The last few weeks have raised some important issues for Lending Club stakeholders, competing marketplace lenders and investors in the high growth Fintech sector. As fund managers our job is to draw conclusions on how our investments will be affected.
Renaud Laplanche was regarded as a visionary CEO of Lending Club. He had founded his company and led it through many years of record growth. His departure therefore has had a more profound effect than normal. Further the circumstances of his removal by his board of directors has rightly called into question the company’s hard won reputation for transparency, efficiency and trust. We have seen before that once a financial company is questioned for its integrity, business and customers can quickly move away. The most significant impact for Lending Club is currently the suspension of loan purchasing by some of its largest investors including the local US savings banks.
What is clear is this has already affected and will have a long lasting effect on the share price of Lending Club but in our view Mr Laplanche’s departure has not changed the longer term fundamentals of either Lending Club, the loans originated or the industry itself. This statement holds true so long as the issues remain limited to the securitisation criteria for institutional investors and an undeclared conflict of interest in the case of Laplanche’s resignation.
I have been in the securitisation market for 17 years and the issue of eligibility criteria for loan securitisation is not as straightforward as you might think. This is a highly technical list of requirements made by Banks and rating agencies to cherry pick loans for securitisation pools and which requires the seller, in this case Lending Club to repurchase them if they subsequently are found not to be in compliance. I have come across multiple instances in my career where a loan issuer buyback was invoked or disagreements had with the lead arranger and this cost no one their job. Indeed each transaction had its own unique requirements. I am therefore certain this alone did not cost Laplanche his job.
What did cost him his job was a lack of judgement on two profound issues for his Board. Laplanche’s alleged behaviour defending his colleagues cited in the internal investigation when he should have accepted their removal was necessary to restore trust and more critical and fatal to himself, failing to disclose his own conflict of interest in a Loan Fund.
Whilst we are not happy to see a leader of Laplanche’s calibre leave, as credit investors would have noted little if anything has changed in relation to the $18 billion of loans issued by Lending Club to date. However if we to invest in Lending Club loans we expect LendingClub to continue to take all necessary actions to restore confidence and trust.
So to summarise where do we go from here?
- The market growth will continue but at a slower rate, the speed of growth last year was unsustainable and some investors will pull back
- Trust is hard won and easily lost
Lending club needs investors to grow. We believe it will redouble its efforts on transparency which is ultimately beneficial to the market as a whole, otherwise the investors will walk away.
- Regulatory scrutiny is only going to increase
We knew regulation was increasing and regulators like the DoJ will need to satisfy themselves the internal investigation is complete…
- Securitisation is not the correct funding model.
The pursuit of growth at all costs led Lending Club to mandate Goldman Sachs and Jeffries to securitise its loan origination. We are not convinced this fits with the simple yet effective business model of marketplace lenders….
- Funding from hot money is not real growth.
The sector and Lending Club has become over reliant on generalist hot money hedge funds to fund investor origination. The industry needs to refocus on finding savers and pensions that will take a longer term view of borrowers……
- Finally, credit investors have done very well.
We are surprised that amid the headlines we haven’t seen one mention of investor returns. Since inception Lending Club loan investors have averaged 7.93% annualised and funded $18 billion plus in loans. (Source: https://www.lendingclub.com/info/demand-and-credit-profile.action)
Lending club is still a remarkable success story for investors and borrowers.