Hedge Fund Looks to Capitalize on Peer-to-Peer

FINANCE: Direct Lending commits $250 million to back loans by Biz2Credit. By Melissah Yang Monday, January 5, 2015

Staked Out: Direct Lending’s Brendan Ross at his home office in December 2013. Photo by Ringo Chiu.

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 lending 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 disclose 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 provides the capital while lenders handle underwriting 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 obvious 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 standard 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 performing bonds.”

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.