Marketplace Lending is Finding a Place in Ultra High-Net Worth Portfolios
“We’re usually looking for high-upside, grand slam investments with IRRs of 30-40% and more,” said Mike Wohl, Investment Manager of Otter Consulting, a South Florida single-family office.
While we wish Mr. Wohl luck in attaining his return targets, everyone including him knows that it is an impossible return on uninvested cash. Marketplace lending as an industry averaged 6.5% returns after fees for all investors last year. Mr. Wohl explained that this is a great return for idle cash given the low risk and volatility, so Otter invests a portion of unallocated cash to marketplace lending.
“For high value clients,” Mike continued, “Marketplace lending can act as an effective cash-replacement since cash yields are under 100 basis points.”
Mr. Wohl has done the calculations on the notes he invests in, and has surmised that even in a down economy where default rates increase, the expected yield is in the 1-2% range. “This is pretty low downside risk,” Mr. Wohl said, “It would take a lot to lose money.”
The issue for Mike is that more money causes more problems. “The first problem is getting cash fully invested. We’ve seen a drop out rate of 20% to 25% of loans we committed to, and sometimes you commit and wait two weeks and then the loan never funds and you start the process all over again.”
Mr. Wohl utilizes LendingRobot, which purchases loans on Lending Club based on his specific criteria in order to ensure the available cash balance is continually committed to loans at the four pre-determined feeding times. This automates and simplifies the majority of the potentially tedious aspects to Marketplace Lending.
Mr. Wohl concluded, “For investment managers sitting on a ton of cash that can handle less liquidity, this makes a lot of sense. Our objective is to beat the current and 3-5 year money market returns, which even as rates go up, we feel comfortable our Lending Club portfolio will accomplish that goal.”
- Stephen Zentner
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