03/06/2013

Consumer-Loan Shop Pursues Leveraged Play

Colchis Capital, a fund manager that invests in “peer-to-peer” loans, is preparing to launch its first leveraged vehicle — a format that could help bring such offerings into the mainstream.

Like its other vehicles, the San Francisco firm’s Colchis P2P Plus Fund would write its loans via online marketplaces operated by LendingClub and Prosper. However, the entity would take advantage of a newly secured credit line that would allow it to borrow up to $3 for every $1 of equity — depending on the quality of the underlying borrowers. Colchis expects to raise $200 million of equity for the new vehicle.

By adding leverage, Colchis hopes to expand its investor base to include more institutional investors. The top-performing peer-to-peer loan funds have been producing annual returns of 9-12%, which has helped them appeal to wealth managers and family offices. A little more buying power could bring those gains into the mid-teens, and might turn the heads of funds of funds and larger institutions. “It’s very natural to put leverage on this because it’s a fixed-income product,” one loan investor said.

Peer-to-peer lenders like LendingClub and Prosper act as middlemen between investors — including individuals, fund managers and others — and borrowers who need money for purposes such as debt consolidation, home improvements, small-business expenses, vehicle purchases or wedding costs. LendingClub and Prosper so far have originated $2 billion of the accounts, and expect to add $130 million per month as more investors look for a stable source of high yields that are uncorrelated to other financial products.

Sequioa Capital has even gotten in on the act, leading a $20 million recapitalization of Prosper in January.

The growth projections for LendingClub and Prosper in part reflect expectations that about 10 multi-billion-dollar fund operators will begin investing in peer-to-peer loans in the coming months, with much of the business flowing through the two firms. All of the fund shops appear to be exploring the possibility of using leverage.

Colchis, meanwhile, has been the leader in the sector. Employing a master-feeder fund structure without leverage, the firm was running $140 million at the beginning of the year and has been growing at a rate of about $20 million per month.

Until now, the only leveraged peer-to-peer lending fund was run by New York startup Eaglewood Capital. That vehicle launched late last year, after founder John Barlow spent several months finding a bank to supply a line of credit. One difference: The Eaglewood fund employs an open-end format, while Colchis is following a closed-end structure.

Colchis was founded in 2005 by Edward Conrads and his father, Robert Conrads. Robert Conrads oversees the firm’s investment decisions. He previously spent 12 years in strategy consulting as a senior partner at McKinsey & Co. Edward Conrads is responsible for research. He previously was an associate at New York fund-of-funds operator Sterling Stamos.

Loan selection is handled by credit chief Kevin McGlynn, formerly of Barclays’ credit-card unit. James Alexander oversees business development at Colchis while also serving as a vice president at Prosper.

CORRECTION (3/13/13): This article has been corrected. The original version incorrectly described how Colchis Capital’s founders are related. Robert Conrads is Edward Conrads’ father.

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