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Early Adopters and the LendingClub IPO

This past Thursday marked a watershed moment in the history of finance and technology, the historic IPO of LendingClub (NYSE: LC), the leading company in marketplace lending. Amidst a swell of enthusiasm, LendingClub roared onto the public market and closed this Friday at a share price of $24.69, implying a market cap of nearly $9 billion. The success of LendingClub’s offering confirms that marketplace lending is a major force in the reinvention of finance globally, and the movement is only just getting started.

 

NYSE-LC-IPO

The New York Stock Exchange on the day of the LC IPO – photo credit Matt Burton

 

In late summer, when LendingClub’s first pre-IPO filing was released, we wrote about the impact LendingClub and marketplace lending in general would have on the world. We also wrote more recently about the credit trends in LendingClub’s portfolio, noting that it was quite a feat to maintain stable performance with such rapid growth. For today’s analysis, we will explore LendingClub loans as an investment class and how they compare to other potential investments.

 

When online lending platforms such as LendingClub, Prosper, and Zopa first launched, lending money to strangers online seemed like a fairly far-out concept, and there had been no real way for ordinary people to invest in consumer credit. Fortunately for all of us, there were some intrepid early adopters who signed up to fund peer-to-peer loans online. By examining historical data, we can see how they fared.

 

Exploring LendingClub Returns

 

For our analysis, we will utilize information on monthly payments made on a large set of LendingClub consumer loans for which data are available. While LendingClub began making loans in 2007, there were changes to the lending process in 2008, with the completion of SEC registration in October 2008. Given the importance of these changes, we will only include loans issued in 2009 and beyond.

 

For our methodology, we simulate a hypothetical investor purchasing a dollar-weighted cross-section of all loans issued in January 2009. In each subsequent month, this investor would take the portfolio’s principal, interest, and fee payments, less service fees and net charge-offs, and reinvest the cash in a dollar-weighted cross-section of loans issued in that month. The results of this simulation are shown in the graph below, with the “100%” representing the value of the account in month 1.

lc-sim-return-2009-jul14

Following this methodology, the portfolio would now be worth 165% of its day-1 value.

 

Benchmarking Investments

In 2009 of course, investing in loans on LendingClub was quite rare. Let’s now explore how some more common investments fared over the same period. We chose 4 popular exchange-traded funds (ETFs) that are designed to track broad market returns. The ETFs we used are as follows:

 

  • iShares S&P 500 Index (IVV)
  • iShares Barclays Aggregate Bond Fund (AGG)
  • iShares 3-7 Year Treasury Bond ETF (IEI)
  • iShares High Yield Corp Bond ETF (HYG)

 

We extracted daily closing price information from the Yahoo Finance API and plotted the results below.

etf-returns

 

Comparing Investments

This next graph shows the above-mentioned ETFs with the LendingClub returns overlayed.

lc-vs-etf-returns

As we can see, the LendingClub trend is significantly smoother than the various ETFs, outperforming the 3 bond funds over the observation period but trailing the S+P 500. While the returns in our simulated portfolio are not quite as strong as those in the equity fund, they are much more stable.

 

Conclusion – Part of a Balanced Portfolio

Diversification is crucial to any long-term investment strategy, and for most investors, it will make sense to spread investments over a variety of asset classes. LendingClub has paid nearly $600MM in interest to investors since inception and has demonstrated solid and consistent returns. As marketplace lending becomes a larger part of mainstream finance, we expect to see such loans showing up as a core component of more investors’ portfolios. We also expect to see a diversification of the types of loans that are available for marketplace funding – in terms of borrower type, yield, duration, and security. The LendingClub IPO on December 11 was a major milestone, but as we wrote this past August, the best days are still ahead.