presentation to the national association of … · 2019-04-03 · out the red carpet for subprime...

Proprietary and Confidential This presentation, furnished on a confidential basis to the recipient, does not constitute an offer of any securities or investment advisory services. It is intended exclusively for the use of the person to whom it has been delivered by Emerald Direct Lending Advisors, and it is not to be reproduced or redistributed to any other person without the prior consent of Emerald Direct Lending Advisers.

Proprietary and Confidential Information contained herein should be used for one‐on‐one presentations only. This presentation, furnished on a confidential basis to the recipient, does not constitute an offer of any securities or investment advisory services. It is intended exclusively for the use of the person to whom it has been delivered by Emerald Direct Lending Advisors, and it is not to be reproduced

or redistributed to any other person without the prior consent of Emerald Direct Lending Advisers.

A New Path for Smart Money as of October 29, 2013

PRESENTATION TO THE NATIONAL ASSOCIATION OF CORPORATE TREASURERS

www.teamemerald.com Emerald Direct Lending Advisers


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NOTIFICATION AND RISK DISCLOSURE

Emerald Direct Lending Partners, LLC (“EDLP”) and Emerald Direct Lending Advisers, LLC (“EDLA”) serve as the General Partner and

Adviser of the Emerald Direct Lending Fund I, L.P. (the “Fund”). The materials and information contained and described herein are

proprietary to EDLP, EDLA, and the Fund and may not be reproduced or distributed in any fashion without such parties’ written consent.

This presentation, furnished on a confidential basis to the recipient, is neither an offer to sell nor a solicitation of any offer to buy any

securities, investment product or investment advisory services, including interests in the Fund. This presentation is not an

advertisement and is not intended for public use or distribution and is intended exclusively for the use of the person to whom it has

been delivered by Emerald Direct Lending Advisers.

The Fund invests in consumer loans and notes originated through various online lending exchanges. Any grades or credit scoring

attached to loans are assigned by the lending exchanges. An investment in the Fund is suitable only for sophisticated investors of

adequate financial means who have no need for liquidity in this investment. There can be no assurances or guarantees that (i) the

Fund’s investment objectives will be realized, (ii) the Fund’s investment strategy will prove successful, or (iii) investors will not incur a

loss of principal by investing in the Fund. Prospective investors should carefully consider, with their respective financial, tax and legal

advisors, the risk factors described in the offering memorandum. Investments may lose value over time and no return is guaranteed.

This presentation is subject to a more complete description and does not contain all of the information necessary to make an investment

decision, including, but not limited to, the risks, fees and investment strategies of the Fund. Any offering is made only pursuant to the

relevant offering memorandum, together with the current financial statements of the Fund, if available, and a relevant subscription

application, all of which must be read in their entirety. No offer to purchase interests will be made or accepted prior to receipt by an

Offeree of these documents and the completion of all appropriate documentation.

This presentation does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or

participate in any particular trading or investment strategy and no representation or warranty is given with respect to any future offer or

sale. This information is not investment or tax advice or an investment recommendation.

The information including projections contained herein is generally believed to be reliable but no representation or warranty is given

with respect to its accuracy or completeness. These materials have been prepared solely for informational purposes and are subject to

change without notice.


HERE’S WHAT YOU SHOULD KNOW ABOUT PEER-TO-PEER LENDING

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• Peer-to-Peer lending is sweeping the nation. • Lending Club and Prosper saw 195% growth over the year ending in

June 30, generating more than $1.5 billion in loans. • In the wake of the financial crisis, the same lenders that once rolled

out the red carpet for subprime borrowers started putting up all sorts of barriers to credit, effectively locking out the people who arguably needed a boost the most.

• Those who could get credit were hit with double-digit interest rates or driven to seek out riskier options like payday loans.

"Clearly, there was a void in consumer financing and peer to peer lending helped fill that void" - Peter Renton, Lend Academy



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WHAT IS PEER-TO-PEER LENDING? • P2P lending sites bridge the gap between consumers who need a

loan and consumers (i.e. investors) who have the money to back them.

• There are no banks or credit lenders to deal with, and the interest rates are generally much lower than borrowers would get otherwise, while investors supposedly get to grow their money much faster than in traditional savings vehicles.



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WHAT DOES IT TAKE TO QUALIFY FOR A LOAN? • You have to live in a state that allows it (Lending Club: 28 states;

Prosper: 31). • Both require decent credit scores (640 to 660 minimum) for

borrowers, which will determine one's interest rate and the risk grade they assign to a loan.

• Interest rates range between 6.03% and 26.03% for Lending Club and 6.04% and 31.34% for Prosper. The grade tells investors how much risk they'll take on. (A grade A loan will have a low interest rate and signal to investors that the borrower has a low risk of defaulting.)

• Loans start at $1,000 and go up to $35,000. Loans are issued in 3- or 5-year term limits and borrowers must pay an origination fee (1.11% to 5% at Lending Club, 0.5% to 4.95% for Prosper).

• Only additional fees are late payment fees.



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WHAT DOES IT TAKE TO INVEST? • Investors must either make $70,000 in annual gross income and have

a net worth of at least $70,000; or have a net worth of more than $250,000. You can start investments in increments as small as $25.

• Investors don't pay anything to sign up but will pay 1% of their earnings per year. All gains are subject to federal income tax rates (Unless you receive your earnings in an IRA, where it can earn interest tax-free.)

• Both sites offer options to open up an IRA with a minimum of $5,000.



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WHY INVEST? • Super safe five-year U.S. Treasuries are yielding just over 1.5%. • High yield four-year junk bonds are averaging around 6.5%. • Compare that to Lending Club, where three-year B1 loans (for

borrowers with FICO scores above 720) are generating 10% average annual interest rates.



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RISK FACTORS • Liquidity is low: it's almost impossible to access your cash until the

loan matures, and "unlike high-yield bonds, which sometimes recover some money in the event of a default, Prosper and Lending Club loans offer investors almost no chance of recovery," cautions the Wall Street Journal's Joe Light.

• Both sites have low default rates, but you've got to remember they're both relatively young.

• They're having a much harder time attracting borrowers than investors: Lending Club has lowered its average rate to attract borrowers.

• Hedge funds have the potential to saturate the lending market so much that it dilutes yields for investors over time.



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HOW TO MITIGATE RISK: • With due diligence you can somewhat tailor that risk to your level of

tolerance. Both Lending Club and Prosper rate borrowers in a way that tells you exactly how risky lending to them would be.

• If you're looking for a stable investment with a low risk factor, chose a borrower with a low risk of default and a high rating. And if you've got cash to burn and really want to roll the dice, go with riskier loans.

• Article’s advice: Use P2P loans as an alternative to a low-yield savings vehicle, not as a get rich quick scheme.

“Here’s What You Should Know About Peer-to-Peer Lending, The Hottest New Investing Trend” By Mandi Woodruff Published 8/30/13


PEER-TO-PEER LENDING

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“[…Direct Lending] is just a way for individuals to earn higher interest, it’s also increasingly a real place for large investors to park their money. That has started [this] on the road to being an alternative – if not a direct competitor – to retail banks.”


PEER-TO-PEER LENDING

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7 Ways To Beat The Banks:

“It's welcome news to many bank-weary savers, and businesspeople people seeking money to expand, that innovators are using new technologies to create alternatives to traditional banks - They're also creating new opportunities for savers and investors.”

Prosper Raises $25 Million in New Round, Adding BlackRock as a Backer: “The latest financing reflects continued interest from Wall Street and the venture capital community in peer-to-peer lending. The most prominent player in the industry, Lending Club, recently drew in Google as an investor, in a transaction that valued Lending Club at $1.55 billion.”

“Google’s investment into Lending Club is further evidence of the current sea change that has begun in financial services. It signals a decisive moment for the validity of P2P lending, the disruption of traditional banking as well as the convergence of finance and information technology” Peter Renton, Founder of Lend Academy

“P2P lending has one other advantage of tremendous importance for retail investors. Success as a P2P lending investor does not require any market timing whatsoever. Rather than staying up nights wondering if this is a good time to buy or sell this fund or that stock, P2P lending investors can rest assured that time has become their ally as they see monthly interest and principal payments returned to their account…” James Levy, Blog on SeekingAlpha.com


WHAT IS PEER-TO-PEER LENDING.

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Principal + Interest

Origination Fee

(Upfront)

Servicing Fee

(Ongoing)

Funding

Internet Lending Platform

TRADITIONAL LENDING PROCESS

PEER-TO-PEER PROCESS


INTERNET PLATFORMS LOWER THE INTERMEDIATION COSTS

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Servicing

Origination

Underwriting

Customer Acquisition

Branch Infrastructure

Technology

drives cost down

Internet Platforms

Operating Expense1: ~2% Traditional Lender

Operating Expense1: 5–7%

Servicing

Origination

Underwriting

Customer Acquisition

Reserve Requirements

Branch Infrastructure

1: Operating expense as a percent of outstanding balance.


PEER-TO-PEER LENDING HAS REACHED CRITICAL MASS

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OVER $2 BILLION OF P2P LOANS ISSUED ANNUALLY

15

0

20

40

60

80

100

120

140

160

180

200

$ M

illio

ns

Total Platform Issuance1:

$2,425,040,450

Annual Issuance Run Rate:

$2,284,008,600

$187,909,500

1. As of 9/30/2013


GROWTH POTENTIAL OF PEER TO PEER CONSUMER CREDIT

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1. Federal Reserve G.19 report published September 9, 2013 with June 2013 data (seasonally adjusted) • 2. Single Family Residential Mortgage Debt Outstanding report updated June 2013 with March 2013 data

(one- to four-family residences)

0

2,000

4,000

6,000

8,000

10,000

12,000

Credit Card Consumer Credit(Non-Housing)

All Consumer Credit

$ B

illi

on

s

P2P All Platforms

852

1

2,842

1

12,701

1,2

3.0


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CONSUMER CREDIT – AN ASSET WITH STABLE YIELDS?

Durable interest rate levels throughout economic cycles

Small loan size and lack of collateral cause above market interest rates

Source: Federal Reserve, Prosper


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HISTORIC PERFORMANCE OF UNSECURED CONSUMER CREDIT CARD DEBT

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

Annualized Gross Yield and Delinquency Rate

Delinquency Rate Gross Yield

Average Gross Yield of 13.8% and Delinquency Rate of 4.9%

Source: Federal Reserve


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CONSISTENT - 90 QUARTERS OF POSITIVE RETURNS

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Annualized Net Yield

Annualized Yield

Recessionary Periods Source: Federal Reserve


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CONSISTENT- 90 QUARTERS OF POSITIVE RETURNS

0.00%

100.00%

200.00%

300.00%

400.00%

500.00%

600.00%

700.00%

800.00%

900.00%

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Compounded Returns on Credit Card Debt versus Bank CDs

CC Net Yield CD

Source: Federal Reserve


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$850 BILLION OF UNSECURED CREDIT CARD DEBT

Source: Barclays Securitization Research. Consumer ABS Strategy

⁺ Direct consumer loans are an alternative to credit card debt

⁺ Bank credit card performance is a reasonable proxy

⁺ Same borrower and credit risk

⁺ Similar interest rates (Avg. 18%)

⁺ Paying off credit cards is a primary use of funds

⁺ Retail credit card’s yields are 900 bps higher than bank cards (Avg. 27%)

⁺ Consumer defaults are near historic lows

Credit card Master Trusts proven profitable and resilient over all economic cycles


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DIRECT CONSUMER LENDING – HIGH YIELD, LOW VOLATILITY, UNCORRELATED

Portfolio Benefits

Cash

Fixed Income

High

Yield

US Stocks

Emerging Markets

Direct Consumer Lending

RISK

RE

TU

RN

Efficient Frontier

⁺ Attractive projected net yields (8% - 11%)

⁺ Uncorrelated to markets and Fed rates

⁺ Monthly cash income

⁺ Low Volatility

⁺ Low Risk To Principal

⁺ Short term liquidity

⁺ Drives efficient frontier up and left


Features of a diversified portfolio of prime credit quality consumer term notes

+ Steady monthly cash income with low volatility

+ Uncorrelated to the public markets

+ Short term liquidity less than 20 months

+ Targeting a 8% - 11% annualized net return

WHY CONSIDER INVESTING IN PEER-TO-PEER ORIGINATED NOTES

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INTERNET BASED LOAN FLOW REACHING $200M PER MONTH

Disciplined Credit Analysis ⁺ Minimum FICO Score (Prime & Super-Prime)

⁺ Minimum monthly gross income

⁺ Size of requested loan amount

⁺ Delinquencies and charge-offs

⁺ Utilization of aggregate credit limit

⁺ Size of revolving credit line

⁺ Job consistency

⁺ Type of employment / occupation

⁺ Employer

⁺ Length of credit history

⁺ Education

We evaluate over 12,000 loans per month

We look for:

• Ability to pay

• Willingness to pay

• Likelihood to pay

EDLA can identify and select mispriced credit risk


EMERALD ASSET MANAGEMENT – “DRIVEN BY RESEARCH”

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Strategies / Products Small, Mid & All Cap Growth Large Cap Core Banking & Finance Sector Global ETFs Fixed Income Alternative High Yield Income

Assets Under Management $2.7 Billion*

Partial Client List City Of Philadelphia Illinois Teachers’ Commonwealth of Pa Contra Costa County (CA) Independence Blue Cross Carpenter Technology Indiana Hospital Shippensburg University

* As of 9/30/2013

Company East Coast Offices: Leola, Pittsburgh & King of Prussia, PA West Coast Office: Oceanside, CA Founded: 1991 Employees: 44 Fundamental, bottom up, active manager

It is not known whether the clients approve or disapprove of Emerald services provided through

its subsidiaries. Emerald did not use performance-based data to determine which clients are

included on this list. Clients were selected based upon their general name recognition and as a

representative sampling of the types of accounts managed. Performance-based data was not

used to determine which clients are included on this list. Clients were selected based on a

sampling of the types of accounts managed.

Client List Disclosure


• Daniel Moyer, IV

• Richard Keller

• Opus Fund Services

• Rothstein Kass

• Pepper Hamilton LLP

• Millennium Trust

• JP Morgan, Chase

• Joe Besecker, CEO

• Scott Rehr, CAO

• Rich Juliano, CFO

• Simon Leach, VP Ops / Compliance

• Chima Narasimhan

• Joseph Witthohn, CFA

• Howard Freedland, CFA

• Andy Smith

• Richard Keller Portfolio Management

&

Strategy

Financial,

Operational, & Risk

Management

Sales

&

Marketing

Third Party

Support

EMERALD DIRECT LENDING ADVISERS CORE TEAM

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CONTACT INFORMATION

Howard Freedland, CFA Principal [email protected]

Richard E. Keller Principal [email protected]

Simon Leach VP Operations & Compliance [email protected]

Emerald Direct Lending Advisers, LLC EAST COAST WEST COAST 3175 Oregon Pike 301 Mission Avenue, Suite 209 Leola, PA 17540 Oceanside, CA 92054 717-396-1116 (760) 444-5012

Joseph E. Besecker CEO [email protected]

Scott L. Rehr CAO [email protected]

Daniel W. Moyer IV EVP, Marketing [email protected]

www.teamemerald.com

Joseph G. Witthohn, CFA Portfolio Manager [email protected]

Andrew Smith Portfolio Manager [email protected]

presentation to the national association of … · 2019-04-03 · out the red carpet for subprime...

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