Peer2Peer lending fund

Investment Thesis for a P2P Lending Fund
Ian Peacock and Robert D. Ferguson
Sloan Fellows, London Business School
January 2015

Investment thesis for a p2p lending fund | 2
Foreword
This paper examines the opportunity to create an alternative finance credit fund that
will build and manage a portfolio of “Peer-to-Peer” (P2P) loans diversified across geog-
raphies, loan durations and sectors to provide attractive risk-adjusted returns with low
correlation to other asset classes. This paper is organised as follows:
• Section 1 provides a brief introduction to the emergence of peer-to-peer lending.
• Section 2 provides an overview of P2P lending and the business models of the
major US and UK P2P platforms.
• In Section 3, we discuss the overall market size and growth opportunity for P2P
lending in the US and Europe.
• In Section 4, we present a model to analyse whether investors can increase their
risk-adjusted returns by including P2P loans in their portfolios and the correlation of
P2P returns with those of other major assets classes.
• In Section 5, we discuss a number of key risks that we believe investors in P2P
loans should be aware of before deciding to add this asset class to their portfolios.
We conclude in SECTION 6 that there is a significant opportunity to establish a fund
specialising in P2P loans that will provide investors with access to an exciting new
asset class and help them to enhance their risk-adjusted returns. We believe that the
fund has the potential to achieve assets under management of £1 billion by 2020.
Ian Peacock Robert D. Ferguson

Introduction1
2
3
4
5
6
5
7
10
17
20
23
27
Overview of P2P lending
Market growth potential
Modelling P2P returns
Key risk considerations
Conclusion
Appendix: Platform descriptions
Contents

“
“
Banking may be on
the cusp of an industrial
revoluƟon. This is being
propelled by technology
on the supply side and
the ﬁnancial crisis on the
demand side. The upshot
could be the most radical
reconﬁguraƟon of bank-
ing in centuries.
Andy Haldane, Executive Director for Financial
Stability at the Bank of England

Household indebtedness is commonly de-
fined as the sum of outstanding mortgag-
es, home equity loans, auto loans, student
loans and credit card debt. According to
the IMF, in the years preceding the 2007
financial crisis household indebtedness
soared to 138% of income in the world’s
advanced economies. Today this ratio is
still over 100% in the US, Euro core and
periphery markets.
In the UK consumer debt has tripled over
the last 20 years and now stands at £1.43
trillion. Mortgages represent 89% of this
figure with student loans accounting for
£54.4 billion and credit card debt £57
billion, growing at 5% annually.
In the US, consumer indebtedness stands
at $11.63 trillion, 8% below its 2003 peak.
Mortgage balances account for $8.1 trillion
with student loans accounting for $1.12
trillion as of June 2014. Credit card balanc-
es at the same date stood at $700 billion
and auto loans at $930 billion.
Today banks have not only paused to
repair their balance sheets, they are also
taking a much more conservative approach
to lending activities. Banks are essentially
changing their business models in re-
sponse to stricter regulation and political
pressure.
In response to this we are seeing the birth
of a new entrant, the P2P lender. These
platforms use Internet technology to con-
nect borrowers directly to the lenders thus
disintermediating banks from the lending
process. The emergence of P2P platforms
marks the simultaneous alignment of
multiple disruptive forces: technology,
regulation and social behaviour to provide
scalable platforms that are able to operate
within the banking spread.
To date, four broad categories of P2P plat-
forms have emerged: consumer, student,
real estate and business lending aimed
at small and medium sized enterprises
(SMEs). Unlike traditional direct lending, all
categories of platform allow each lender
to invest in partial loans. This creates a
new opportunity for an investor to access
a very large number of business and real
estate loans in “consumer size” amounts.
As additional platforms enter the market,
we expect that they will specialise in spe-
cific sectors, risk profiles and geographies
creating a greatly diversifiable asset class.
Figure A. Cumulative lending by the top five US and
UK platforms (GBP billion) representing a CAGR of
136%.
Although the outstanding volume of P2P
loans remains small at this stage, P2P
lending has huge growth potential. So
far traction is greatest in the US, UK and
China1
with platforms targeting consum-
ers and small businesses. Cumulative P2P
1
Note that while the Chinese P2P market has significant
scale, due to exchange controls and uncertainties regard-
ing the ability to enforce P2P contracts in Chinese courts
we do not believe that the Chinese P2P market currently
offers attractive opportunities for international investors.
Accordingly, an analysis of the Chinese P2P industry is
outside the scope of this report.
1. Introduction
2009
4
2
0
2010 2011 2012 2013 2014e

lending to date is approximately $3 billion
in the UK and $6 billion in the US however
the industry is set for explosive growth.
As with any new credit market place, the
critical success factor will be the ability to
match lenders with borrowers. As plat-
forms grow they will face an imbalance in
supply and demand that can be smoothed
with institutional liquidity. The deploy-
ment of institutional capital can not only
dynamically increase matching rates, it can
also underwrite whole categories of loans
allowing platforms to scale much more
quickly.
P2P Lending Fund | Introduction

2. Overview of P2P lending
Since Zopa pioneered P2P lending in 2005
most of the growth in the industry has
taken place in the US and the UK. Currently
the majority of P2P lending has been facili-
tated by the following five platforms:
• LendingClub, the largest US platform,
has facilitated over $5 billion in loans
since it was launched in 2007. Lend-
ingClub focuses primarily on consumer
loans but also offers small business
loans, education loans and patient
finance loans.
• Prosper, the second largest US platform,
has facilitated over $1.6 billion in loans
since it was launched in 2006. Prosper
focuses exclusively on consumer loans.
• Zopa, the largest UK platform, has facil-
itated over £650 million in loans since
it was launched in 2005. Zopa focuses
primarily on consumer loans but also
offers loans to businesses run by sole
traders.
• Funding Circle, the second largest UK
platform, has facilitated over £400
million in loans since it was launched
in 2010. In 2013 Funding Circle also
entered the US market. Funding Circle
focuses exclusively on business loans.
• RateSetter, the third largest UK plat-
form, has facilitated over £380 million in
loans since it was launched in 2010.
All of these platforms operate under
broadly similar business models. How-
ever, investors should be aware of some
important differences among platforms
particularly in their sector focus, loan
term, revenue model, pricing model,
lending mechanics, underwriting stan-
dards and approach to risk management.
These differences have arisen for a variety
of reasons, including regulatory factors
and a desire on the part of new entrants
to differentiate themselves from existing
platforms.
All of the major platforms allow both
individuals and institutional investors to
lend via their platforms, but for regulatory
reasons some assets may be restricted to
institutional or high net worth investors. In
particular, while most platforms offer all in-
vestors the opportunity to invest in partial
loans, the option to invest in whole loans is
typically restricted to institutional or high
net worth investors.
Sector focus
P2P lending was originally focussed on
facilitating unsecured loans to consumers,
and this remains by far the largest class of
loans made by LendingClub, Prosper, Zopa
and RateSetter. Other platforms such as
Funding Circle focus on facilitating loans
to businesses. More recently, other asset
classes have emerged and there are now
P2P lending platforms that specialise in
mortgages, student loans, short-term re-
ceivables financing and patient finance.
Loan term
Most platforms require lenders to com-
mit their capital for periods ranging from
one to five years, although RateSetter and
Funding Circle also offer shorter durations.

Borrowers, on the other hand, are typically
able to prepay their loans at any time with-
out any penalties. P2P loans are usually
amortising loans in which lenders receive
a fixed monthly payment consisting of a
blend of interest and principal repayments,
so lenders are repaid a portion of their
principal every month.
Revenue model
P2P lending platforms typically generate
revenue from two sources: origination fees
charged to borrowers (which range from
1 to 5% of the loan amount) and servicing
fees charged to lenders (usually 1%). Some
platforms, such as LendingClub, charge the
servicing fee as a percentage of payments
received. Others such as Prosper and Zopa
charge an on-going servicing fee on the
outstanding principal amount, which can
result in a higher level of overall fees paid
by the lender. RateSetter does not charge
any fees to lenders.
These fee structures mean that the plat-
forms can only increase revenues by origi-
nating and servicing higher loan volumes.
Pricing models
Two main loan-pricing models have de-
veloped. The original model (still followed
by Zopa, RateSetter and Funding Circle) is
for interest rates to be set dynamically by
the market. In this model, borrowers post
loan requests on the platform and lenders
make bids to fund a portion of the loan at
a specified interest rate. Lender bids are
ranked from the lowest rate to the highest
until the loan is fully funded. The borrower
is provided with a weighted average inter-
est rate across all of the lenders that have
bid and can then either accept the bids
offered or wait to see if additional lenders
bid at lower rates. If the borrower accepts
the bids, each lender receives the interest
rate offered for his portion of the loan and
not the average interest rate the borrower
pays.
The second model, which is followed by
LendingClub and Prosper, is for the lending
platform to set interest rates for each loan
according to the platform’s assessment
of the borrower’s risk based on propri-
etary algorithms. In this model, lenders
simply select a fixed interest rate that
corresponds to their risk tolerance and all
lenders to borrowers in that risk category
receive the same interest rate.
Lending mechanics
Two very different models for matching
borrowers with lenders of partial loans
have developed as a direct consequence
of the different regulatory requirements
in the US and the UK.1
In the UK lenders
have a direct contractual relationship with
each borrower and the platform is in no
way liable under the agreement. In the
US, in order to comply with applicable SEC
regulations, the legal lender of every loan
funded by retail investors is technically the
platform, which in turn issues securities to
investors that are backed by the underlying
cash flows. The securities are structured so
that the platform is only required to make
payments to investors to the extent that it
receives payments from the relevant bor-
rower. While the differences between the
two models may appear to be more form
over substance, a bankruptcy of the plat-
form will have very different consequences
under each model as described under “Key
risk considerations” below.
Underwriting standards
Some P2P lending platforms differentiate
themselves based on their underwriting
standards. For example, in the US Lend-
ingClub is focussed on making loans to
“prime” borrowers with a minimum FICO
score of 660 whereas Prosper will consid-
er lenders with minimum FICO scores of
1
Note that these considerations are not applicable to
investments in whole loans. In those circumstances, the
investor holds the loan on its balance sheet and has a
direct contractual relationship with the borrower.
P2P Lending Fund | Overview of P2P lending

640. Neither of these platforms verifies
employment and income information for
every borrower; instead they rely primarily
on credit bureau data and their proprietary
algorithms to assess borrower risk. These
platforms offer investors a wide range of
potential risk/return profiles and generally
higher interest rates than the UK plat-
forms. The UK platforms such as Zopa and
RateSetter have much stricter underwrit-
ing standards and significantly lower yields
than the US platforms: each application
is assessed for risk both by proprietary
algorithms and manually by the platform’s
underwriting staff. RateSetter for example
claims that 85% of all loan applications do
not meet their strict underwriters criteria.
Risk management
Most P2P platforms, including Lending-
Club, Prosper and Zopa, help lenders to
manage risk by automatically diversifying
their loans across a very large number of
borrowers in each risk band and in rela-
tively small increments (typically $25 for
US platforms and £10 for UK platforms).
Zopa has further mitigated lender risk by
establishing a safeguard fund, funded from
the origination fees paid by the borrow-
ers. The fund is specifically to compensate
lenders in the event that a borrower miss-
es a payment or defaults. Zopa’s safeguard
fund has been designed to cover approx-
imately 120% of Zopa’s estimate of the
amount the fund will need to cover, which
in turn is above current default rates.
RateSetter has adopted a different ap-
proach to risk management. Under the
RateSetter model, lenders choose to lend
based purely on duration without regard
to the risk of the underlying borrower.
Instead, RateSetter has established a much
larger safeguard fund (which it calls the
“Provision Fund”) funded again by borrow-
ers according to RateSetter’s assessment
of the risk of the loan. As a result, RateSet-
ter claims that there is no need to diversify
across multiple borrowers because the risk
of default is already diversified across all
borrowers and accumulated in the Provi-
sion Fund. The Provision Fund currently
covers approximately 223.2% (as of Octo-
ber 27, 2014) of RateSetter’s estimate of
potential claims against the fund.
These consumer-focussed protection funds
are determined by the platform and held
as segregated cash. They are not contrac-
tual percentages.
More detailed summaries of the five major
P2P platforms and their business models
are provided in the Appendix.
Secondary market liquidity
All of the major platforms provide a facility
for secondary trading of loans. Fees are
applicable and liquidity is platform de-
pendent. We anticipate the low levels of
liquidity available today will improve as
the industry grows and central markets
develop.
P2P Lending Fund | Overview of P2P lending

In this section we examine the main driv-
ers of growth and the potential size of the
market opportunity in each of the UK, the
rest of Europe and the US
UK
The P2P lending industry in the UK today is
a dynamic market with over 30 platforms
focussed on consumer and SME lend-
ing. Cumulative lending by UK platforms
reached £1.89 billion in 2014 with £900
million lent in the first nine months of the
year.
Figure B. Cumulative consumer lending in the UK.1
Although the majority of platforms by
number (80%) focus on business lending,
consumer and SME lending are similar
in size based on volume of cumulative
lending. In the first nine months of 2014
lending to SMEs was approximately £900
million and to the more mature consumer
market was approximately £1 billion.
A significant development in the UK has
been the recent announcement that the
government is planning to include P2P
products within ISA eligible investments
1
Peer-to-Peer Finance Association, Q3 2014 market data.
3. Market growth potential
from April 2015. UK consumers have £470
billion invested in ISAs, of which £228.5
billion is held in cash or money market
deposits.2
This represents a huge growth
opportunity for P2P lending and a unique
opportunity to create strategic part-
nerships by ‘wrapping’ an ISA structure
around our fund.
Consumer lending
At the end of September 2013 outstanding
personal borrowing in the UK was £1.43
trillion,3
a figure that has tripled over the
last 20 years and is currently increasing by
approximately £90 million per day. Mort-
gages represent £1.29 trillion, or 89% of
the total, and outstanding consumer credit
at the end of September stood at £165
billion and was growing by 6.1% per year.4
Credit card debt represents £58.5 billion
of the total outstanding personal borrow-
ing with current average interest rates
2
UK Government Office of National Statistics (www.gov.
uk).
3
The Money Statistics November 2014, (www.themoney-
charity.org.uk).
4
Bank of England annual growth rate estimate August
2014.
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2010 2011 2012 2013 2014
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
GBP (MILLIONS)
114
205
407
951
1,890
“ “We predict that by
2020 cumulaƟve lending
by UK plaƞorms will
exceed £60 billion.
Sum of our predicƟons for the UK consumer, business
and factoring markets.

of 18.06%, or 17.56% above the UK base
rate. The average APR on a £5,000 person-
al loan stands at 9.2%, while the average
rate for an overdraft, an £8 billion market,
is 19.67% according to the Bank of En-
gland. These rates are significantly higher
than those available from P2P platforms.
For example, one year loans are currently
available from Zopa at 6.9% APR.
To date Zopa borrowers have mainly used
the loans to consolidate debt (21%), for
auto loans (43%), and for home improve-
ment (21%).
Focussing on these forms of debt we can
make a rough estimate of the potential
demand for loans through P2P platforms in
the medium term.
Approximately 50% of UK consumers have
no savings or savings of less than £1,500
per household. Conservatively, to remain
comfortably in the prime borrower market
we estimate that if P2P platforms were
to achieve a 10% market share in credit
card debt via debt consolidation, 20% of
the personal loan market and 5% of the
overdraft market this would equate to
£26 billion in consumer lending via P2P
platforms (a 26-fold increase) saving bor-
rowers over £1.5 billion in annual interest
payments. This impressive figure does not
even take into account the potential for
P2P platforms to capture a significant part
of the UK mortgage market.
The CAGR of P2P loans originated by the
top five US and UK platforms combined is
136% with the UK platforms alone growing
at a CAGR of 104%. Applying these growth
rates as upper and lower growth bands
we expect the UK consumer P2P market
size to reach our estimate of £26 billion in
between four and five years.
This level of growth can only be achieved
if the demand from borrowers can be
matched by the supply of willing lenders.
However, on the supply side we see a po-
tential imbalance. We estimate that there
are currently 75,000 consumer lenders on
UK P2P platforms each lending an average
of £16,000. Consumer lender numbers are
growing at a CAGR of 46%, which means
that at current growth rates there will be
a shortfall in supply of between £10-20
billion by the time our medium term esti-
mates are reached.
Even assuming higher rates of consumer
lender growth on P2P platforms due to
greater consumer awareness, ISA eligibil-
ity for P2P loans and continued lacklustre
returns from other asset classes (for ex-
ample, the average annual interest rate on
cash ISAs is currently 0.82%5
),we foresee a
significant need for institutional investors
to provide liquidity to the consumer P2P
market to meet expected demand from
borrowers and smooth growth.
Further opportunities are also likely to
arise as P2P platforms move up the value
chain and challenge the mortgage lending
market6
and the broken business models of
payday lenders result in some pivoting into
sub-prime P2P lending.
Business lending
A large proportion of the outstanding debt
issued by European SMEs between 2004
and 2007 is due to be refinanced by 2017.
5
The Money Statistics November 2014, (www.themoney-
charity.org.uk).
6
Mortgages account for 89% of outstanding consumer
debt in the UK with average interest rates of 3.2% (al-
though sub-prime borrowers pay much higher rates). This
presents an enormous market opportunity where to date
there have been limited P2P entrants. Lendinvest, a P2P
platform that specialises in financing for residential and
commercial property, has lent a total of £166 million and
folk2folk, a specialist platform focussed on the financing
of residential property in the South West of England, has
lent £37 million.
P2P Lending Fund | Growth potential

However, many of the markets in which
these loans were originally made are ei-
ther closed or are operating at significantly
reduced capacity. In 2012 a UK govern-
ment backed taskforce estimated that
domestic small businesses could face a
funding gap of up to £190 billion by 2016.
This presents a very attractive opportunity
for P2P platforms and other alternative
capital providers to fill the gap left by the
banks.
Just four banks control 80% of UK SMEs’
primary banking relationships and 92% of
SME lending comes from the traditional
banking system. The chart below shows
the decreasing trend in bank lending since
the 2007 financial crisis and specifically the
continued decline (4% per year) in bank
lending to the SME sector.
Figure C. Bank of England: Lending to UK business-
es.7
(B) Lending to UK SMEs with annual debit account turnover
less than £25 million.
(C) Lending by a British Bankers’ Association panel of
lenders to SMEs in Great Britain. SMEs are defined as
businesses with turnover of up to £25 million. Data are to
March 2014.
7
Bank of England trends on credit, July 2014.
In an effort to further boost SME lending,
in 2013 the UK government formed the
British Business Bank (BBB) with an initial
public funding commitment of £3 billion.
The BBB’s mandate is to support SMEs via
established and newly emerging finance
providers. To date, the BBB has lent over
£800 million to UK SMEs. In 2014 the
BBB began matching money lent via P2P
platforms. The BBB has already committed
£40 million to Funding Circle, £10 million
to Zopa aimed at UK small businesses and
sole traders, and £5 million to MarketIn-
voice. We believe that this explicit govern-
ment support for P2P lending to SMEs will
drive significant growth in the market.
Based on our discussions with UK bank-
ers we believe that SMEs will increasingly
need to turn to alternative finance sources
for their funding needs. Banks are continu-
ing to jettison unprofitable banking rela-
tionships and lending to small businesses
is particularly capital intensive.
Aside from the people and processing cost,
we estimate that the bank’s tier 1 capital
requirement resulting from an average
SME loan across Europe is 10 to 14% of
the loan value. This is a requirement the
P2P lenders do not have and as such is a
sustainable competitive advantage.
We further predict that more and more
SMEs will turn to P2P platforms for their
borrowing needs as they become frustrat-
ed by the banks’ increased due diligence
processes and bureaucracy and the asso-
ciated delays in making lending decisions.
For many SMEs, the primary attraction
of P2P platforms is the relative speed at
which loans can be funded when com-
pared to the high street banks.
Another promising trend is for UK banks
to enter into formal partnerships in which
they refer some of their SME customers to
P2P platforms for their borrowing needs.
For example, Santander announced a for-
mal referral agreement with Funding Circle
(A) NON-FINANCIAL BUSINESSES (C) BBA SMES
(D) LARGE BUSINESSES(B) BANK OF ENGLAND SMES
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q2Q3 Q4 Q1
4
0
-4
-6
-10
-2
2
6
10
-8
-12
12
8
2009 2010 2011 2012 2013 2014
12
0
-4
-2
-6
-8
2012 2013
Q1 Q2 Q3 Q4 Q1 Q1Q2 Q3 Q4

in June 2014 and RBS announced their
intent to enter into a similar arrangement
with an unnamed platform in October. We
are aware of at least two other UK lenders
that are exploring similar opportunities.
The UK government has also recently indi-
cated that it may require UK banks to refer
declined SME loan requests to alternative
lenders, which could further boost P2P
SME loan origination.
To date, cumulative business lending by
UK P2P platforms is approximately £900
million and this figure is growing at a CAGR
of 340%. This rate of growth cannot be
sustained by retail lenders alone. We be-
lieve that P2P platforms are best viewed as
highly efficient loan originators that create
a central market in which loans are funded
by a combination of retail and institutional
investors.
The average size of an SME loan funded by
UK P2P platforms is £70,000, the average
tenor is 45 months and net returns to
lenders range from 7-12%. P2P platforms
anticipate that SME default rates will be
between 1-2% but this has not yet been
tested through a downturn. Investors
should not exclusively rely on the credit
analysis of the platforms in this sector;
detailed judgmental analysis should be
undertaken by investors to supplement
the credit assessment undertaken by the
platforms.
Funding Circle, the largest originator of UK
P2P loans for SMEs, is growing at a CAGR
of 150% with cumulative lending to date
of £426 million. Considering the rate of
growth to date, the announced partner-
ships with banks, and government pres-
sures and incentives to boost SME lending,
we anticipate that the UK P2P business
market could reach £20 billion in the next
five years.
Factoring (invoice financing for short term
funding needs) is another sector in which
UK P2P platforms have become increasing-
ly active. We have witnessed the creation
of a tradable invoice market that offers
net returns to investors of 8-12%. We
believe that there is tremendous scope
for P2P platforms to expand in this area.
The Asset-Based Finance Association
(ABFA) estimates that there are 250,000
small businesses in the UK that operate in
markets suitable for invoice discounting
and factoring. ABFA further estimates that
the financing requirements of this market
currently stand at over £300 billion and
are growing at over 170% per year, of
which less than 1% is currently funded via
P2P platforms. Extrapolating growth and
assuming a relatively modest market share
of 5%, this suggests that the P2P invoice
trading market could be as large as £15
billion in five years.
This market, now technologically enabled,
allows efficient access to very short-term
lending. We consider this an excellent
vehicle to dynamically manage cash flows
of the fund and reinvestment risk.
Europe
P2P lending in Europe is much less mature
than in the US and the UK with generally
only one or two platforms operating in
each market.
Europe’s P2P platforms are regulated at
a national level creating as many as 28
regulatory regimes, with regulators in each
country operating at their own speed and
in their own national interests. The plat-
forms we have polled in France, Germany,
Italy took an average of two years to gain
regulatory approval and generally were
required to adhere to the same regulatory
standards as traditional banks.

We believe that the slowness of European
regulators to embrace the opportunity
offered by P2P platforms, plus bureaucracy
at the EU level should they try to imple-
ment a harmonised approach, will supress
growth and consumer confidence in the
industry in the short to medium term both
for domestic and cross border P2P lending
in Europe.
Consumer lending
Although total real outstanding household
debt has been declining steadily since the
financial crisis, European households have
not de-levered in a uniform way. Outstand-
ing European unsecured consumer debt is
currently approximately €1.1 trillion, most
of which has been financed by banks.
We are seeing slow and steady growth in
lending via European P2P platforms with
cumulative euro area consumer lending of
approximately €500 million to date. The
largest European platforms are current-
ly Prêt d’Union in France (€120 million),
Auxmoney in Germany (€120 million),
Trustbuddy in Sweden (€100 million) and
Prestiamoci in Italy (€20 million).
Domestic markets are evolving at varying
speeds, creating domestic opportunities
of different sizes. We see this as the first
stage in the evolution of P2P lending but
anticipate a rapid evolution to a second
stage with fierce cross border competition.
This ambition of growth beyond national
boundaries will facilitate the need for insti-
tutional capital to achieve critical scale for
the platforms to reach escape velocity.
Business lending
Despite the gradual recovery in demand
for credit, European regulators continue
to press banks to de-lever their balance
sheets making it harder for them to lend.
Local policy initiatives aimed at stimulating
lending (such as the European equivalents
of the British Business Bank) may not be
sufficient to overcome these factors and
help banks to satisfy credit demand.
According to the ECB, access to finance is
an issue cited by 60% of SMEs as one of
the most pressing challenges they face.
In general, the ECB finds euro area SMEs
require more bank loans and overdrafts
than are available from banks, and almost
40% of loan applications made by euro
zone SMEs were refused or only partially
granted over the period.
Demand for credit will receive an addition-
al boost in 2017 as many of the SME loans
written before the financial crisis will fall
due for refinancing.
As the chart below shows, growth in bank
loans has been flat to negative in recent
years, which has created a clear funding
gap for European businesses.
Figure D. Loan growth (% YOY) in Euro zone non-fi-
nancial business sector. Source: European Central
Bank, Pictet Asset Management.
“
“
We predict that even-
tually ConƟnental Europe
will become a larger P2P
market than the UK but
explosive growth will re-
quire a more supporƟve
regulatory framework.
0
10
20
30
40
Italy
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
-30
-20
-10
Germany
France
Spain
Euro Zone

We believe that in the longer term P2P
lending has massive potential in Europe,
a market where 80% of financing to the
real economy currently comes from banks.
However, significant growth in Europe will
only come once P2P platforms are able
to operate in a more flexible regulatory
environment similar to that in the UK. If
a favourable regulatory environment can
be established, P2P platforms will be able
to compete for the €2.4 trillion in non-
core loans sitting on the balance sheets of
Europe’s traditional banks.
US
Two platforms, Lending Club and Prosper,
currently dominate the US P2P lending
market. To date they have lent $6.2 billion
and $2 billion, respectively, with lend-
ing volumes growing exponentially since
2009.8
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2009
0
6,000
2010 2011 2012 2013 2014
1,000
2,000
3,000
4,000
5,000
LENDING CLUB PROSPER
USD (MILLIONS)
Figure E. Cumulative US consumer P2P lending
2009-14.
Other P2P platforms account collectively
for less than $250 million in consumer
lending but growth is doubling every six
months with returns ranging from 7% to
25% depending on the risk profile of the
borrower.
The US P2P business lending market is
much less mature than the consumer mar-
ket. Of the two major platforms, Prosper
does not currently facilitate business loans
and LendingClub only recently entered
the business loan market. In addition to
LendingClub, Funding Circle entered the
US market in 2014 and OnDeck recently
8
Lending Academy 2014.
began offering lenders the opportunity to
purchase loans via its online marketplace.
All three of these platforms only make
business loans available to institutional
lenders.
Student loans and mortgage lending are
low yielding assets that some P2P plat-
forms have started to securitise. The
concept is to create a low yielding portion
of “rated” prime debt to place with asset
managers, and a higher yielding equity
component for retail and other institution-
al investors. P2P student loan platform SoFi
has securitised over $400m in “A” rated
debt in the last twelve months.
US P2P lending has so far grown without
widespread publicity and marketing. How-
ever, we believe that the proposed IPOs of
LendingClub and Prosper in the consumer
space, SoFi in student loans and OnDeck in
business lending will add further momen-
tum to this rapidly growing sector over the
next twelve months.
Consumer lending
According to the NY Fed, US consumer
indebtedness now stands at $11.62 trillion,
8% below its 2003 peak.9
Of this amount,
mortgage balances account for $8.1
trillion, student loans account for $1.12
trillion, credit card balances account for
$700 billion and auto loans account for
$930 billion.
2003
Auto Loan
Credit Card
Mortgage
HE Revolving
0
2,000
4,000
6,000
(70%)
(4%)
(8%)
(6%)
(10%)
(3%)
8,000
10,000
14,000
12,000
USD (BILLION)
2004 2005
Q1 2014
USD 11.65 trillion
Q2 2014
USD 11.62 trillion
2006 2007 2008 2009 2010 2011 2012 2013 2014
Student Loan
Other
Figure F. Total US consumer debt composition.
Source: FRBNY Consumer Credit Panel/Equifax.
9
NY Fed Quarterly Report on Household Debt and Credit
August 2014.

Lending for consumer loans, credit card
and other revolving consumer credit are all
facilitated via P2P lending. Gross interest
rates on platforms range from 6 to 35%
with charge off rates ranging from 1.9%
for a grade A 36 month loan to 21.2% for
a 60 month G rated loan. The average
net return to investors on US platforms is
approximately 200-300 bps higher than on
UK platforms, possibly due to the higher
risk tolerance of US investors.
At its current growth rate the US P2P con-
sumer credit market is expected to surpass
$300 billion by 2020.
Business lending
The US has a much more advanced capital
market than Europe with banks accounting
for just 20% of business financing needs.
This diversified source of funds has led
to faster adoption of business lending
through P2P platforms than in the UK and
Europe as the default option for borrowers
in the US is no longer the traditional banks.
In the US, public assistance to support the
growth of small business is provided by the
US Small Business Administration (SBA).
In 2013 the SBA supported $29 billion in
lending to small businesses, an increase
of 10% on 2012. This growth is in direct
response to the decrease in availability of
bank lending.
There are 28 million SMEs in the US. In the
non-farm commercial and industrial sector,
loans to small businesses of $1 million
or less stood at $299 billion as of June
2014, down 12% on pre-crisis levels. Of
that amount, $130 billion in loans were in
amounts less than $100,000, $48 billion in
loans were in amounts between $100,000
and $250,000 and $120 billion in loans
were in amounts between $250,000 and
$1 million. If P2P platforms, whose aver-
age business loan size is $130,000, were
to capture 15% of the market, this would
equate to $45 billion of lending.
Rest of the world
This report focusses on the development
of P2P lending in the UK, Europe and the
US. However, it should be noted that P2P
lending platforms are emerging in many
other countries around the world.
Today the only significant market outside
of the US and UK is China where there are
over 1,000 P2P platforms operating within
a shadow banking market with assets of
between $3-6 trillion. Only a small propor-
tion of these companies operate online
and they face a number of restrictions that
limit their growth. For example, there are
limits on the maximum number of times a
loan can be “sliced” into smaller portions
and retail borrowers may only be matched
with retail lenders.
We believe that in the medium term there
is massive potential for P2P lending to
become a global phenomenon. Investors
that are interested in investing in P2P loans
in new markets will need to undertake
detailed analysis of the relevant political,
legal and regulatory frameworks as well
as the cultural backdrop and individual
credit risk regimes in each country. We are
already seeing interesting developments
in Australasia, Canada, South Africa, Latin
America and across Asia. We intend to
monitor developments in these and other
jurisdictions closely so that we can identify
the platforms with the greatest potential
to succeed in each market and that have
management teams able to execute within
our investment tolerances.
“ “The US P2P market
could account for $400
billion in lending by the
end of the decade.

4. Modelling P2P returns
P2P lending is a new asset class that offers
attractive risk-adjusted returns both in the
US and the UK with low to negative cor-
relation with traditional equity and fixed
income markets.
Our P2P portfolio will comprise consum-
er loans and ‘consumer sized’ SME loans
allowing very broad diversification across
the US and European debt markets. Cash
management and reinvestment risk will be
managed by the dynamic investment into
P2P invoice financing platforms.
The loan books of the biggest platforms
since the third quarter of 2010 consistently
generated attractive monthly returns while
also maintaining extremely low month-to-
month volatility.
We were able to analyse the loan books
of LendingClub and Prosper in the US and
Funding Circle in the UK. We were also
able to backward induce performance for
the loan book of RateSetter.1
Return profiles
To compile monthly returns, we priced
each loan book entry as an annuity with
monthly income equivalent to the amor-
tized monthly loan payment. Although
interest rates were determined by a
combination of fixed and auction pricing,
we assumed both market mechanisms
accurately priced loan risk and thus set the
discount factor equal to the interest rate
net of fees.
1
Returns modelled do not incorporate any outperfor-
mance in picking loans or allocating among loan classes.
We anticipate improved performance through better than
average selection.
Monthly returns were calculated by sum-
ming the annuity payment and the capital
gain or loss. Prepayments were treated as
redemptions at par value while defaults
were reflected as a near total loss of
capital. Capital loss in cases of default was
reduced to 95%2
to reflect the average 5%
recovery of principal through collections.
The model portfolios summarised below,
invested in every possible loan available on
each platform, and returns are compiled
on a value-weighted basis assuming no re-
investment risk and no holdings of excess
capital.
The risk free rate used to calculate excess
return is an equally weighted average of
1, 3, and 5-year yields on US Treasuries.3
Given the brief track record and the finan-
cial environment since 2010, the portfolios
produced extremely high Sharpe ratios.
The Sharpe ratio has been provided for
illustrative purposes only since we remain
wary of drawing any definitive conclusions
while the asset class is still maturing. On
a monthly basis, we have only observed
47 periods during which the economy has
been growing steadily and interest rates
have remained persistently low. No annu-
alized Sharpe ratio is provided since such a
figure would only be based on four obser-
vations that all occurred during a time of
historically low volatility. We do however
expect the Sharpe ratio to stabilise at a
2
Because of low default rates, recovery percentages be-
tween 0% and 20% did not materially alter returns.
3
US Treasuries were chosen rather than the Fed Funds
rate to more closely reflect P2P loan characteristics.

level higher than other asset classes in
the long run because of the nature of the
asset.
US consumer P2P
Prosper’s loan book of approximately
100,000 loans over 47 months returned
1.17% monthly (15.0% annually) on
average with a low of 1.04% and a high
of 1.24%. Month-to-month volatility was
0.06% corresponding to a Sharpe ratio of
18.3.
LendingClub’s loan book consists of ap-
proximately 350,000 individual loans over
the same period, and a random sample of
50,000 loans produced monthly returns
averaging 0.99% (12.5% annually) with a
high of 1.23% and low of 0.84%. Monthly
volatility averaged 0.11% to produce a
Sharpe ratio of 8.6.
UK consumer P2P
RateSetter does not disclose its loan book,
but provides average returns for 1, 3, and
5 year loans on a monthly basis. An equally
term weighted portfolio of loans produced
monthly returns of 0.39% (4.8% annually)
with a standard deviation of 0.07% yielding
a Sharpe ratio of 4.7.
UK business P2P
Funding Circle’s loan book consists of
approximately 9,000 SME loans across
the UK. The portfolio returned 0.60% per
month on average (7.4% annually) with
a high of 0.64% and low of 0.56% corre-
sponding to a monthly volatility of 0.02%
and a Sharpe ratio of 23.3.
DJIA SP
500
10 yr
Bond
NAS-
DAQ
FTSE Pros-
per
Fund-
ing
Circle
Rate-
Set-
ter
Lend-
ing
Club
Avg Mon
Return
1.13% 1.37% 0.19% 1.64% 0.60% 1.17% 0.60% 0.39% 0.99%
Risk-Adj
Return
1.13% 1.37% 0.19% 1.64% 0.60% 1.11% 0.54% 0.33% 0.93%
Risk
(Mon St
Dev)
3.28% 3.50% 1.98% 4.10% 3.47% 0.06% 0.02% 0.07% 0.11%
Sharpe 0.34 0.39 0.10 0.40 0.17 18.29 23.34 4.65 8.59
Figure G. Monthly returns and STD by asset portfolio.
Asset correlations
As an asset class, P2P loans are attractive
not only due to high risk-adjusted returns,
but also because of their low or negative
correlations to other asset classes (see
Figure H below). None of the platforms (UK
or US) show any correlation with equities,
and furthermore, all but RateSetter show
no correlation with US Treasuries.
Even within the P2P space, platforms
targeting different borrowers, consumer
(RateSetter) versus SME (Funding Circle),
are negatively correlated with each other.
Together the P2P return profiles present
compelling opportunities for diversifica-
tion.
DJIA SP
500
10 yr
Bond
NAS-
DAQ
FTSE Pros-
per
Fund-
ing
Circle
Rate-
Set-
ter
Lend-
ing
Club
DJIA 1.00
SP500 0.97 1.00
10 yr
Bond
-0.51 -0.54 1.00
NASDAQ 0.87 0.94 -0.49 1.00
FTSE 0.85 0.87 -0.44 0.79 1.00
Prosper -0.09 -0.09 0.04 -0.12 -0.03 1.00
Funding
Circle
-0.07 -0.04 -0.04 -0.07 0.04 0.37 1.00
RateSet-
ter -0.06 -0.10 0.23 -0.12 -0.09 -0.26 -0.73 1.00
Lending
Club
-0.06 -0.02 -0.06 -0.02 0.02 0.13 0.77 -0.72 1.00
Figure H. Correlation of asset portfolios standard
deviation.
Due to the limited operational history of
platforms, we observe outliers in certain
correlations. Over time we expect these
to stabilise at weak positive values among
P2P platforms while maintaining almost no
correlation to other asset classes.
Portfolio diversification
P2P return characteristics make it an
attractive asset class to incorporate in a di-
versified portfolio. Although the P2P track
record only spans 47 months, P2P assets
significantly expand the efficient portfolio
frontier when included in an optimally
diversified portfolio.
P2P Lending Fund | Modelling P2P returns

Based on all monthly returns since the
third quarter of 2010, as seen in Figure I,
the minimum variance portfolio with P2P
assets included achieves a return of 0.6%
monthly with an average volatility of only
0.01%. The minimum variance portfolio
without P2P loans generates 0.8% month-
ly, but is subject to volatility of 1.5%.
By including P2P assets in the minimum
variance equity portfolio, we can increase
returns by up to 70bps per month for
the same risk appetite. This can be seen
from the blue dotted line on the efficient
frontier graph below. For the same amount
of volatility, the P2P optimized portfolio
returns up to 1.34%.
These figures are all without leverage.
Figure I. Efficient portfolio frontier.
Leveraged returns
Average P2P asset returns are below that
of US equities historically, but due to their
low volatility, leverage is a viable strate-
gy for generating attractive risk-adjusted
returns. As shown below, conservative
amounts of leverage based on a monthly
risk free rate of 0.16% (2% annually) can
significantly boost returns while holding
risk relatively unchanged.
% Leverage Monthly Return Monthly Risk Annual Return
0% 0.60% 0.01% 7.44%
5% 0.62% 0.01% 7.72%
10% 0.64% 0.01% 8.01%
20% 0.69% 0.02% 8.58%
25% 0.71% 0.02% 8.86%
30% 0.73% 0.02% 9.15%
40% 0.78% 0.02% 9.72%
50% 0.82% 0.02% 10.30%
60% 0.86% 0.02% 10.88%
70% 0.91% 0.02% 11.46%
80% 0.95% 0.02% 12.04%
90% 1.00% 0.02% 12.63%
100% 1.04% 0.03% 13.22%
Figure J. Optimised portfolio employing leverage.
For example, an optimised portfolio em-
ploying a conservative 30% leverage ratio
enhances monthly returns from 0.60% to
0.73% (7.44% to 9.15% annually) with a
monthly volatility of 0.02%.
Caveats
Our modelling shows that the P2P asset
class presents tremendous opportunities,
but with some caveats.
• Returns modelled do not incorporate
any outperformance in picking loans or
allocating among loan classes. We an-
ticipate improved performance through
better than average selection.
• All the historical returns discussed
above assume no unallocated capital
while actual investment returns face
prepayment and reinvestment risk.
This can be mitigated to an extent by
redirecting excess capital into other
short term asset classes such as invoice
financing, which have yielded net dou-
ble digit annualized returns.4
• No platform had a losing month during
the entire 47-month time frame. Until
the asset class goes through a full eco-
nomic cycle, the performance data is
limited.
4
For example, MarketInvoice, a leading trade financing
platform in the UK, returned 18.8%, 14.51%, 12.70%, and
11.69% net of fees in 2011-2014 respectively.
MONTHLYRETURNS
RISK
2.0%
2.0%
1.5%
1.5%
1.0%
1.0%
0.0%
0.0%
0.5%
0.5% 4.0%3.5%3.0%2.5%
With P2P Tangent
Without P2P
P2P assets
Traditional assets
X
X
X
X
X
X
X
X
P2P Lending Fund | Modelling P2P returns

We believe that the global P2P lending
market is at an inflection point and ex-
pect that it will grow increasingly rapidly
over the medium term. The growth in this
exciting new asset class offers investors a
tremendous opportunity to achieve attrac-
tive risk-adjusted returns with low volatility
that are relatively uncorrelated with other
asset classes. However, the P2P lending
industry is still in its infancy and investors
in P2P loans face a number of important
risks and uncertainties. We believe it is
crucial that investors be fully aware of the
following risks when deciding whether to
participate in this market.
The platforms have a limited oper-
ating history and default rates could
be much higher than expected in a
downturn
Zopa, the first P2P lending platform, was
only launched in 2005 and most of the
growth in the P2P industry has occurred
after the 2007-2008 global financial crisis.
As a result, most of the P2P platforms have
a relatively limited operating history, par-
ticularly at their current scale, and do not
know what their long-term loss experience
may be. To date, P2P lending platforms
have been able to fairly accurately predict
default rates and have generated attractive
returns to investors after taking defaults
into account. However, it is unclear how
default rates would be affected by a future
major downturn and investors should
not rely on historical default rates as an
indication of future default rates. If default
rates were to increase significantly (as they
did during the most recent downturn),
investor returns could be much lower than
expected and they may even occur losses.
The platforms’ revenue models pro-
vides them with incentives that may
not be aligned with investors’ inter-
ests
P2P lending operates as an origi-
nate-to-distribute model where the plat-
forms have no “skin in the game” and lend-
ers bear all of the losses in the event of a
default.1
Under this model, P2P platforms
generate revenue from origination fees on
new loans and servicing fees on existing
loans. Accordingly, the more loans they
originate and the larger their loan books
the more money the platforms will make.
This provides the platforms with a clear in-
centive to originate as many new loans as
possible regardless of quality. To date, the
platforms have maintained high underwrit-
ing standards and some platforms distin-
guish themselves from their competitors
on the basis of their rigorous underwriting
standards. In the current environment in
which P2P loan volumes are increasing
exponentially the platforms have no incen-
tive to lower their underwriting standards.
Because the industry is relatively new it
is also important for reputational reasons
for the platforms to maintain high under-
writing standards. However, if in the future
origination volumes start to decrease
then the platforms may have an incentive
1
Other than a reduction in servicing fees to the extent
that loans are charged off.
5. Key risk considerations

to lower their underwriting standards to
maintain revenues despite any reputation-
al consequences this might have.
Because P2P borrowers have the
right to prepay their loans at any
time investors may face significant
reinvestment risk
All P2P loans originated by the major US
and UK platforms bear a fixed rate of inter-
est for the entire term of the loan. These
platforms also allow borrowers to prepay
their loans at any time without penalty,
whereas lenders must commit their funds
for the duration of their loans.2
This means
that in an increasing interest rate environ-
ment lenders will not have the opportunity
to take advantage of the higher interest
rates, whereas in a decreasing interest
rate environment borrowers will have
an incentive to refinance their loans at a
lower rate. If this happens then investors
face the risk that they will not be able to
reinvest their money for a similar rate of
return. Investors should be mindful of the
risk of prepayment when projecting future
returns based on current loan yields.
It is notoriously difficult to assess
SME credit risk. P2P platforms may
not be able to assess SME credit risk
as well as banks, which could result
in higher default rates and losses for
SME loans originated by P2P plat-
forms.
All lending decisions require high quality
credit information so the lender can accu-
rately assess the risk and required return
for a given loan. However, high quality data
is often not available for SMEs, particularly
smaller SMEs that are not required to pro-
duce audited financial information. Banks
are able to rely on their analysis of past
loan performance, personal relationships
2
Note that while most platforms provide a facility for
lenders to resell their loans in a secondary market these
markets have limited liquidity.
with the borrower, their ability to monitor
ongoing creditworthiness using current
account activity and their knowledge of
the local business environment when
assessing credit risk to make up for the
lack of reliable historical financial data. P2P
platforms, which have centralized credit
underwriting teams that rely primarily
on algorithmic credit scoring models, are
therefore at a significant disadvantage to
banks when assessing SME credit risk.
Over time, the algorithmic credit scoring
models used by P2P platforms may result
in increasingly reliable credit assessments
as more and more historical default infor-
mation for borrowers with similar charac-
teristics are added to the models.
Investors should not place undue
reliance on Zopa’s Safeguard Fund or
RateSetter’s Provision Fund
To date, Zopa’s Safeguard Fund and
RateSetter’s Provision Fund have done
an excellent job at protecting investors
against 100% of losses resulting from
defaulting borrowers. Both funds current-
ly provide a significant cushion over and
above the amounts that the platforms
expect they will need to pay out (120%
in the case of Zopa’s Safeguard Fund and
223% in the case of RateSetter). However,
Zopa’s Safeguard Fund represents less than
1% of its total loan book and RateSetter’s
Provision Fund represents less than 2.5%
of its loan book. This means that a relative-
ly small increase in nominal default rates
above those expected by these platforms
could easily exhaust these funds and
leave lenders exposed to the full impact
of borrower defaults. Neither platform
discloses estimates of the probability that
defaults could exceed the levels provided
for by these funds. While both Zopa and
RateSetter do warn lenders of this possibil-
ity their marketing materials place a lot of
P2P Lending Fund | Key risks considerations

emphasis on their historical track record of
covering 100% of defaulted loans, which
may give lenders a false sense of security.
Investors in fractional loans origi-
nated by LendingClub and Prosper
are significantly exposed to the risk
that the platform becomes bankrupt,
which undermines the diversification
benefits from lending to a large num-
ber of borrowers
In order to comply with SEC regulations,
investors in fractional loans originated by
LendingClub and Prosper do not have di-
rect contractual relationships with borrow-
ers. Instead, they hold SEC-registered debt
securities issued by the platforms that are
backed by cash flows from the underlying
loans. Because these securities are debt
obligations of the platforms, lenders are
exposed to both the risk of default on the
part of the borrowers and also the risk
that the platform becomes bankrupt. In
particular, borrowers may stop making
payments on their loans, the platform may
be restricted from making payments on
the notes, interest may no longer accrue
on the notes, and noteholders may not
have any priority over other creditors
of the platform. It appears that Prosper
lenders may be in a better position than
LendingClub lenders since it has designed
its corporate structure to reduce the risk
of a bankruptcy of the issuer of the notes
to investors, but there is significant uncer-
tainty regarding the effectiveness of these
measures.
A large number of LendingClub
and Prosper borrowers appear to
have provided false employment or
income information on their loan
applications, which raises legitimate
questions regarding the integrity of
the borrowers on those platforms
LendingClub and Proper do not verify
employment or income information for
all prospective borrowers. Instead, the
platforms rely on their proprietary algo-
rithms to select a sample of borrowers
to verify. According to their SEC filings, a
very significant proportion of borrowers
selected for verification are unable or un-
willing to provide satisfactory evidence to
confirm this information (up to 40% in the
case of LendingClub and 15% in the case of
Prosper). While both platforms warn inves-
tors not to rely on unverified information
provided by borrowers investors should
maintain a healthy degree of scepticism
regarding whether borrowers that provide
false information on their loan applications
should be trusted to repay their loans.
P2P Lending Fund | Key risks considerations
“ “
A key component of
our value proposiƟon is
our ability to compre-
hensively assess and
manage these risks.

P2P platforms are in the early stages of
harnessing network effects to disrupt
traditional lending models just as Amazon
has disrupted the retailing industry. For
the first time, investors have the ability to
gain direct exposure to SME loans in “con-
sumer sizes” allowing them to spread their
investments across a very large number of
consumer and business borrowers further
diversifying risk.
We believe that P2P platforms have a
sustainable competitive advantage over
banks due to their superior, low cost oper-
ating model. They can function within the
bank bid offer spread, delivering superior
returns to lenders and improved rates to
borrowers.
These driving forces, if supported by
pragmatic regulation, should propel this
industry to facilitate half a trillion pounds
of lending globally by 2010 of which over
£100 billion will be in the UK and Europe.
Consumer lending
Net returns on P2P consumer loans in the
US are approximately 2-3% higher than in
Europe due to the much lower appetite
for risk in Europe and specifically the UK
P2P market where platforms are currently
targeting savers. This is a key cultural dif-
ference, but we believe that it will change
as platforms have to grow origination vol-
umes in order to increase their revenues.
The next evolution will be for UK platforms
to move further up the risk curve in the
consumer market delivering greater risk
adjusted returns. This is a segment in
which institutional liquidity will play a key
role, allowing platforms to experiment
without affecting performance on their
retail funded super prime loans. It will be
crucial to develop strong partnerships with
the platforms in advance of this evolution
to jointly develop new classes of loans that
offer different risk/return profiles. First
movers will seize these opportunities and
create an edge that will enhance value and
raise barriers to entry.
The same is true of European platforms,
not only to smooth and boost growth
domestically as they broaden risk appetite,
but also critically to provide essential li-
quidity when they commence cross border
activity.
Due to the diversification achievable
in the consumer sector significant due
diligence is required on each platform and
its underwriting process in order to build
confidence in the quality of the underlying
borrowers.
As we will be closely analysing each plat-
form, the respective underwriting stan-
dards, management team and competitive
environment we will be in a strong position
to identify interesting private equity invest-
ment opportunities. We envisage using up
to 5% of the AUM of the fund to invest in
P2P equity, in the process strengthening
key business partnerships.
6. Conclusion

P2P SME platforms bring scale of origi-
nation through a technology model that
democratises the origination process.
The average borrower is seeking less than
£100,000 and we will generally take just a
small proportion of each loan.
In Europe (as with much of the rest of the
world), SMEs represent 99% of all private
businesses and account for a very sub-
stantial percentage of new jobs that are
created. SMEs currently have very limited
alternatives to the banking sector when
it comes to their financing needs, and
politicians are acutely aware of the risks
associated with the oligopoly that is bank
lending to this sector. New capital require-
ments for banks will only serve to choke
the availability of capital to a significant
engine of growth.
The platform’s own credit analysis will be
done primarily on a ‘scored’ basis that em-
phasises individual credit quality, sector/
industry analysis and a review of available
financial information. The data-driven
process does not allow for much, if any,
subjective analysis. This centralised scored
approach, plus platforms having ‘no skin in
the game‘, presents a clear misalignment
of interests. This credit analysis risk is mit-
igated by us holding a diversified portfolio
of consumer-sized loans.
An added benefit of the scale of loans
in which we will invest is the ability to
increase the size of an individual SME loan
at our discretion.
In this case, a key component of our alpha
generation will be in the ‘judgemental’ de-
cisions we will make around larger lending
to specific sectors, geographies and indi-
vidual businesses. We will analyse the key
factors such as macro and micro business
environment, team quality and execution
ability, competitive forces as well as finan-
cials to create a diversified portfolio of
business loans. We will not rely exclusively
on the P2P platform’s assessment of credit
risk in this notoriously difficult sector.
Invoice financing will be a key component
of our portfolio as it provides not only
shorter term investments but it will also fa-
cilitate the management of cash flows and
reinvestment risk. We believe there will be
an opportunity to dynamically manage this
asset class with the use of bank revolving
credit lines to augment the fund’s capital
base and improve performance.
Over time the algorithmic credit scoring
models used by P2P platforms should
result in increasingly reliable credit assess-
ments as more and more historical default
information for borrowers with similar
characteristics are added to the models.
As these models continue to develop, P2P
platforms have the potential to be able to
make more sophisticated and reliable SME
credit assessments than banks that rely
primarily on subjective factors. A key factor
of our success is our ability to dynamically
manage our portfolio and P2P partner-
ships in line with this evolution. There will
be many entrants to this market and it is
key to partner with or invest through the
platforms that will succeed.
The P2P asset class as it exists today has
yet to endure an economic downturn,
but evidence suggests returns are robust.
Using historical consumer and SME default
rates during the financial crisis as a proxy,
we would expect returns to significantly
outpace defaults.
For the US unsecured consumer loan mar-
ket charge-offs reached a high of 6.71% in
the second quarter of 2010. For the same
market in the UK, write-offs reached a
high of 1.94% of the total outstanding loan
amount in the second quarter of 2009.
The US SME loan market is segmented into
Real Estate Commercial and Commercial/
P2P Lending Fund | Conclusion

Industrial loans, which experienced charge
off rates of 2.94% and 2.56% respectively.
Detailed data on UK SMEs is only available
from 2011, but as a proxy, the SME failure
rate was only 2.84% in 2009.
We aim to prove concept and returns with
a strategic seed investor throughout 2015
and then quickly raise external assets tar-
geting the wealth management and family
office community.
At inception of the
fund the team will ac-
tively manage all rela-
tionships with the plat-
forms and regulators
and closely monitor
the industry’s develop-
ment. Partnerships will
be formed with existing
and emerging platforms
creating important bar-
riers to entry. The fund structure provides
a necessary conduit to the market through-
out this early cycle. As winners emerge and
the market scales we expect that there will
be an evolution towards some direct insti-
tutional investment, from some of the larg-
er asset managers, into loans originated by
established and proven platforms. They will
of course receive only the average returns
of the platform, trailing the evolution of the
market and therefore performance as this
sector continues to scale and innovate.
We expect that the fund will begin as an
active manager taking an economic share
of performance as well as assets under
management. As the winning P2P plat-
forms emerge and strong partnerships
are formed an element of deployment
will become passive focussing on capital
reinvestment with the very active focus on
new platforms, initiatives and regions.
Our investment value is built on our ability
to better segment the market and to
access loans in those specific sub-grades
that we believe offer the greatest risk-ad-
justed returns. Because of our proximity
to management at the largest platforms
and our ability to find
and evaluate emerg-
ing ones, we have the
scale necessary to
economically allocate
across the P2P spec-
trum in terms of SME
and consumers. Within
each segment, our
diversification reduc-
es the modelling risk that direct lending
would otherwise face, which allows us
to achieve lower volatility for the same
return. Furthermore, our strategy manages
reinvestment risk much more aggressively
through short term invoice financing and
by utilising diversification to ensure greater
liquidity. Together, our tactical allocation
offers more attractive returns for the risk
we take.
By taking just 1% of the forecast Europe-
an P2P market we are confident we can
achieve assets under management of £1
billion by 2020.
P2P Lending Fund | Conclusion
“
“
A porƞolio with default
rates of up to 8% in SME,
16% in US consumer, and 5%
in UK consumer loans—2.5
Ɵmes crises levels—would
sƟll suﬀer zero losses.

The following are general description of
the five major P2P lending platforms:
LendingClub and Prosper (which operate
solely in the US), Zopa and RateSetter
(which operate solely in the UK ) and Fund-
ing Circle (which operates in both the US
and the UK).
In order to comply with US federal secu-
rities laws, LendingClub and Prosper are
required to publish detailed prospectuses
that contain far more information than is
currently disclosed by the UK platforms.
We have therefore been able to provide
significantly more information regarding
LendingClub and Prosper than for the oth-
er major platforms.
Overview
LendingClub1
is the largest P2P lending
platform in the US. Since it was launched
in 2007, LendingClub has facilitated over
$5 billion in loans.
LendingClub offers investors the opportu-
nity to participate in either its standard or
its custom loan programs. The standard
program loans are three- to five-year per-
sonal loans made to individual borrowers
with a FICO score of at least 660 (among
other criteria). Standard program loans are
issued in amounts ranging from $1,000
1
Unless otherwise specified, information in this section
has been sourced from LendingClub’s Registration
Statements on Form S-1 filed with the US Securities and
Exchange Commission on July 23, 2014 and October 20,
2014.
to $35,000. Standard program loans are
offered publicly to all investors via Lend-
ingClub’s website or privately to qualified
investors (essentially wealthy individuals
or institutions) in private transactions. Cus-
tom program loans include small business
loans in amounts ranging from $15,000 to
$100,000 with various maturities between
one and five years, education and patient
finance loans in amounts ranging from
$499 to $40,000 and other loans that do
not meet the requirements of the stan-
dard loan program. Custom program loans
are available only to qualified investors in
private transactions.
All of LendingClub’s loans have fixed inter-
est rates, are amortizing, are unsecured
and may be prepaid in whole or in part by
the borrower without penalty at any time.
Borrowers are therefore protected against
rises in interest rates and have the option
to refinance at a lower rate if interest rates
fall, exposing lenders to reinvestment risk.
LendingClub does not restrict borrowers
from incurring additional future debt
and its loans do not contain cross-default
provisions.
Investors that are not qualified investors
may only invest in standard program loans
via SEC-registered “borrower payment
dependent notes” issued by LendingClub
that correspond to payments received on
underlying loans selected by the investor.
Qualified investors may invest in standard
program loans or custom loans via trust
certificates or interests in limited part-
nerships that purchase trust certificates.
Appendix: Platform descriptions

These trust certificates also correspond to
cash flows from underlying loans chosen
by the investors. In both cases it is import-
ant to note that the investor does not have
a direct contractual relationship with the
borrower: LendingClub issues investors
with securities backed by cash flows from
the underlying loans. In addition, banks
and other financial institutions that wish
to hold the actual loans on their balance
sheet can purchase whole loans, but are
prohibited from contacting the borrowers
directly.
LendingClub charges borrowers a fee of
between 1-6% of the amount borrowed
depending on the term of the loan and its
credit grade. Investors that invest via notes
typically pay a servicing fee of 1% of each
payment (principal and interest) received
from the borrower. Investors that invest via
trust certificates can instead choose to pay
a management fee of up to 1.3% per year.
Qualified investors and institutions cur-
rently provide the majority of Lending-
Club’s financing. As of June 30, 2014, there
were $3.3 billion of LendingClub loans out-
standing, of which $1.5 billion (44%) were
financed by trust certificates, $981 million
(29%) were financed by trust certificates
and $881 million (26%) were financed by
notes.
Underwriting process
To be eligible for a standard program loan
LendingClub requires borrowers to have
a minimum FICO score of 660, a debt to
income ratio (excluding the borrower’s
mortgage) below 35%, an “acceptable”
debt-to-income ratio (including both
the borrower’s mortgage and requested
LendingClub loan), and a credit report that
reflects at least two revolving accounts
currently open, six or few credit inquiries
in the last six months, and a minimum
credit history of 36 months.
If a borrower meets these criteria, Lend-
ingClub uses a proprietary algorithm based
upon historical performance of its borrow-
ers to assign an LC Score between 1 and
25 corresponding to base risk grades of A1
through E5. LendingClub uses the base risk
grade to assign a final interest rate de-
pending on the channel through which the
borrower is sourced, the loan amount and
the loan term. As of September 30, 2014,
the interest rate on an A1 loan was 6.03%
and on an E5 loan was 22.15%. Additional
risk grades from F1-G% are modified from
the E5 base grade based on channel, term
and amount and had interest rates ranging
from 23.43% to 26.06% as of September
30, 2014.
LendingClub screens applicants through
US government sanctions lists and its own
fraud detection systems and indemnifies
investors for losses resulting from identity
fraud. However, it is important to note that
LendingClub does not verify employment
or income information for all applicants
and does not indemnify investors in any
other cases of fraud. From October 2008
through December 2013, LendingClub
reimbursed investors a total of $0.5 million
in 51 cases of identity fraud.
In 2013, LendingClub verified employ-
ment and income information for 79% of
applicants. Of the borrowers selected for
verification, only 58.6% provided Lending-
Club with satisfactory evidence to verify
their income, 30.5% failed to respond to
the request or provide satisfactory evi-
dence and therefore had their applications
rejected, and 9.6% withdrew their appli-
cations. This suggests that approximately
40% of all potential borrowers (including
those not selected for verification) are pro-
viding unreliable employment or income
information during the application process.
LendingClub does not guarantee that it
P2P Lending Fund | Platform descriptions

will continue to perform employment or
income checks. Accordingly, LendingClub
warns investors that information supplied
by borrowers should not be relied on—
they should only rely on the loan grade
assigned by LendingClub.
Loan issuance process
LendingClub’s loan issuance process has
been specifically designed to comply
with a myriad of US federal, state and
local laws, including those governing the
issuance and sale of securities, lending
practices and usury limitations. For exam-
ple, notes are registered with the SEC to
comply with US restrictions on the offer
and sale of securities to the public. A key
element of the loan issuance process is
LendingClub’s relationship with WebBank,
an FDIC-insured industrial bank chartered
in Utah, which originates all of Lending-
Club’s loans. By using WebBank to origi-
nate its loans LendingClub believes that
under federal law its loans will generally
not be subject to state usury limitations
If a loan application is approved it is listed
on LendingClub’s marketplace to attract in-
vestor commitments. If sufficient investor
commitments are received, WebBank is-
sues the loan and keeps the loan on its bal-
ance sheet for two business days and then
sells the loan to LendingClub. LendingClub
funds the loan purchase with the proceeds
from the sale of notes and trust certificates
to investors. All of LendingClub’s outstand-
ing loans appear as assets on its balance
sheet and all outstanding notes and trust
certificates appear as liabilities. As a result,
investors do not have a direct contractual
relationship with borrowers. Investors can
achieve diversification by spreading their
investment across a large number of loans
that meet their criteria in minimum incre-
ments of $25.
Late payments and defaults
If a loan is past due, LendingClub contacts
the borrower to request payment. After
a 15-day grace period, LendingClub can
charge a late fee of the greater of 5% of
the unpaid payment or $15. Any late fees
received are passed on to investors net of
LendingClub’s 1% service charge. If a loan
becomes 31 days overdue it is either re-
ferred to an outside collection agent or to
LendingClub’s own collections department.
Any amounts recovered on such loans are
passed on to investors net of LendingClub’s
1% service charge and a collection fee of
up to 35% of the amount collected.
Investors are likely to suffer significant loss-
es if a loan becomes more than 30 days
overdue given the 35% collection charge
and the fact that late payments are an ear-
ly indicator of charge off probability.
LendingClub publishes significant amounts
of data regarding historical delinquency
and charge-off rates for its loan portfolio.
Bankruptcy and other potential
issues
Investors face a very significant risk of loss
if LendingClub were to become subject
to a bankruptcy proceeding for several
important reasons. First, LendingClub
has made arrangements for only limited
backup servicing of its loans. If Lending-
Club were to fail and it is not able to put
adequate servicing arrangements in place
then it may not be able to make payments
on the notes or trust certificates. Second,
because the notes and trust certificates
that investors purchase are obligations
of LendingClub and not the borrowers,
in the event of a bankruptcy LendingClub
may be prevented or delayed from making
payments to investors and interest may
cease to accrue on the notes and trust
certificates. Since bankruptcy proceedings

can take many months or years to com-
plete, this could severely impair the value
of the notes and trust certificates. Finally,
because the note and trust certificates are
unsecured, investors may not have priority
over other LendingClub creditors to pay-
ment from the corresponding loans and
may have to share those proceeds with all
of LendingClub’s other creditors, including
investors in other loans. Accordingly, even
though LendingClub’s lending model al-
lows investors to diversify their risk across
a wide range of borrowers, all investors are
very exposed to the risk of a LendingClub
bankruptcy.
Another potential issue facing LendingClub
relates to the fact that it is required to reg-
ister notes with the SEC. Each time a loan
is made and is funded with notes, Lending-
Club is required to post specific informa-
tion about that loan and file that informa-
tion with the SEC, including employment,
income and credit bureau information that
may not have been verified by Lending-
Club. This additional information is sub-
ject to the anti fraud provisions of the US
securities laws. Accordingly, LendingClub is
potentially exposed to the risk of litigation
from the SEC or investors who relied on
false or misleading borrower information
when making their investment. Although
the risk may be small, it is possible that
LendingClub could faces substantial dam-
ages claims or penalties in respect of this
information. If these damages claims or
penalties were sufficiently large they could
result in a bankruptcy proceeding, which
would expose all LendingClub investors to
the risks described above.
Overview
Prosper2
is the second largest P2P lending
platform in the US. Since it was launched
in 2006, Prosper has facilitated over $1.6
billion in loans.
Prosper offers investors the opportunity to
invest in three to five year loans to indi-
viduals in amounts ranging from $2,000 to
$35,000 via two channels, the Notes Chan-
nel and the Whole Loan Channel. Unlike
LendingClub, prosper does not currently
facilitate loans to SMEs. Loans are assigned
randomly to the two channels based on
Prosper’s determination of the relative
overall demand in each channel. Loans on
the Notes Channel may be partially funded
if they receive bids for at least 70% of the
amount requested. Loans on the Whole
Loan Channel must received bids for 100%
of the amount requested. Only institu-
tional investors are eligible to invest in via
the Whole Loan Channel, but all loans are
offered via Prosper’s website.
All of Prosper’s loans have fixed interest
rates, are amortizing, are unsecured and
may be prepaid in whole or in part by the
borrower without penalty at any time.
2
has been sourced from Prosper’s Registration Statement
on Form S-1 filed with the US Securities and Exchange
Commission on October 3, 2014, its Annual Report on
Form 10-K for the year ended December 31, 2013 and
its Quarterly Report on Form 10-Q for the three months
ended June 30, 2014.

Prosper does not restrict borrowers from
incurring additional future debt and its
loans do not contain cross-default provi-
sions.
Investors that invest via the Notes Chan-
nel invest in SEC-registered “borrower
payment dependent notes” that corre-
spond to payments received on underlying
loans selected by the investor. This model
operates almost identically to Lending-
Club’s standard program loans and, as
with LendingClub, investors via the Notes
Channel do not have a direct contractual
relationship with the borrower: Prosper
issues investors with securities backed
by cash flows from the underlying loans.
Investors via the Whole Loan channel hold
these loans on their balance sheet but are
prohibited from contacting the borrowers
directly.
Prosper charges borrowers a fee of be-
tween 1-5% of the amount borrowed
depending on the term of the loan and its
credit grade. Lenders are charged ongoing
servicing fees of 1% per annum on the
outstanding principal amount of the loan.
This could result in significantly higher
charges to lenders over the term of the
loan as compared with LendingClub, which
only charges servicing fees on payments
of principal and interest received by the
lender.
Prosper does not separately disclose the
proportion of loans funded via the Notes
channel and Whole Loan channel, but it
appears that as with LendingClub insti-
tutions currently provide the majority of
LendingClub’s financing. For example, for
the quarter ended June 30, 2014 Prosper
originated $370 million in new loans but
the volume of loans held on Prosper’s
balance sheet increased by only $8 million.
This suggests that approximately $362
million of loans were purchased by inves-
tors via the Whole Loan channel, or almost
98%.
Prosper’s eligibility criteria are less strin-
gent than LendingClub’s. Borrowers must
have a minimum FICO score of 640, fewer
than seven credit bureau inquiries within
the last 6 months, have a stated income
greater than $0, have a debt-to-income
ratio below 50%, have at least two open
trades reported on their credit bureau,
have no reported delinquencies of 30 or
more days within the last 3 months and
have not filed for bankruptcy within the
last 12 months.
If a borrower meets these criteria, Prosper
uses a proprietary algorithm based upon
historical performance of its borrowers to
assign a “Prosper Rating” between AA and
HR that correspond to estimated average
annualized loss rates ranging from 0%-
1.99% for AA to over 15% for HR. Prosper
determines estimated loss rates by using
credit scores from credit reporting agen-
cies and a proprietary “Prosper Score.” The
Prosper Score predicts the probability of
a loan going more than 60 days past due
within 12 months from the application
date based on historical data from Pros-
per’s borrowers and a data archive from a
consumer credit bureau. LendingClub uses
the base risk grade to assign a final interest
rate depending on the channel through
which the borrower is sourced, the loan
amount and the loan term. As of Octo-
ber 2014, the interest rates on AA loans
ranged from 3%-15% and for HR loans
ranged from 25%-36%.
As with LendingClub, Prosper indemnifies
investors for losses resulting from identi-
ty fraud but does not verify income and
employment information for all applicants
or indemnify investors in any other cases

of fraud. From inception through June 30,
2014, Prosper had reimbursed investors a
total of $0.75 million under its indemnifi-
cation obligations.
Between July 14, 2009 and June 30, 2014,
Prosper verified employment and income
information for 59% of applicants and
cancelled 15% of loan listings because
they contained inaccurate or insufficient
employment or income information. Un-
like LendingClub, Prosper has undertaken
to continue to provide income and verifi-
cation checks consistent with its current
practices going forward.
Prosper’s loan issuance process, like Lend-
ingClub’s, has been specifically designed to
comply with a myriad of US federal, state
and local laws, including those governing
the issuance and sale of securities, lending
practices and usury limitations. Prosper
also uses WebBank to originate all of its
loans
If a loan application is approved it is listed
on Prosper’s marketplace in either the
Notes Channel or the Whole Loan Chan-
nel in order to attract investor bids. The
bidding period on the Notes Channel ends
on the earlier of 14 days and the date on
which it has received bids totalling the re-
quested loan amount. The bidding period
on the Whole Loan Channel ends on the
earlier of one hour after the loan is posted
and a lender committing to purchase the
loan. This suggests that institutional in-
vestors are very active in monitoring loans
that become available on Prosper and are
able to very quickly determine whether
to purchase a given loan. If a Whole Loan
Channel loan does not received purchase
commitments then it is re-posted for
bidding in the Notes Channel and potential
lenders are informed that it had previously
been posted on the Whole Loan Channel.
The process for funding Notes Channel
loans is identical to LendingClub’s. If suffi-
cient investor commitments are received,
WebBank issues the loan and then sells
the loan to Prosper. Prosper funds the loan
purchase with the proceeds from the sale
of notes to investors. All loans funded via
the Notes Channel appear as assets on its
balance sheet and all outstanding notes
appear as liabilities. As a result, investors
do not have a direct contractual relation-
ship with borrowers. Investors can achieve
diversification by spreading their invest-
ment across a large number of loans that
meet their criteria in minimum increments
of $25.
If a loan is past due, Prosper contacts the
borrower to request payment. After a
15-day grace period, Prosper charges a
late fee of the greater of 5% of the unpaid
payment or $15. Any late fees received
are passed on to investors net of Prosper’s
collection and servicing fees. If a loan
becomes overdue it is either referred to
an outside collection agent or to Prosper’s
own collections department. Any amounts
recovered on such loans are passed on
to investors net of Prosper’s 1% service
charge and a collection fee of up to 40% of
the amount collected. Loans that become
more than 120 days overdue are charged
off.
Investors are likely to suffer significant
losses if a loan becomes more than 30
days overdue given the 40% collection
charge and the fact that late payments are
an early indicator of charge off probability.

Prosper publishes significant amounts of
data regarding historical delinquency and
charge-off rates for its loan portfolio.
Bankruptcy and other potential is-
sues
Unlike LendingClub, Prosper has specifical-
ly designed its organizational structure to
minimize the likelihood that the issuer of
notes will become subject to a bankruptcy
proceeding. It has done this by creating a
special purpose entity to make loans and
issue notes that is restricted from under-
taking unrelated activities and incurring lia-
bilities unrelated to funding loans. Howev-
er, there is no guarantee that this structure
would be effective in practice and a bank-
ruptcy of Prosper would raise the same
issues as with LendingClub. In addition,
as with LendingClub, Prosper has made
arrangements for only limited backup
servicing of its loans. Again, even though
Prosper’s lending model allows investors to
diversify their risk across a wide range of
borrowers, all investors are very exposed
to the risk of a Prosper bankruptcy.
Like LendingClub, Prosper is also poten-
tially exposed to the risk of litigation from
the SEC or investors who relied on false
or misleading borrower information when
making their investment.
Overview
Zopa3
is currently the largest P2P lending
platform in the UK. Since it was launched
in 2005, Zopa has facilitated over £650
million in loans.
3
has been sourced from Zopa’s corporate website (www.
zopa.com).
Zopa offers investors the opportunity to
invest in one to five year personal loans
made to individual borrowers (including
businesses run by sole traders). Loans are
issued in amounts ranging from £1,000
to £25,000. Institutions lending via Zopa’s
platform must be authorised by the UK
Financial Conduct Authority to lend to
consumers.
All of Zopa’s loans have fixed interest
rates, are amortizing, are unsecured and
may be prepaid in whole or in part by the
borrower without penalty at any time.
Zopa does not restrict borrowers from in-
curring additional future debt and its loans
do not contain cross-default provisions.
Unlike the major US platforms, Zopa lend-
ers have direct contractual relationship
with borrowers.
Zopa charges borrowers a fixed fee of up
to £190. Lenders are charged ongoing
servicing fees of 1% per annum on the out-
standing principal amount of the loan.
Zopa does not publicly disclose the pro-
portion of loans on its platform that are
funded by institutional investors. However,
Zopa officials have informed us that they
expect individuals to fund the majority of
Zopa’s loans.
All borrowers must be at least 20 years old,
have a credit history, a good track record
of repaying debt, a three year address
history in the UK, an income of at least
£12,000 per year and be able to afford
the loan. Zopa conducts the same credit
searches done by banks and other loan
companies.

Zopa has established a “safeguard” fund
funded from the fees that borrowers pay
to Zopa. The safeguard fund offers lenders
a degree of protection in the event that
borrowers fail to repay their loans, includ-
ing in respect of unpaid interest. The fund
is held in trust by an affiliate of Zopa. As
of October 2014, approximately £6 million
had been set aside in the trust of which
Zopa expects to have to pay up by £5
million leaving a buffer of approximately
£1 million.
If a loan is past due, Zopa will refer the
loan to its collection agent who may
charge the borrower a fee of 22.5%-40%
of the amount overdue. If the borrower
misses four consecutive payments, dies or
becomes bankrupt then a claim is made
against the safeguard fund. If there are
not sufficient funds in the safeguard fund
to cover a defaulted loan then Zopa will
continue to try to collect from the borrow-
er and pay any recovered amounts (net of
enforcement fees) to the lenders on a pro
rata basis.
Zopa publishes data regarding historical
actual and expected default rates for all of
its loans since inception grouped by loan
market and loan duration.
Bankruptcy and other potential is-
sues
Zopa investors do not face the same bank-
ruptcy risks as investors in LendingClub or
Prosper loans for the simple reason that
they have direct contractual relationships
with lenders. Accordingly, even if Zopa
were to fail, investors would still be able to
claim directly against borrowers. According
to Zopa, in that situation the fees related
to each loan will be sufficient to cover
borrower repayments and crediting lender
accounts. Furthermore, under regulations
Zopa conducts identity, fraud and cred-
it checks on all borrowers but does not
disclose how often it verifies employ-
ment or income information. All of Zopa’s
underwriting is conducted manually by its
employees.
Zopa’s loan issuance process is very
different to the LendingClub and Prosper
model. If a loan application is approved
the loan is assigned to one of the follow-
ing five loan markets based on the bor-
rower’s credit quality: A*, A, B, C1 and S
(business). Lenders submit their lending
criteria, including the amount they wish
to lend, the market in which they wish to
lend, the rate they are prepared to lend
at and the period over which they are
prepared to lend. These lending offers
are then ranked first by interest rate from
lowest to highest and second by the time
of the offer. If offers from lenders match
the borrower’s borrowing criteria then the
borrower is provided with a personalised
quote showing the average interest rate
from all borrowers on a given day. If the
borrower accepts the quote his or her loan
is funded by lenders in rank order until the
full amount of the loan is matched. Each
lender receives the interest rate he or
she requested and the borrower pays the
weighted average rate across all borrow-
ers.
Unlike loans funded through LendingClub
and Prosper’s public platforms, Zopa’s in-
vestors have a direct contractual relation-
ship with borrowers. However, the identity
of the borrowers is not made public to the
lenders unless required as part of legal
proceedings for the enforcement of the
loan. Investors can achieve diversification
by spreading their investment across a
large number of loans that meet their cri-
teria in minimum increments of £10.

adopted by the UK Financial Conduct
Authority in 2014, all UK P2P lenders put
in place policies to manage the continued
collection of loan payments should the
platform fail.
To help ensure that the platform has suffi-
cient funds available in the event of future
financial shocks, the FCA has also estab-
lished prudential standards that require UK
P2P lenders to hold the following mini-
mum capital levels:
• 0.2% of the first £50 million of total
loans outstanding;
• 0.15% of the next £200 million of total
loans outstanding;
• 0.1% of the next £250 million of total
loans outstanding; and
• 0.05% of any remaining balance of loans
outstanding above £500 million.
Overview
RateSetter4
is currently the third largest
P2P lending platform in the UK. Since it
was launched in 2010, RateSetter has facil-
itated over £380 million in loans.
RateSetter offers investors the opportunity
to invest funds for one month, one year,
three year or five years to fund loans made
to individual borrowers (including busi-
nesses run by sole traders). Borrowers can
borrow on terms ranging from six months
to five years. Loans are issued in amounts
ranging from £1,000 to £25,000. Institu-
tions lending via RateSetter’s platform
must be authorised by the UK Financial
Conduct Authority to lend to consumers.
4
has been sourced from Funding Circle’s corporate website
(www.fundingcircle.com).
All of RateSetter’s loans have fixed interest
rates, are amortizing and may be pre-
paid in whole or in part by the borrower
without penalty at any time. Borrowers are
therefore protected against rises in inter-
est rates and have the option to refinance
at a lower rate if interest rates fall, expos-
ing lenders to reinvestment risk. RateSetter
does not restrict borrowers from incur-
ring additional future debt and its loans
do not contain cross-default provisions.
RateSetter lenders have direct contractual
relationship with borrowers. According to
RateSetter, the vast majority of its loans
are unsecured.
RateSetter charges borrowers fees de-
pending upon the amount borrowed, the
loan term and the borrower’s personal
credit profile. RateSetter does not current-
ly charge any fees to lenders.
RateSetter does not publicly disclose the
proportion of loans on its platform that are
funded by institutional investors. However,
RateSetter officials have informed us that
they expect individuals to fund the majori-
ty of RateSetter’s loans.
RateSetter seeks to distinguish itself from
competitors by its stringent underwriting
process. According to RateSetter, 85% of
all loan applications are turned down.
All borrowers must be at least 21 years old,
have a good credit history and an income.
RateSetter uses credit bureau reports and
additional information provided by the
borrower to evaluate the borrower’s ability
to service the loan. RateSetter then uses a
risk grading structure to allocate borrowers
into one of 13 credit grades. Each credit
grade carries a risk fee that the borrower
pays into RateSetter’s “Provision Fund”
(see “Late Payments and Defaults” below).

If a borrower misses a payment RateSet-
ter will make a second attempt to debit
the payment from the borrower’s bank
account. If the second attempt is unsuc-
cessful, RateSetter will write to the bor-
rower and if necessary refer the loan to an
external debt collection agency. If there
are sufficient funds in the Provision Fund
to cover the missed payment then lenders
will receive the full amount of the missed
payment from the Provision Fund. Other-
wise, RateSetter will declare a “resolution
event” and from that point in time all loan
repayments will be collected on behalf of
all of RateSetter’s savers on a pro rata basis
to ensure diversification of default risk. Ac-
cordingly, no single lender will be exposed
to any individual default.
RateSetter publishes data regarding histori-
cal actual and expected default rates for all
of its loans for the past five years but does
not provide a breakdown by loan duration.
Bankruptcy and other potential
issues
The position of investors in the event of a
bankruptcy of RateSetter would be similar
to that of Zopa investors. Like Zopa, Rate-
Setter has put in place policies to manage
the continued collection of loan payments
should the platform fail and is subject to
the FCA’s minimum capital requirements.
UK platform
Overview
Funding Circle5
is the largest P2P lending
platform in the UK. Since it was launched
in 2010, Funding Circle has facilitated over
£400 million in loans.
5
has been sourced from Funding Circle’s corporate website
(www.fundingcircle.com).
RateSetter’s loan issuance process is
slightly different than Zopa’s with loans
being assigned to markets based on loan
term rather than borrower credit quality.
Lenders and borrowers whose applications
have been approved make an offer to lend
or borrow and the rates at which they
are prepared to lend or borrow. Borrower
and lender orders are matched first by
rate and then by time. Offers to borrow
remain open for at least 14 days and offers
to lend remain open for at least 30 days.
Each lender receives the interest rate he or
she requested and the borrower pays the
weighted average rate across all borrow-
ers.
As with Zopa, RateSetter’ investors have
a direct contractual relationship with
borrowers. However, the identity of the
borrowers is not made public to the
lenders unless required as part of legal
proceedings for the enforcement of the
loan. Unlike Zopa, RateSetter does not split
lender’s funds across multiple borrowers
instead relying on the Provision Fund to
mitigate the risk of an individual borrower
defaulting.
RateSetter’s Provision Fund is similar to
Zopa’s safeguard fund but provides signifi-
cantly greater cover over expected default
rates: 223% of estimated claims as of
October 27, 2014 versus Zopa’s 120%. The
Provision Fund is funded from the fees that
borrowers pay according to the borrow-
er’s risk grading. The Provision Fund offers
lenders a degree of protection in the event
that borrowers fail to make loan payments.
RateSetter claims that to date no lender
has lost a penny by investing on its plat-
form as a result of the Provision Fund. As
of October 27, 2014, approximately £8.9
million had been set aside in the Provision
Fund. The Provision Fund is held in trust by
an affiliate of RateSetter.

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