George Soros Plans to Back Peer-to-Peer Lending

The billionaire George Soros is preparing to back the peer-to-peer lending industry, which is increasingly leaning on traditional capital sources to cheapen funding costs.

Soros Fund Management officials, including a portfolio manager and a strategist, have met repeatedly with potential partners over recent months, people who attended the private meetings said.

Capital allocation has not yet been determined, and formal announcements could still be months away, according to one of the sources, who described the plans as still in a planning phase.

The Soros portfolio manager and the strategist did not reply to messages left on their office voicemail machines and sent to their office email addresses. Michael Vachon, a spokesman for the firm, declined to comment.

Rising institutional interest is amounting to a takeover of the once individually funded credits, and making the label "online marketplace lending" more apt.

BlackRock, Fortress Investment Group and the boutique investor Waterfall Asset Management have been seen beefing up their cash machines in recent months. BlackRock may be the most heavily invested in marketplace lending, but the spectrum of engagement now includes money managers, business development companies, banks and, soon, life insurance companies, advisers say.

40 FUNDS

Institutional investors alone may already be committing around $6 billion through almost 40 different funds, according to Matt Burton, the chief executive of Orchard Platform, which matches institutional investors with lenders. Only some $9 billion is expected in total annual origination volume this year.

As many as 12 large funds are each committing $200 million to $400 million, to purchase assets from direct-lending platforms such as Lending Club and Prosper, Burton said, adding that some 25 midsize investors have injected on average $50 million each to asset purchases.

"There are a lot more [investors] to come," he said.

Burton claims the business of matching lenders and investors is booming, and if he wanted to, he could turn his business cash-flow positive in six months' time. Large life insurance companies are looking to put their money to work, too, he said. No insurance companies have yet formally announced their investments.

Charles Muldow, a partner at Foundation Capital, estimates $9 billion in total yearend volume for industrywide marketplace-lending-originated credit. But that figure may multiply to $250 billion in just a few years, said Sam Hodges, the U.S. managing director of the small-business lender Funding Circle. Hodges estimated as much as 80% of lenders' originations are going to institutional buyers. Lending Club founder and CEO Renaud Laplanche at a recent industry gathering said that at 25%, institutional money backing the company roughly equals the proportion of funding from individuals investing directly.

Former Pimco CEO Mohamed El-Erian was the most recent high-profile investor to formally enter marketplace lending with a $12 million equity stake in online platform Payoff. Payoff is setting up an infrastructure to originate its own loans. Such a platform would compete against firms like Lending Club, which may attempt its initial public offering in a matter of weeks. Lending Club tapped Morgan Stanley and Goldman Sachs in June to underwrite its IPO.

The IPO is expected by yearend.

'PARTNER OR BUY'

Banks are increasingly visible participants in marketplace lending. A handful, including Capital One, have taken second-lien positions to lever funding lines to prop up the industry. Others are also now said to include CapitalSource, Citigroup, Credit Suisse and Deutsche Bank. CapitalSource is offering lenders revolving and term note credit facilities between $5 million and $100 million, officials there are telling potential partners.

At least six U.S. banks are in talks with Funding Circle to either buy loans whole or refer them on for a fee, according to Hodges. Those six banks include several community banks, one major regional bank and even a money center institution, he said. Hodges also claims to have had separate conversations with Wells Fargo, the bank that in January forbid its employees from investing personally in P-to-P. He declined to elaborate on the nature of the meeting.

The next phase may be for banks to buy entire origination platforms, such as Prosper, to reduce the competitive landscape. "Banks are taking a very close look," Hodges said. "I think they will partner or they will buy."

The largest banks are extracting special deals, even if they are not directly invested in marketplace-lending asset purchases. Morgan Stanley's wealth management business, for example, has worked out an agreement with Lending Club to offer those clients direct access to invest, a person with direct knowledge said. Morgan Stanley spokeswoman Mary Claire Delaney declined to comment.

FIVE TIMES OVERSUBSCRIBED

True P-to-P lending platforms, which began with a focus on consumer credit, have been hit with realities of tighter margins and narrower profits. That has forced them to seek traditional sources of funding in order to cheapen costs. This sort of maturation in funding has certain benefits, including the possibility of ascertaining investment grade credit ratings.

Investors in early November filled Morgan Stanley's and Goldman Sachs' syndicate books five times over for the third asset-backed bond offering from Social Finance, the California firm that was originally founded as a P-to-P student lender.

The oversubscription indicated $1.5 billion in demand for only $303 million offered. Social Finance sold the notes at a cheaper price than during its first two capital market appearances. Investors received the equivalent of 2.5% yield, compared with a 3.75% coupon attached to its 2013 transaction, in which no major rating agency participated. Spreads paid for the notes tightened also from four months ago, when the company paid buyers, including Western Asset Management Co., 35 basis points more for the most senior paper.