One of the funds controlled by Lending Club that invests in its online consumer loans is coming off of a bad month. A really bad month, characterized by one of the worst monthly performances the firm has ever seen and the revelation it has been buying riskier loans than originally intended, according to letters reviewed by The Wall Street Journal.
It wasn't quite the worst performance ever. With a return of 0.12 percent, it was the second-worst return in the fund's five-year existence. The worst month was in January of this year at 0.1 percent. The fund tends to average around 0.6 percent.
Called Broad Based Consumer Credit (Q) Fund, the portfolio manages $825 million in assets and is run by Lending Club unit LC Advisors.
The dropoff follows the rapid-fire decline and fall of Renaud Laplanche — the colorful and quotable founder of the firm, who was asked to leave two weeks ago on the revelation that some data on a package of loans had been intentionally falsified and sold to an investment bank.
Laplanche's exit has inspired many loan buyers to consider taking leave of the platform — an eventuality that would likely spell the end of Lending Club, which is in the business of connecting lenders to borrowers, not in the business of actually carrying loans on its books.
The letters also indicated concern about disclosures to the board, as a review for a regulatory filing found that the board was not told that one of its funds, part of its LC Advisors unit, was buying more five-year loans than planned.
“Although the portfolio composition of the fund was disclosed monthly to the investors of the fund, it was not disclosed to our board,” the May 16 filing said. The allocation of five-year loans “was out of tolerance,” the filing said.
LC Advisors also told its investors that over 60 percent of its loans were five-year loans, versus a maximum target of 42 percent. The fund also carries three-year loans.
In a letter to investors on Tuesday (May 24), Lending Club Chief Financial Officer Carrie Dolan noted valuation adjustments on existing loans, due to increases in interest rates charged for new loans to borrowers earlier this year, were driving the weaker performance.
She said the fund still has outperformed 99 percent of intermediate-term bond funds tracked by Morningstar Inc.
However, Lending Club's other funds reported some trouble. Cirrix Capital LP, for instance, reported a 3 percent loss.
LC Advisors is one of the largest holders of Lending Club loans. At the end of last year, the fund had nearly $1.2 billion in assets across its six private funds and an additional $150 million in separately managed accounts.