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Marketplace Lending Investments

A primer for investment managers

Web-based platforms offering marketplace lending, or P2P lending, are proliferating as many traditional consumer and small business lenders struggle with increasing regulatory compliance costs and operational inefficiencies. Sponsors of marketplace lending platforms, such as Lending Club, Prosper and OnDeck, use proprietary advanced technologies to bring the loan underwriting process to the digital age and expedite the loan approval process. Institutional investors in the United States, Europe and Asia appear to have substantial interest in investing in marketplace loans because of the favorable risk-return profile of such investments relative to other comparable loan products. A recent survey by the influential New York Hedge Fund Roundtable confirms the growing interest of hedge funds in acquiring loans through marketplace lending platforms. This article is highlights important considerations for investment managers who may be interested in managing a private investment fund or a securitisation issuer that invests in marketplace loans.

No water without an NDA…

Before investing the assets of a private investment fund in marketplace loans originated by any platform, the investment manager of the fund must conduct a thorough diligence review of the platform’s sponsor and the platform’s underwriting and servicing processes. In connection with any such diligence, the investment manager will be required to sign some form of non-disclosure agreement (NDA) restricting the use of certain confidential information that will be provided to the investment manager. Sensitivity among marketplace lending sponsors over confidentiality is high. Paraphrasing a manager that has invested in marketplace loans from multiple platforms, some marketplace loan platform sponsors believe that their platforms are such unique golden geese that during a site visit “they will make you sign an NDA just to use their water coolers.” It is important for investment managers to negotiate the terms of the NDA carefully so that the NDA does not restrict the manager’s ability to provide information to its investors and regulators, including pursuant to routine SEC examination, without the burden of procuring the sponsor’s approval.

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