Operating

Fees

Perfor-mance Fee

Profit Dividend

0%2%4%6%8%

10%12%14%16%18%

10.3%

4.2% 0.4%

2.1%

2.0%1.6%

8.2%9.3% 9.3%

Source: Bloomberg / analyst reports

P2PGI Total NAV Return Breakdown

Ranger (US SME) Total NAV Return Breakdown

‘For Illustrative purposes only’

‘For Illustrative purposes only’

21


Ranger Di-rect Lend-ing Fund

Real Estate Credit In-vestments

P2P GI Victory Park

GLI Finance SQN Asset Finance Income

UK Mort-gages Ltd

Starwood European

Real Estate Finance

Sequoia Economic Infrastruc-ture Fund

ICG Longbow

GCP In-frastruc-ture In-vest-ments

0%

2%

4%

6%

8%

10%

12%

Average target Return NAV - ODL Funds

Online Direct Lending Funds typically have targeted NAV returns 25% higher than other income funds

• ODL funds offering higher returns: Sample of 4 London listed Direct Lending funds offer an average total NAV return of 10.1% vs. 8.0% for other income funds

Source: Bloomberg/ Other

Target NAV Return ‘For Illustrative purposes only’

22


23

Retail capital channels into Direct Lending are evolving… Preliminary

2015e2014

Description

Example

Inception Date

Pros / cons for Platforms

Pros / cons for Investors

Classic P2PDiversified Closed-End

Investment TrustDedicated trusts for

larger platforms

1-stop-shop P2P portal/ Offering convenient structured products

Pros: Lost cost

Cons: Time intensive

2005

e.g. Zopae.g. P2PGI / Ranger

Direct Lending

P2P platform directly connecting with lenders

Listed Investment trust lending via multiple

platforms

e.g. LendInvest/ Funding Circle / Direct Money

Dedicated listed Investment trust lending passively via

one platform

Under development

Under development

Single account / product for retail investors

Pros: Relatively low churn of lending capital

Cons: Only likely to attract early adopters/ sophisticatedinvestors

Pros: Diversified access

Cons: Higher costs

Pros: Increased access to funding especially for

early stage platforms

Cons: Funding can be easily diverted to other platforms offering better

returns

Pros: Efficient access; accessible via brokerage account

Cons: Less diversification

Pros: Scalable permanentcapital

Cons: More difficult to attract capital

initially for less established platforms – due to relative illiquidity

Pros: Convenience; diversified low cost, structured solutions

Cons: Unavailablevia security broker

Pros: Access to broaderretail mass market;equity ownership ofportal

Cons: More fluid funding than dedicated trust–

contingent onperformance

Currently topical



24

25


At least 4 key drivers underpinning sector long term sustainability…

• Ongoing unbundling of credit info ecosystem

• Enhanced credit data via FinTech innovation

• Online Direct lenders (ODLs) are c60% more efficient

vs. traditional lenders

a. ODL reduces systemic risk since no single point of

failure

b. In addition, ODL enables government to channel

credit where it is most needed (e.g. SME – British

Business Bank, NTMA in Ireland)

• ODLs are using technology to drive convenience and

better user experience=> better Net Promoter

Scores

Online credit data as good/ better than bank

data

60% relative cost efficiency for smaller

loan amounts

Improved User Experience

Government support for ODL sector

1

2

3

4

78%64%

43%21% 9%

Average net promoter score (NPS) – 1Q2015

Systemic Risk Comparison: Traditional Banking vs. MPL

Government agencies already using MPL

Reserve Requirements

Branch Infrastructure

Customer Acquisition

Origination

Underwriting

Servicing

Customer AcquisitionUnderwritingOriginationServicing

Operating expense: ~2%

Technology and business model drive cost down

Traditional LenderOperating expense: 5-

7%

a

b


26

Over $220m of equity capital already raised in 2015 by UK platforms

• RateSetter estimated forward revenue multiple, a c20% discount to Lending Club valuation multiple (9.2x)

• Funding Circle valued at over $1bn on relatively high revenue multiple – due to US/ global opportunity

• Direct Lending now accessing equity capital from mainstream asset managers

*Estimated forward revenues over the next 12 months at time of transaction

Source: Company data / press reports; Liberum estimates

Investors Investors

InvestorsInvestors

Paul Forster

Date Apr 15

Amount raised $150m

Est. post money Val.

$1bn

Est. Price/Revenue*

23.3x

Date Mar 15

Amount raised $31m


$230m

Est. Price/Revenue*

7.7x

Date Aug 15

Amount raised $9m


N/A

Est. Price/Revenue N/A

Date Jun 15

Amount raised $34m


N/A

Est. Price/Revenue N/A


27

Significant equity value creation: Average IRR from Series A: 143% with valuation 0.8x run rate loan originations

A (Aug 07) B (Mar 09) C (Apr 10) D (Aug 11) E (Jun 12) F (Apr 14) IPO (Dec 14)

Curr. (Oct 15)

02468

101214161820

01,0002,0003,0004,0005,0006,0007,0008,0009,000

0.0 0.4 0.81.8

3.5

14.2 15.014.5

Share Price $ (LHS) Valuation m$ (RHS) Run rate loan origination m$ (RHS)

IRR: 74%IRR to IPO: 90%

A (Apr 11) B (Mar 12) C (Oct 13) D (Jul 14) E (Apr 15)

0100200300400500600700800900

1,000

0

200

400

600

800

1,000

1,200

14 50122

307

521


IRR: 147%

A (Jan 06) B (Jan 07) C (Aug 11) C 1 (May 13) D (Mar 14) E (Apr 14) IPO (Dec 14) Current (Oct 15)

0

5

10

15

20

25

30

02004006008001,0001,2001,4001,6001,8002,000

0.4 1.5 2.1 2.85.2

14.7

20.0

9.0


IRR: 39%IRR to IPO: 57%

A (Jan 13) B (Sep 13) C (May 14) D (Apr 15)

0

5

10

15

20

25

30

35

40

05001,0001,5002,0002,5003,0003,5004,0004,500

1.43.0

14.3

34.5


IRR: 311%

Lending Club Prosper

Funding Circle OnDeck


28

Substantial growth for LC and ONDK still expected despite share price declines

Lending Club DCF: what’s implied in current share price?$bn

Source: Liberum preliminary estimates (not under coverage)

OnDeck DCF: what’s implied in current share price?$bn

Source: Liberum preliminary estimates (not under coverage)

Lending Club share price IPO to date, $

Source: Bloomberg

On Deck Capital share price IPO to date, $

Source: Bloomberg

• LC and ONDK share prices under some pressure post IPO

• Reverse engineering current valuation suggests market still expecting 22-32% revenue CAGR over next 10 years

2015e

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

-0.2 -

0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8

Revenue Net Income

DCF$0.6b

n

2015e

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

(1.0)

-

1.0

2.0

3.0

4.0

5.0

6.0

Revenue Net Income

DCF$5.5b

n

0

5

10

15

20

25

30

0

5

10

15

20

25

30


29

Equity opportunity to anticipate institutional lending capital – particularly in non-P2P direct lending

• Direct Lending (DL): All non-bank lending executed both offline and online

• Online Direct Lending (ODL): Smaller loan size direct lending to SMEs and consumers where the majority of the borrower interaction and underwriting is online

• Market Place Lending (MPL): ODL where the platform retains none of the credit risk. Lenders buy whole/ fractional loans via the platform

• Peer to Peer lending (P2P): MPL where retail investors can invest in fractional loans via the platform

Estimated US 2015e Volume by Category with Examples of each Lender Type

*Estimated US annual SME & Consumer 2015 volume $bn; Source: NFIB, FDIC, Company data, NFIB, Liberum estimates

• Origination run rate vs. equity valuation: Platform revenue and valuation are closely linked to volumes (approximately linear relationship)

• Institutional lending capital – valuation catalyst: Investing in platform equity concurrent with institutional loan capital deployment drives exceptional investment returns

‘For Illustrative purposes only’Segmenting direct lending landscape Institutional lending capital as valuation catalyst

Source: Liberum analysis

DL: $71bn*

ODL: $27bn

MPL: $20bn

P2P: $16bn

VolumeValuatio

n

Frequent opportunities to access equity beforeInstitutional lending capital deployed

Potential impact of institution

al loan capital

Time


30

*Selected businesses Liberum have sourced funding for or invested in

Liberum Alternative Finance- what we’re focused on…Specialist strategic adviser and development partner to the Alternative Finance sector

Working with entrepreneurs and investors in emerging, high-growth AltFi businesses

• Focus on online direct and marketplace lending and equity crowdfunding

• Work with leading platforms in the sector and back new and emerging ventures

• Support platforms in their development and provide specialist advice and expertise in funding from a dedicated team that knows the leading platforms and institutional funding providers

At Liberum we:

• Raise equity capital through our Investment Banking and Equities teams

• Source lending capital funding for platforms

• Act as a strategic development partner and selectively provide venture capital

• Partner with investors to source equity and loan investment opportunities and raise funds

• Sponsor the benchmark Liberum AltFi Indices



31


32

Regulatory Priorities: fraud risk, fee transparency and management incentive alignment

Fraud minimisation via

central data repository

• Marketplace lenders typically take no credit risk

• Potential incentive to prioritise short –term growth over credit quality

• Potential solution: portion of staff performance compensation should be continuously deferred until loans have been fully repaid

Management incentive alignment

Fee transparency

• Retail investors often use the rate offered as risk proxy

• Currently possible for ODL platform to transform a high borrower APR into a low investor net return via large opaque fee margin

• Retail investors may take more risk than intended /have less protection in stress scenario

• Potential solution: require clear statement of annualised platform fees.

Fraud prevention / detection platform• Risk of capital being misappropriated/ loan risk not matching description/ collateral not matching contract

• In contrast to other Fintech products (e.g. P2P FX and Payments) – payments for P2P lenders are extended over time => ponzi scheme risk is higher

• Potential solution: Regulator-managed data repository that automatically monitors and cross references all loans to individual bank statements – funded by a small sector levy

Regulator data

repository

Cashflow information & other contract info

ODL lenderLender Borrower

Annual lender returns pre and post fees %

Alignment of management incentives with lender returns

Gross yield less credit losses

Fees Net yield

Lender returns

Management compensation

More aligned payoffCurrent management payoff


33

Future retail banking impact? MPL loans may become increasingly like ‘cash’ as liquidity & connectivity improvesFuture Central Bank engagement with MPL

• MPL systemically important once > e.g. 25% of Consumer and SME lending

• Targeted monetary policy: MPL will enable government to target components of the economy e.g. SME credit by region and industry

• MPL may become part of money supply mgmt: central banks could buy / sell pools of MPL loans (via ABS market) as part of their open market operations

MPL liquidity will become approx as good as deposits• Central bank MPL liquidity : Central banks should provide

unlimited sector liquidity at discount for performing MPLs

• Bagehot: “In a financial crisis, central banks should lend freely against good collateral at a penalty rate”

• Inherent structural liquidity: due to amortisation flowback e.g. 1/3rd of 3yr loans are repaid annually.

• Payment connectivity: In future, P2P will connect with mobile wallets and payment systems providing public good investment returns AND immediate access to savings MPL loans likely to behave as broader money: ‘M5’ MPLs will have real time flows to / from mobile

wallets

*With govt/ institutional liquidity backstop

Potential future asset liquidity categories

P2P Platforms / Funds

Attractive returns: e.g. 5-10% pa

P2P Platforms / Funds

Returns: 5-10% pa

Rapid Loan repayments imply significant structural liquidity

Future MPL linkages with payment fintech

M0: Cash

M4 bank deposits

‘M5’ MPL loans*


Conclusions

• Regionally, more growth in Europe: Continental Europe originations likely to overtake UK by 2020 (currently 3x smaller); China set to slow relatively

• Better Sharpe ratio vs other asset classes: MPL asset class offers better risk / reward ratio than equities (up to 4x higher)

• Focus on lending niches: smaller & overlooked segments offer best debt and equity opportunities

• Retail sector access evolving towards low cost/ convenient solutions; MPL not yet reached mass market; aggregator solution/ packaged products under development

• MPL loans to partially disintermediate cash: as means of payment and store of value; opportunity in integration with digital wallets & current accounts (once liquidity challenges addressed).

34

35

Disclaimer


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 2299United 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.

Documents

Direct Lending: Finding value/ minimising risk Ropemaker Place, 25 Ropemaker Street, London EC2Y 9LY / T: +44 (0)20 3100 2000 Liberum Capital