VICTORY PARK CAPITAL: ALTUS CONFERENCE ONLINE DIRECT LENDING SECTOR DISCUSSION UNDERSTANDING RISK OF ONLINE DIRECT LENDING AS AN ASSET CLASS NOVEMBER 2016
BACKGROUND / AGENDA FOR ALTUS PRESENTATION ▪ Recently joined Victory Park Capital Advisors, LLC (VPC) as a Principal – alternative credit focused investment firm 1,2 ▪ Past 3 years: Co-founder and Director of Liberum Alternative Finance . Focused on the online direct lending P2P sector › Involved in raising £1bn+ capital for some of the leading platforms and several direct lending investment trusts ▪ Large cap Financials/ Banks analyst for over decade ▪ Presentation covers: › VPC overview › Advantages of Balance Sheet lending vs. buying whole loans › Current Online Direct Lending (ODL) volumes, returns › Historical returns from ODL sector and proxies › Key Risks and Risk mitigation for Investors in ODL 1. Sector Views presented here are those of presenter individually rather than necessarily VPC. 2. Services provided through a consultancy relationship with Vital Concept U.K. Ltd., registration with U.K. Financial Conduct Authority pending. Page 1
UNDERSTANDING RISK OF ONLINE LENDING AS AN ASSET CLASS VPC Introduction Broader Online Direct Lending Sector Overview Conclusion Page 2
OVERVIEW OF VICTORY PARK CAPITAL Founded in 2007 by Richard Levy and Brendan Carroll ▪ Senior management team has worked together since 2005 with proven performance through multiple credit cycles ▪ Based in Chicago with additional resources in London, Los Angeles and New York, with over 40 employees ▪ Top-tier Executive Board comprised of prominent investment and industry professionals 1 An Experienced Investor in Non-Bank Financial Services Companies ▪ VPC has made approximately $4.6 billion of commitments across various non-bank financial services platforms 2 ▪ Wide range of experience lending to small and medium-sized business, subprime, near-prime and prime consumers, secured and unsecured debt, legal finance and other miscellaneous types of capital providers ▪ Extensive knowledge of sector participants as well as the complex regulatory requirements needed to operate within the industry ▪ Experience in both direct lending and purchasing whole loans ▪ Proven ability to add value across its platforms given history and network in the space Extensive Sourcing Network ▪ VPC has executed transactions partnering with more than 35 leading financial sponsors in the sector 3 ▪ In 2015, VPC reviewed 925 new opportunities, issued 55 term sheets, executed 34 term sheets and closed 24 transactions across the Firm 1. Please refer to Appendix F for more information. 2. As of June 30, 2016. 3. List of identified managers is not exhaustive. Page 3
UNDERSERVED MARKETS CREATE UNIQUE OPPORTUNITY United States U.K., Mainland Europe and Australia Number of Loan Facilities Approved U.S. Consumers Ability to Come Up with $2,000 within 30 Days 1 for U.K. SMB Businesses 2 (in Thousands) Since the credit crisis, the supply of The number of loan facilities ▪ ▪ 119 125 consumer credit for non-prime approved by banks for U.K. small Definitely borrowers remains constrained businesses was 61 thousand in 4Q15, Not 100 down 49% since 3Q11 26% 61 75 Yes 40% of Americans cite they would ▪ 36% not be able to come up with $2,000 50 The aggregate amount of loan ▪ Probably in thirty days facilities approved has decreased Not 25 31% from £9.0 billion in 3Q11 to 16% 0 £6.2 billion in 4Q15 Probably Could 22% U.S. Commercial Loans Outstanding, Australia Bank Credit by Sector And % Small Business 3 (Share of Total) 4 Lending to small businesses Over the past twenty years, the ▪ ▪ 61% continues to compress and accounts portion of bank credit extended to $1.2 50% $1.0 for only 24% of all commercial loans businesses and consumers in outstanding Australia has consistently declined $0.8 40% 33% $0.5 Loans below $1 million are Credit to businesses, which ▪ ▪ 47% uneconomical for banks to accounted for half of bank credit in 40% 31% 24% 11% 6% underwrite from a cost and capital 1995, now accounts for only 33%, efficiency standpoint while the share to consumers has 2000 2005 2010 3Q15 1995 2000 2005 2010 Sep-15 compressed to just 6% Housing Business Commerical Loans ($ Trillions) Personal % Small Business 1. FINRA, Barclays Research (November 2013). 2. British Bankers Association Statistics (September 2015). 3. FDIC Quarterly Banking Profile (September 2015). Page 4 4. Reserve Bank of Australia (September 2015).
VPC NON-BANK FINANCIAL SERVICES INVESTMENTS Originators Consumer Lenders / Investors Small / Medium Business Borrowers Other Page 5
A PROVEN INVESTMENT MODEL Comparison of Lending Models Warehouse Loan Model Structured Credit Opportunities Loans originated and retained by Platform Loans originated by platforms ▪ ▪ Lender Platforms access capital through a combination of equity, mostly from Loans are sold, generally at par, to peers or institutional investors, in ▪ ▪ venture investors, and credit facilities whole or in part Generally not model dependent (i.e. consumer loans can be offered ▪ Product through either balance sheet or P2P models) Offering Platform makes loan and is entitled to all principal and interest Marketplace earns origination fee with principal and interest flowing ▪ ▪ payments to individual investors Unit Targets unlevered returns of 11% to 16% Targets unlevered returns of 6% to 10% and levered returns of 11% ▪ ▪ Economics to 18% Platform is subject to loss of principal on defaulted loans Although platform does not directly experience losses on defaulted ▪ ▪ loans, if underwriting is perceived to be inaccurate, investors will no Credit Risks Lender has exposure if losses increase over historical trends ▪ longer purchase / Mitigants Credit enhancement or incentive-based fee structure to align interest ▪ with platforms Examples Guarantee/ Cash Cash Blanket Lien VPC VPC Borrowers Platform Borrowers Platform Notes + Notes + Origination Fee Origination Cash + Equity Fee Structure Servicing Fee Assigned Loans/ Equity Cash Senior Notes (Principal + Participation Secured Loan Interest Payments) Interests SPV SPV Page 6
RISK MANAGEMENT – BALANCE SHEET MODEL ADVANTAGES Strategy Overview ▪ VPC provides financing to non-bank consumer and small business lenders ▪ Generally structured as debt, with seniority within a vehicle ▪ Selectively participate in minority equity positions where the upside might be significant Diversity of Assets ▪ Investments in multiple platforms provided across diverse geographies (U.S., U.K., Europe, Australia and Latin America), products (SME loans, prime, near-prime and sub-prime consumer loans, legal settlement finance and other types of capital providers) and structures (whole loans, senior credit facilities and equity) ▪ Underlying pool of tens of thousands of borrowers with loans ranging from $200 to more than $1,000,000 and terms from one week to 60 months Risk Control ▪ The majority of VPC’s investments are structured as loans to a SPV, with a guarantee and lien, transparency and control ▪ Typically, VPC does not fund the platform’s working capital ▪ VPC retains funding discretion with dynamic LTV ratios based on loss ratio and a typical cushion of 2x to 3x ▪ VPC puts in place control agreements and can restrict the platform’s access to cash in the event of a default Page 7
UNDERSTANDING RISK OF ONLINE LENDING AS AN ASSET CLASS VPC Introduction Broader Online Direct Lending Sector Overview Conclusion Page 8
ANNUAL ONLINE LENDING VOLUMES OVER $300BN IN 2016E ▪ China dominates globally: 90% of Annual Online Lending Volumes by Geography, USD billions 2016e annual P2P volumes $bn 350 CAGR: 151% 300 250 200 150 100 50 0 2013 2014 2015 2016E Europe ex-UK UK US China Source: WDZJ , AltFi Data, Company reports Page 9
RECENT HALF ON HALF GROWTH SLOWDOWN MOST PRONOUNCED IN U.S. Year on Year growth rates China historical volumes $bn US historical volumes $bn 1H15 o 1H14 xx 180% 8.0 92% 140 2H15 o 2H14 7.0 xx 13% 120 305% 6.0 111% 1H16 o 1H15 100 xx 5.0 80 4.0 255% 3.0 60 2.0 40 1.0 20 - - 1H14 2H14 1H15 2H15 1H16 1H14 2H14 1H15 2H15 1H16 Lending Club Prosper China Volume Source: WDZJ Source: Company reports UK historical volumes $bn Continental Europe historical volumes $bn 115% 43% 0.5 2.5 73% 2.0 0.4 75% 130% 1.5 0.3 107% 1.0 0.2 0.5 0.1 0.0 - 1H14 2H14 1H15 2H15 1H16 1H14 2H14 1H15 2H15 1H16 Younited Credit Auxmoney* Funding Circle Zopa RateSetter Mintos F. Circle EU LendInvest Market Invoice Others Twino Others Source: AltFi Data Source: AltFi Data Page 10
UNLEVERED NET RETURNS IN U.K. CURRENTLY: 5.4% ▪ Average UK unlevered P2P returns to Liberum AltFi Returns Index (LARI): Annual Returns from U.K. P2P Loans investors net of all fees, relatively stable in the 5-6% range 8.0% ▪ P2P Liberum AltFi Returns Index Methodology: values are time-weighted, 7.0% published as aggregate annualised returns, measuring what an equal time-weighted exposure to every loan made would 6.0% have returned over a preceding 12 month period 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Market Invoice Zopa RateSetter Funding Circle Overall Sector Return Source: AltFi Data Page 11
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