P2P Lender Prosper Valued At $1.9B

The United States’ second biggest P2P lending market has closed out a financing round that pushes its valuation to $1.9 billion – rocketing it into the “unicorn” strata of startups and nearly tripling up its last valuation of a year ago. This all comes while Prosper tries to keep losses down as loan growth is skyrocketing.

The latest investors into the San Francisco-based firm were Credit Suisse, JPMorgan and BBVA Ventures, all of which threw in on $160 million of “expansion capital.” Those funds will go toward developing a facility in Phoenix, Arizona. The focus there will be vetting unsecured personal loan data.

As Prosper looks to expand, it faces the peculiar challenge of lenders everywhere: handing out money is easy, handing out money to people who will pay it back in a timely and predictable manner is not. The new operation that Prosper opened last August is a move to ensure that the firm’s lending standards remain high, even as it pursues higher loan volumes.

Originations during the first quarter clocked in at an impressive $590 million, three times greater than the same period in 2014. As of right now, Prosper has $3 billion in loans circulating.

“Those people are kind of our boots on the ground,”said Aaron Vermut, Prosper’s CEO. “Unlike some other companies out there, we really see underwriting as the most important thing we do, the glue that holds the marketplace together.”

Prosper is among the fastest growing of a new breed of non-banks, which aim to use online platforms and data-driven technology to directly connect borrowers with lenders, extending financing at a lower rate than that offered by traditional banks while simultaneously generating higher returns for investors.

Growth in the personal loans segment has been particularly strong, prompting analysts at Goldman Sachs to predict last month that the new entrants could control up to 15 percent of the $843 billion market over the next 10 years, up from less than 2 percent today.

Generally, Prosper brings in about 9.3 percent across its portfolio. While that is attractive to investors, it becomes far less so if loss levels rise much from their current 6.6 percent when returns start becoming severely compressed. During 2010 and 2012, when Prosper began what Mr. Vermut referred to as a “slide into subprime” under its previous management team, such a compression sent some investors walking.

The latest round of funding – Prosper’s fourth – has also perked up speculation that it plans to follow its main competitor, LendingClub, into an IPO.

“We are definitely progressing down the right path, but the company needs to be ready for [an IPO], with really strong business processes, and all the right people in all the right seats,” Mr. Vermut said, noting that traditional banks — still anxious to preserve capital and avoid the close attention of regulators — remain reluctant to compete in unsecured loans.

Apart from the Phoenix facility, some of the latest round will go toward sales operations in Salt Lake City. Prosper recently purchased a software business as a platform to enter the elective surgery loan market.