Low Volatility Returns vs High Returns, Which Is Better?

backed returns

As unsecured online lenders lose their luster, investors are looking for more reliable ways to capitalize on online lending. Whether a financier, lender, asset holder, or borrower, cosigning is a better way to lend. The past two years of online lending can be summed up as the “rise and fall of speculated returns.” According to […]

backed returns

As unsecured online lenders lose their luster, investors are looking for more reliable ways to capitalize on online lending. Whether a financier, lender, asset holder, or borrower, cosigning is a better way to lend.

The past two years of online lending can be summed up as the “rise and fall of speculated returns.” According to TechCrunch, The U.S. consumer lending market is a $3.5 trillion business, and online lenders originated just $10 billion in 2015. Seeing the opportunity, venture capital firms and institutional investors started investing in online lenders. Online lending startups have raised a total of $12.6 billion across 463 deals since 2011, according PitchBook. Online lenders were able to convince investors to provide them money to lend out based on the presumption that new algorithms and machine learning can determine who is most likely to pay off a loan, even if their credit score was a higher risk.

This “high yield” portfolio of high yield loans has become a rocky road for everyone. The computers may not able to accurately predict who could pay off the loans, and higher than expected default rates can result in insufficient interest income or repayment of principal to pay any returns to investors.

Even as bundles of consumer loans are being securitized and sold to large investors, the wave of defaults have caused certain “triggers” to be breached where the online lender is no longer able to issue more consumer loans. They have to use all their money to pay off the investors. In some cases, lenders can continue to issue new loans, but only by raising the amount of interest they charge for each loan. They must raise the standards a potential borrower must meet in order get approval for a loan, thereby cannibalizing their own market.

The classic example is CircleBack Lending, which shut down due to higher than expected defaults. They lost 13.5% on hundreds of millions of dollars in unsecured debt. Loanio, the previous online lending company started by the same founder, also closed due to higher than anticipated default rates.

Does this make online lending a passing fad? Are there still opportunities to make solid returns on what many say is the lending of the future?

Online Cosigning is a Solution for Everyone

Cosigning a loan has been in practice for centuries. It can be used in cases where a borrower has a poor credit history, a thin credit history, or no borrowing history at all. A potential borrower can get a loan even with a credit score of 580-660, or no credit score at all. They can have a loan cosigned by someone with a good credit, and get approved.

Cosigning offers several advantages that negate some of the risks of most personal loans:

  1. Greater Customer Loyalty. When someone takes out an unsecured loan, there is no collateral, just a promise to the bank. A borrower risks losing credit score, and the ability to raise debt in the future. When a loan is cosigned, the borrower is no longer obligated to the bank, but to the cosigner. A cosigner can be an army buddy, a best friend, a trusted co-worker, a sibling, or a parent. This type of personal loan is backed by the trust between the borrower and the cosigner.
  2. Better prospects of collecting the total interest on the loan. In the case of lending to borrowers with higher credit scores, the risk is that they have the means to repay the loan faster than anticipated, resulting in unearned interest income. In cosigning, the borrower has a lower credit score, and is more likely to pay the loan over the full time given.
  3. Higher returns for your risk. With cosigning, you can issue a loan to someone with a below average credit score and ask for higher interest rate to cover the risk. However, the loan is backed by someone with a higher credit score, who serves as hedge.
  4. Greater confidence in your return being realized. Cosigning, with the additional layer of human security, and a higher credit score as backup, leads to lower default rates than other types of unsecured lending. This translates to a higher likelihood of reaping the full return on your investment, and a less danger of bond triggers being breached.
  5. Less risk of default. While a personal loan is unsecured, cosigning adds an additional layer of security. Upon default of a loan, the cosigner assumes liability for the debt. The right online lenders will alert a cosigner at every stage in the debt, and enable them to make payments to keep the debt in good standing without demanding additional fees or paperwork.

Backed, Inc. is a pioneer of online lending. They offer the best in conversion rates, derived from user experience. Their underwiring model enables borrowers to get the best rate available while providing investors with the highest return on their investment relative to the risks. Backed, Inc. uses a unique servicing methodology where the cosigner is treated like a co-borrower, kept in the loop at every step.

Authors:

Before Backed, Gilad Woltsovitch co-founded iAlbums, a semantic curation engine for media players in 2010 where he served as the company’s CEO from 2011-2014. In 2013, Gilad also served as the entrepreneur in residence for Cyhawk Ventures and joined the Ethereum project, establishing the Israeli Ethereum meet-up group. Gilad holds a Masters of Art Science and Bachelors in Sonology from the Royal Conservatory of The Netherlands in The Hague, University of Leiden.

Princeton Alternative Funding (PAF) returns 16.78% in its first year of management

Princeton Alternative Funding (PAF) returns 16.78% in its first year of management

Princeton Alternative Funding (PAF), an investment management company in exclusive partnership with Microbilt Inc., a Consumer Rating Agency has posted a 16.78% return in its first year of management. They accumulated roughly $65 million under management in the first year and aim to significantly increase asset under management. Credit bureau partnership PAF’s partnership with Microbilt […]

Princeton Alternative Funding (PAF) returns 16.78% in its first year of management

Princeton Alternative Funding (PAF), an investment management company in exclusive partnership with Microbilt Inc., a Consumer Rating Agency has posted a 16.78% return in its first year of management.

They accumulated roughly $65 million under management in the first year and aim to significantly increase asset under management.

Credit bureau partnership

PAF’s partnership with Microbilt gives it a protective moat through best-in-class analysis and monitoring of both borrowers and lenders. The initial returns posted by the fund are impressive and should help it in attracting new investors. But the fund has still to experience a financial downturn like the Lehman crisis. Despite research that non-prime is not only the first category to be hit but it also experiences the largest number of delinquencies, Microbilt research shows that delinquencies in the subprime marketplace actually trended lower in 2009 and 2010, the peak of the recent major downturn. How is this possible? “This population of consumers is more influenced by the price of gas than the financial markets. 2009 was the last time the price of oil dropped to near $35 a barrel,” said COO Jack Cook. How will the fund manage such a situation and will Microbilt’s analytics hold in such a crisis are important questions.

Market segment

By targeting a specific category of lenders focusing on non-prime consumers, PAF underlines its focus on generating superior alpha while mitigating risk through superior data and analytics available at its partner firm, Microbilt. In hedge fund parlance, it’s like a fund of funds which will use its oversight and deep knowledge to ensure that its investors end up on the winning side of the trade. The fund is suitable for family offices, fund-of-funds, pension funds, endowments and HNWIs, or basically, qualified investors who are seeking positive yield.

Background

Two-thirds of U.S adults are not able to cover unexpected or emergency expenses. According to recent research, 26 million Americans do not have a credit history, in addition to that 19 million have limited or thin credit files. According to Experian, a further 68 million US Consumers have credit scores less than 601, rendering them ineligible for the majority of credit products. After the financial meltdown in 2009 and subsequent regulation of the banking industry, alternative lending models grew to occupy the space vacated by banks. Princeton Alternative Funding (PAF) is trying to fill the gap for non-prime consumers by providing credit facilities to select lenders while concentrating on the top companies in the space to ensure superior returns for its investors.

The company

Princeton Alternative Funding (PAF), an investment management company launched Princeton Alternative Income Fund (PAIF) in March 2015. The company has an exclusive partnership with Microbilt Inc., a Consumer Rating Agency which provides top of the line analysis and monitoring capabilities. According to the management of PAF, Microbilt(MB), which has been in business for 38 years, has three times the alternative market data than the three big credit agencies combined.

PAF has senior personnel of  MB on board as advisors. The close relationship can be attested by the fact that PAF is currently housed in the New Jersey office of MB. Through this partnership, PAIF will be able to lower the risk while ensuring a higher rate of return to its investors. It will have access to proprietary databases and scorecards of MB, which will allow it not only to analyze the originators and their performance but evaluate borrower performance on a granular level.  More than 27 million loans have been originated using MB’s database.

The loans have averaged a 15% default rate, which allows for appropriate pricing by the lenders.  PAF generates revenue by charging 2% as management fees and 20% as performance fees.

Princeton Alternative Income Fund is an open-end 3(c)7 vehicle with a monthly redemption period, subject to notice of 180 days. Investors have the choice to choose monthly distributions from underlying loans or they can reinvest the capital.

Team

PAF has an experienced team. Howard Davner (CEO) was a founder and principal of Terrapin Advisors and Ryett Capital Partners, a long and short Hedge Fund with a successful track record. He was an equity specialist at Goldman Sachs and a member of NYSE. Jack Cook (CCO & COO) was also a founder of Terrapin Advisors and Director at Credit Suisse in the Fixed Income Division. Jeff Davner (Executive Vice President) was a co-founder of Terrapin Advisors, a partner in Bluestone Capital, and co- founder of ATL consulting.

Targeting sub-prime for better returns

Last year, PAIF agreed to provide a credit facility of up to $ 100 million in growth capital in Balance Credit, a leading online lender to working class families and individuals. The facility will enable Balance Credit to expand their offering of unsecured personal loans and credit services to people who are in urgent need of cash. Balance Credit provides loans that are a better option to payday and title loans. Another credit facility was extended to Argon, a leading provider of online customer loans. The financing has enabled Argon to accelerate their growth in near-prime and prime consumer loans through its own online platform.

Authors: Heena Dhir and George Popescu

George Popescu