Lending Club Mulls Committing Capital to Venture Fund After Brutal 2Q

Lending Club survived a brutal second quarter (barely) and is considering some fundamental changes to thrive going forward. Specifically, the beleaguered marketplace lender will consider committing investor capital to a venture fund.

The company’s president and acting CEO, Scott Sanborn, began yesterday’s earnings call by noting that the good news about the second quarter is that it is over. However, he ended the call saying Lending Club expects to resume revenue growth in 2017.

Lending Club 2QThe only thing that went up for Lending Club this quarter were expenses, particularly legal. Everything else — originations, EBITDA, you name it — went down. The company originated $1.96 billion in loans this quarter, down about 29% from the quarter previous. It’s back to the levels it was about a year ago, as the graph at right, from the earnings presentation, illustrates.

Borrower response rates did not appreciably decline during the quarter, though the company had more difficulty funding their loans. As Sanborn pointed out, borrowers were not likely to be aware of the flurry of bad news that hit Lending Club.

Investors, of course, were. Returns for investors have held relatively stable, and loan performance has not degraded significantly. Lending Club’s investors in the quarter broke down as follows, Sanborn said:

  • Individual retail investors – 11%
  • Managed accounts – 35%
  • Asset managers and hedge funds – 20%
  • Banks – 34%

Of these groups, banks have been the slowest to return, due to their rigorous due diligence processes, Sanborn said.

What does the future hold for Lending Club? Will it keep loans on the books to earn more revenue over the life of the loan? (94% of its revenue comes from fees at origination.) This is the model used by the soon-to-IPO subprime lender Elevate, which services riskier customers and maintains a 20% margin by keeping the loans on its books. Here’s what Sanborn had to say when asked about this:

So to your point, our immediate focus has been on reengaging with our preexisting investors, and that’s kind of been our primary focus, and as noted we feel like we are making very good progress there. Going forward we are exploring what — adding some additional sources and or structures of capital to increase resiliency and diversity and that would include committed capital that we think might be a beneficial addition to our overall mix.

Now that will come at a cost — having a committed capital out there. So we are being thoughtful about the size and scale of that, but that’s absolutely something we will be exploring actively once we’ve got our preexisting investors fully reengaged.

Lending Club did not mention funding its own loans, though this is a move many in the industry have predicted and called for.

This story has been updated.

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