Blue Elephant Capital Management is planning to launch in January a second fund to purchase loans originated on online marketplaces, and the differences from its first fund show how hot the sector has become.
The Irvington, N.Y., investment firm has secured multiple verbal commitments for at least $20 million in funding for the first quarter of 2015, officials at the firm said. Unlike Blue Elephant's first marketplace-loan fund, which launched a year and a half ago and has since grown to become a levered $60 million vehicle, the second venture will be entirely unlevered.
The new fund, which will seek absolute returns, would be funded exclusively with institutional investors' cash, highlighting how quickly lender financing has evolved in just a short time. Potential backers include banks, insurance companies, pension funds, endowments and family offices, officials at the firm said.
Another change: While the first Blue Elephant fund was composed entirely of consumer loans, the new one will scout non-consumer credits, such as real estate loans.
The new "qualified purchaser fund" would launch as more promises to bring institutional money into the sector threaten to eventually drive down the extravagant yields that drew in early risk-takers. George Soros, for example, has been sniffing around in this field. The plan also comes as LendingClub, the largest marketplace platform, is raising funds for an initial public offering.
High-yield investors like Blue Elephant are taking advantage of the current illiquidity premium that lenders are working hard to prove unfounded. Coupled with anticipation of higher interest rates, fears of investors' flight from marketplace lenders in a future downturn have platforms scrambling to originate as much as they can and to secure bidders for the loans.
There is a real risk that lenders could lose investor interest in a downturn, according to marketplace critics. Lenders have no guarantees that their loans will be liquid if investors flee to other, cheaper assets, once rates rise.
Equity bulls are touting a $4 billion valuation for the largest marketplace platform, Lending Club. Its executives are flying coast-to-coast to raise funds for its IPO this week. A strong investor turnout would suggest confidence in the company's thesis that traditional banks will for years be crippled by regulation, leaving the field open to nimbler lenders.
Despite the enthusiasm in this sector for heavily data-driven credit decisions, Blue Elephant is looking for loans that involved some human underwriting.
"Data is not the answer to all lending problems. You need some human element," said Brian Weinstein, managing partner at Blue Elephant, in a recent call. "You'll see other platforms doing interesting things in niche markets."
Blue Elephant may also in January test the waters for another, possibly more liquid market for marketplace loans, as well. It may sell its first securitization from loans tied to Prosper collateral, purchased in its first fund. That exit strategy is just another option to fund new loan acquisitions.