Are client portfolios ready for P2P lending?

By Simon Doyle | October 17, 2016 | Last updated on October 17, 2016
3 min read

Vault Circle, a division of online lender Lendified Holdings Inc., is hoping for big investor interest in its new debt securities that will support online small business loans.

Last month, the OSC gave Vault Circle an exempt market dealer licence to offer debt securities to accredited investors in Ontario. Marcel Schroder, the company’s managing director and chief compliance officer, is now pitching the assets to advisors as a potential portfolio piece.

Schroder tells the firm’s target is to offer notes of 12 to 24 months, yielding fixed rates of 6% to 8% annually, though that may be adjusted depending on investor demand. The notes are expected to be available by end of year. The pitch is investing in online lending.

“We’re going to provide access to an asset class that no one had access to before, and the proven history that this asset class has in other countries shouldn’t be any different in Canada,” Schroder says. “[That it’s] non-correlated to equity and fixed income I think is key.”

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This summer, Toronto-based Lendified received a $20-million line of credit for its business from Liquid Capital Corp. Now, debt securities will provide another source of funding for a company whose online selling point is easy borrowing for small business owners.

Entrepreneurs can “apply online, get approved right away and get your small business loan as early as the next business day,” Lendified’s website says.

The debt securities provide financing, not direct loans to businesses, making the Vault Circle model a step or two removed from peer-to-peer, or marketplace lending, where investors provide loans directly to borrowers. Some bigger marketplace lenders include London’s Ratesetter or San Francisco’s Lending Club.

“P2P is an option for us to lead with. The reality is, you get a pipe, you prove it, and then you build on it,” Schroder says.

In a setback for marketplace lending in May, Lending Club dismissed its CEO over faulty loans. It’s part of the reason investors want to see further testing of the marketplace lending model, including its performance through a recession.

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“There’s still skepticism that it hasn’t gone through a full cycle of unemployment and higher delinquencies because, at the end of the day, your credit model is built to maintain your portfolio within a certain percentage of delinquency, and you want to be under that,” Schroder says.

He adds: “Once we build the product and prove the product’s worth, we want to take a look at bringing it down to a retail market. We’d need to go back to the regulators to go to the retail market, but I think that’s really where the peer-to-peer model would work.”

California’s Foundation Capital has estimated marketplace lending platforms will originate loans worth US$1 trillion by 2025. Other alternative fintech lenders in Canada include Thinking Capital Inc., Kabbage Inc., and Lending Loop.

Lending Loop has halted the posting of new loan requests as it “engage[s] in discussions with the appropriate securities regulatory authorities to ensure that its model complies with applicable laws,” according to its website.

“It’s clear that the regulators in Canada look at loans as securities,” Schroder says.

Craig Skauge, head of the National Exempt Market Association, says Canada, as a relatively small market, may not have the scale to support the kind of initiatives that are successful in the U.S.

He says that, like others in the exempt market, Vault Circle’s is selling private debt to accredited investors. Aside from its online offerings, Skauge says, “there isn’t necessarily anything unique about what they’re doing.”

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Regulators are well aware that the online space will take on a bigger position in the capital markets through crowdfunding and peer-to-peer lending, Skauge adds, with the OSC taking the right approach by not being hasty with new ideas.

“It may seem to market participants like they take too long, but they do give these things the attention they deserve, to make sure there’s necessary mechanisms for investor protection and reporting, and so forth,” Skauge says.

Simon Doyle