Blue Elephant Capital Management

My Take on the Lending Club News

I’m sure everyone has seen the Lending Club news and read the articles about how badly the equity has done. I thought it was important to send out a note highlighting that there has been a major change in the investing environment in favor of loan investors like Blue Elephant.

Anyone who has followed the Elephant is aware that we’d become cautious on marketplace lending. We haven’t made a meaningful marketplace consumer loan investment since September of last year. It seemed to us that the alignment of interest was skewed against us, as the platforms were focused on growth instead of loan quality. Lower rates and weaker underwriting is a clear recipe for lower returns. Turns out, we were correct in that view. Our returns have been lower over the past two quarters partially because we’ve cut risk and partially because the loans we purchased in the middle of last year have not performed as well as we expected. The loans issued later in the year that we did not buy will have even weaker performance.

Before the Lending Club news, the environment had already started to turn in favor of loan investors. Lending Club has raised rates three times since December and tightened lending standards along the way. Prosper has raised rates twice and tightened standards as well.

With the goings on at Lending Club, one thing is clear. The only thing these underwriters will have to fall back on will be their performance for all loans issued from today forward. They have no room for error. While it is easy to focus on the fear in the market, remember that the fear is being driven by equity investors – it is masking the real opportunity for us, the loan buyers.

I approach investing with a skepticism that makes it hard to be a cheerleader. That said, my entire career before Blue Elephant was based on knowing when there were opportunities to invest and when to hide quietly in a corner. This is an opportunity for investors who have been intelligently waiting on the sidelines to take action.

Please contact us if you have questions or are interested in getting involved.

– Brian