Entries in Pertuity Direct (4)


Pertuity Direct closes, dealing a loss of diversity to the social lending space

Over the past two weeks, the Twitter-scape has seen a minor flurry of speculation regarding Pertuity Direct, a more recent entrant to the social lending space. As a PD lender, I was mildly worried about the status of my deposits and confused by the lack of formal notice on the platform's website. This past week, I had my full deposit (plus ~2% interest) returned unceremoniously to my bank account, confirming my suspicions that the site is closing its doors.

This is an unfortunate development for the social lending industry. I interviewed the PD CEO back in April and was impressed with the caliber of the team and also the different approach that the company was taking, as they sought to make social lending a more mainstream concept. Unlike the major players at the time, Prosper and Lending Club, PD eschewed the typical borrower profile pages, instead embracing the concept of a pool of anonymous super-prime borrower loans. This approach earned them some flak at the time for being more of a bank than a p2p lending destination, but I always appreciated the approach of targeting a more mainstream segment of the population with more traditional banking and investment products that were nonetheless informed by some of the goals of the social lending movement. This seemed like an important complement to the other players that were more community-based, holding interest auctions or creating borrower profiles.

At the time of their arrival on the scene, I thought that this model might have ended up being the more long-lasting, but it appears that is not the case. PD has offered no explanation as to the reason for their disappearance, but I would speculate that the hybrid approach just didn't catch on.  Like Lending Club, PD is SEC-registered, so legal woes were probably not their challenge (as in the case of Prosper), but there was still something non-traditional in their tactics that lacked the appeal of direct borrower-lender connection that many entrants expected from the space.

Yet, while Pertuity Direct closes, the broader social lending space is still going strong. Lending Club is thriving, fast approaching their 25,000th investor. They, too, are seeking to take the p2p lending concept mainstream, offering a great alternative investment product for lenders and loan conditions for borrowers, and currently offer the best hope for the nascent industry in the US.


Five things to ask yourself if you are interested in social lending

There is significant buzz around the concept of social lending these days. From the dramatic re-opening and prompt re-closing of Prosper Marketplace, to the calm (and dare I say bank-like?) steady returns of Pertuity Direct, mainstream borrowers and lenders across the spectrum are wondering whether social lending may be a legitimate pursuit. But who is it for? Is it an alternative reliable source of returns for investors? An option for borrowers who seem to have no other options? A platform to lend to the working poor around the globe? A risky, high-payoff avenue for lenders? A way to feel good about helping people reach goals that you support?

The truth is that social lending is an incredible diverse market space. If you’re thinking about entering the social lending sphere, ask yourselves these questions to know which platform may be right for you:

  1. What originally drew you to social lending? I see three main classes of people interested in social lending: 1) Investors looking for an alternative return stream; 2) Idealists looking for a concrete, high-impact way to contribute to social good; and 3) Casual lenders intrigued by the possibility of cutting out the bank to earn returns and create a more transparent financial experience. You should know immediately which type you are—investor, idealist, or casual lender—and your options will narrow considerably based on these goals.
  2. How much personal connection are you looking for? As the term “peer-to-peer lending” has evolved to the broader “social lending”, some sites are moving away from the direct p2p connection. Pertuity Direct, for example, has very consciously tried to move to the mainstream lending market by relegating the typical “borrower profile” to an optional community page. Instead, lenders buy into a pool of borrowers of a given asset class. This approach is excellent from an efficiency standpoint—no need to browse through profiles to try to create your own diversified portfolio—but the lenders looking for the feel-good sensation of getting to know your borrower will be disappointed. Lending Club offers the more traditional profile-browsing approach which gives you a direct connection to your borrowers. On Kiva and Microplace, you choose a microfinance institution who finds individual micro-entrepreneurs according to filters—in your chosen country, target demographic, etc.—whereas on LendforPeace, the entrepreneurs are all Palestinian. Through Virgin Money, you simply formalize deals with people you already know; no new relationships are gained, rather the site creates the framework to help prevent existing relationships from deteriorating when they are complicated by a financial bond. The latest entrant Unithrive connects Harvard alumni with current Harvard students – the possibility for a durable bond between individuals is there with both the financial and university connection.
  3. How much risk are you willing to take? Initial challenges with high default rates when the p2p lending space was in its infancy led to many charges that borrowers on these platforms are an adversely-selected population and lending is risky business. The industry has made great strides since then and has instituted far more stringent borrower requirements, but the risk factor is still relevant. Pertuity Direct and Lending Club are the only two companies that are registered with the SEC, so if the government’s blessing matters to you, your options are quite limited. The international microfinance sites have very low default rates (1.7% on Kiva). Pooled lending, like on Pertuity Direct, achieves the highest rate of diversification, but if you’re willing to accept the risk, you can choose borrowers paying a higher interest rate based upon their profiles at Lending Club. Prosper is still shut down, but many early lenders were burned on the site – often due to their own lack of judgment, but an issue nonetheless.
  4. Do you want to make money? At Kiva and LendforPeace, p2p microfinance sites, you earn no interest, but the sites offer a high-impact way for you to park additional money (as little as $25). At Microplace, you can earn up to 6% interest (although most investments fall more in the 1-3% range). At Pertuity Direct, the average interest rate is around 13.4% (minus fees). Lending Club claims a 9.05% average annual performance.
  5. Are you interested in a particular cause? Many sites target very niche markets. If you are appalled by the usury of payday lending, check out alternative Yadyap (“payday” spelled backwards). Passionate about education financing? Look into People Capital or Unithrive. If you are looking to provide economic opportunities in Palestine, LendforPeace is your site. To help mainstream American families, Prosper and LendingClub are the best known.

Pertuity Direct takes social lending mainstream

CEO Kim Muhota explains that Pertuity Direct operates “at the intersection of traditional banking, social networking and capital markets.” In an interview with Transcapitalist last Thursday, the Pertuity Direct team sought to make the case for why their model enables them to go after the mass market and eliminate the frictions that exist in the p2p market.

First a few basics about the PD model:

For borrowers:

  • The current sole loan product is a three year installment loan. The average interest rate is around 13%.
  • The minimum FICO score is 660. PD is very selective in the borrowers that they approve.
  • Borrowers retain full privacy. No credit information is made public. Pertuity Direct handles all of the underwriting and approvals, then sells the loans to NRF.
  • Loans are either funded in their entirety or rejected. Within 3 days you will have full certainty over whether your loan will be approved.
  • Borrower closing fees total 1-2%

For lenders:

  • Focused exclusively on the prime to super-prime sector of the marketplace. Borrowers have an average FICO score of 740.
  • Lenders participate through the National Retail Fund, a mutual fund registered with the SEC. There is no auctioning of interest rates or browsing profiles to choose who to fund.
  • The fund is valued daily. The penalty fee for early withdrawals is a fixed 2%, but it only applies for the first 12 months. After that, the full investment amount can be withdrawn for free. Earnings can be redeemed on a quarterly basis.
  • There is no net worth requirement to invest. The minimum investment is $250.
  • Lender fees total 1.63%

From these facts, a simple question arises: what makes Pertuity Direct a social lending platform? Without interest rate auctions, borrower profiles, or direct borrower-lender relationships, it seems that the defining p2p market characteristics are missing. Lisa Lough, SVP of Marketing explains that the community aspect is still present. Borrowers can choose to make their story public in the community section if they wish and lenders can participate in the Pertuity Bucks program to help pay down the principal of borrowers whose stories they find to be particularly compelling.

Still, Mr. Muhota explains that their model is significantly different from the competitors. Studies indicate that one reason people have not been interested in p2p is because it seemed alien to them; lenders often do not have the expertise to make credit decisions and borrowers are faced with too much uncertainty over whether their loans will be funded and at what rate. Consequently, the PD opinion is that auction-based, labor-intensive approach is not the way of the future for social lending. For the broader population, the competitive set is traditional banking and investment products and PD seeks to offer an alternative to those.

As social lending evolves, PD believes that they are well positioned to step into a “huge gap in the marketplace.” Their model is equally well suited to those borrowers and investors who love the community aspect of p2p lending as to borrowers who would rather remain anonymous and lenders who are simply looking to invest in a strong asset class.

First, they have sought to make the account opening process “as simple as possible.” Indeed, as I described in my experience opening an account with them, a lender can have an account running within 5 minutes. They also seek to “aggressively manage risk” so that lenders don’t have to. From a borrower perspective, they highly value privacy, an important element of reaching the prime marketplace. Prime borrowers with a variety of opportunities are going to walk away from a deal where they have to make their personal credit information public. By protecting the privacy of their borrowers, PD avoids the adverse selection problem confronted by the p2p players.

By integrating these best practices of traditional banks but offering a different loan product, PD seeks to take the banks and credit card companies head on. Mr. Muhota made clear that PD is not just striving to be the main social lender, but rather sees the traditional banking and credit establishment as competitors, because “until you look broadly to the market, you remain a niche player.” Consumers are looking to put their money to work in a safe asset class and PD can provide that service. Unlike the Lending Club platform (the only other social lender registered with the SEC) where each dollar lent needs to be assigned by the lender to a given borrower, which can be a time-consuming process and totally unwieldy if you are working with several thousands of dollars, the PD model allows lenders to deploy their capital efficiently and at any sum to a diversified pool.

Social lending has clearly evolved from the model of browsing individual stories and choosing to fund borrowers one-by-one. Pertuity Direct offers an intuitive and mainstream approach to social lending that makes it attractive to the broad market and may well be the best model for the emerging industry as it moves forward.


First step of the Transcapitalist P2P Fund complete

Today I invested $250 with Pertuity Direct, a recent entry to the social lending marketplace. This is the first step in a plan to invest $1,000 total across 4 different p2p lending platforms to compare the experiences and returns. I'll update as the fund matures and share my experience with the hope of informing p2p newbies interested in entering the space and shopping among the services currently available.

What is the Pertuity Direct model?

The company takes a different approach to social lending (I use the term "social lending" rather than "p2p lending" consciously because it better describes their model and its the term that they use). Lenders invest into the National Retail Fund--essentially a p2p mutual fund--which composes all of the loans made through the website.  Through this structure, the Fund's investments are automatically spread out over a large portfolio of loans, providing a level of diversification usually not reached with p2p platforms.

What is my expected return?

Borrowers pay interest rates ranging from 8.9% to 17.9%. As borrowers pay back loans, investors earn returns. Pertuity charges a lending fee of approximately 3.17% 1.63% [Update: the Pertuity Direct team informs me that the rate for lenders is now 1.63%]. The service is too new to have information on default rates or average returns. [Update: The National Retail Fund now has preliminary figures up. The average interest rate is 13.5%]

What do I like so far?

  • High expected returns. 
  • Prime borrowers. The service requires a minimum 660 FICO score, but the average score is more like 740. Expected defaults are low.
  • Incredibly easy. I signed up, had my information confirmed, and invested $250 within 5 minutes. It will take 2-3 days for the loan to be finalized. I didn't have to screen a single borrower.
  • Predictable liquidity. Perpetuity offers the option to withdraw all of your money before the close-out date for a small 2% fee. Most other services require you to commit for the full term of the loan (often 3 years).
  • Full SEC-backing. This site did it right and waited until they had full SEC approval before launching. I feel confident putting my money with such a competent team.

What did I not like?

  • The experience felt distinctly "un-p2p". I went from start to finish without "meeting" a single borrower. The experience was simple and professional (which is good), but it was just like dealing with a normal bank.
  • Poor conveyance of information. Information is hidden within Pertuity Direct's site and that of its partner National Retail Fund. Prosper Lending Review's site helped.
  • $250 minimum investment. This is a sharp contrast to Kiva or Lending Club, where you can start with $25.