Direct Lending - Brendan Ross - LA Business Journal 1.5.15

1. 6 LOS ANGELES BUSINESS JOURNAL NEWS & ANALYSIS JANUARY 5, 2015
By MELISSAH YANG Staff Reporter
Peer-to-peer lending isn’t as “alternative”
as it used to be, and that’s been a boon to funds
such as Direct Lending Investments, which
specializes in buying high-interest, short-term
small-business loans.
The downtown L.A. hedge fund last week
made a three-year, $250 million commitment
to provide capital for loans made through lend-
ing site Biz2Credit. The deal is Direct
Lending’s largest commitment to date, and the
latest sign of the firm’s growth.
Since launching in 2012, Direct Lending
has grown to manage 2,000 loans, and it now
has assets under management of $115 million
– up from just $14 million a year ago. As new
money comes in and loans turn over and self-
liquidate, the firm is picking up loans at a rate
of $25 million to $30 million a month.
President Brendan Ross declined to dis-
close Direct Lending’s return rate, but said a
fund with a similar portfolio in the same asset
class would generate annual returns of around
11 percent to 13 percent.
Direct Lending backs loans made through
several online lenders. The hedge fund pro-
vides the capital while lenders handle under-
writing and loan servicing. That’s also how
Direct Lending’s deal with Biz2Credit, a New
York firm, will work.
Ross, whose firm has previously funded
loans through Biz2Credit, said the new deal
creates a more direct line for his company –
and his investors – to access top-quality loans.
Biz2Credit’s track record of $1.2 billion in
small-business funding and its default rate of
0.7 percent also made the partnership an obvi-
ous play.
Loan sizes will range from $25,000 to
$500,000 for terms of six to 24 months. More
than $60 million of Direct Lending’s capital
has already been distributed across 700 to 800
loans, according to Biz2Credit President
Ramit Arora.
Peer-to-peer lending has now become stan-
dard practice for investors looking to diversify
their business portfolios, even though returns
have fallen over the past few years.
But the once revolutionary online financial
service is still a relatively safe bet that offers
solid returns, Ross said.
“Peer-to-peer lending is nothing more than
lending money and getting repaid,” Arora said.
“It’s the oldest asset class, and it’s finally
replacing overvalued stocks and low perform-
ing bonds.”
Handoff
Lending platforms such as Prosper
Marketplace Inc. and Lending Club Corp.,
which priced its initial public offering last
month at $15 a share and raised $870 million,
hit their stride during the economic downturn
of the late 2000s when banks were forced to
tighten credit terms. Borrowers, specifically
small-business owners, turned to lending sites
for short-term loans despite staggering interest
rates that could be upwards of 40 percent.
What made peer-to-peer lending attractive
for borrowers, though, was the offer of quick
cash. Biz2Credit’s Arora said his company
could process loans of up to $100,000 in just
48 hours, shaving off the days or weeks need-
ed to wait for a bank loan approval.
And for investors, such as retired venture
capitalist Brett Byers, such loans offer higher
returns at lower risks than bonds and stocks.
Byers currently purchases loans through
Direct Lending, Lending Club, Prosper as well
as niche platforms StreetShares, Open
Capital Exchange and ApplePie Capital. At
one point, Byers said, he was Prosper’s largest
investor, putting in $6 million to purchase loans
through the San Francisco company’s website.
“I was in early to get higher returns,” he
said. “But the returns have come down as peer-
to-peer lending moves into the mainstream.”
Banks are starting to loosen their credit
policies, and a growing number of peer-to-peer
loan providers are competing to buy a limited
supply of loans. Lending sites have been
forced to drop their interest rates – meaning
lower returns for investors – as they try to
attract more borrowers. Byers said his average
annual return rates have fallen from 20 percent
in 2009 to around 12 percent today.
But those double-digit returns are still pret-
ty attractive for investors given the high price
of stocks and the low yield of bonds.
David Reyes, founder of San Diego wealth
management firm Reyes Financial
Architecture, said he wouldn’t be alarmed if
30 percent of a client’s portfolio was dedicated
to peer-to-peer loans, as those are not subject
to the same interest rate or inflation risk that
comes with bonds.
“People are scared of both the stock market
and the bond market,” he said. “It fills the void
where I feel we can help to protect and diver-
sify the portfolio, have yield and find an option
that’s not correlative to the stock market.”
While peer-to-peer lending is still tiny com-
pared with the lending business done by com-
mercial banks, Direct Lending’s Ross said
peer-to-peer lending will soon become syn-
onymous with private credit, making it a core
part of even a conservative portfolio.
“We didn’t even use the phrase ‘private
credit’ 10 years ago,” he said. “It’s really peer-
to-peer lending that’s putting it on the map.”
AMAG, INC. Since 1994
An Affiliate of A-Mark Financial Corporation Since 1965
Loans made pursuant to Department of Business Oversight California Finance Lenders License
For a confidential discussion call:
Dennis Lautzenheiser
310-260-0315
amfc233@amarkfinancial.com
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Hedge Fund Looks to Capitalize on Peer-to-Peer
FINANCE: Direct Lending
commits $250 million to
back loans by Biz2Credit.
Staked Out: Direct Lending’s Brendan Ross at his home office in December 2013.
RINGO H.W. CHIU/LABJ