Prosper Inks $5 Billion Loan-Buying Deal With Investors Including Soros, Jefferies
Investors in online lender’s loans also include Third Point, Fortress affiliate
February 27, 2017 – by Peter Rudegeair
Prosper Marketplace Inc. struck a deal on Monday to sell up to $5 billion worth of consumer loans to a group of investment firms over the next two years.
Members of the group arranged by the online lender include New Residential Investment Corp, a real-estate investment trust managed by an affiliate of asset manager Fortress Investment Group LLC; hedge-fund firms Soros Fund Management LLC and Third Point LLC; and the investment bank Jefferies LLC. The Wall Street Journal reported in August that the four firms in the consortium being announced Monday were in advanced talks with Prosper on a loan-buying deal.
The arrangement clears one of the biggest issues hanging over the San Francisco-based company, which was valued at $1.9 billion in an April 2015 fundraising round. A subsequent drying up of investor appetite for Prosper’s credits caused loan volume to fall by around one-third in the first nine months of 2016, prompting the company to lay off staff and slash spending to conserve cash.
“The space was maybe hotter [among money managers] than the mechanics or fundamentals would have supported at the time,” said Prosper CEO David Kimball in an interview Monday. “Now I think we’re at a stage where there’s just a little more of a thoughtful approach.”
Mr. Kimball, who took over the top job at Prosper late last year, said his focus was on getting the company to profitability. The bulk of Prosper’s revenue comes from fees it charges borrowers to take out loans, so having a large commitment from money managers to fund loans helps ensure that revenue will be more sustainable.
That certainty won’t come cheap, though. As part of the deal, the investor group will receive warrants to buy Prosper shares that are tied to the volume of loans that they buy at face value. If the group buys the full $5 billion, they would have the right to purchase shares representing 35% of the company, according to people familiar with the matter.
In the deal, Prosper was advised by investment bank Financial Technology Partners LP.
Prosper was founded in 2005 as a peer-to-peer lender, but following a 2013 recapitalization, it began to look to Wall Street firms to fund more of the loans it made. Until last fall, one of its biggest sources of funding was Citigroup Inc., which packaged Prosper loans into bonds. That arrangement ended in April after Prosper executives indicated dissatisfaction about how the bonds were priced.
Mr. Kimball said that he expected Prosper to launch its own securitization program, Prosper Marketplace Issuance Trust, in the second quarter. Loans that will underlie those bonds will likely come from the new investor group as well as other Prosper investors that want to fund their purchases in alternative ways.
Part of what delayed the deal’s closing was a legal dispute between Prosper and another money manager, Colchis Capital Management, over the terms of an earlier loan-purchase agreement, Mr. Kimball said. In November, Prosper said it would pay Colchis $9 million in cash and warrants to purchase shares worth 7% of the company as part of a settlement.