Avant’s Sailing Troubled Waters

Whether or not Lending Club managed to get a month or so jump on the Fourth of July with its interpretation of fireworks, 2016 was already shaping up to be a tough year for marketplace lenders. Market conditions were changing, as were investor options about where to put their money. Those options got more tempting as some platforms delivered the online lending double whammy: rising default rates and underperforming loan packages.

Into the already tense environment came Lending Club with the internal investigation that blew the lid off of some situations that were more than a little troubling: document falsification, lying about the loans being sold off, and the board being kept in the dark about conflicts of interest relating to major investments.

What happened next to Lending Club was certainly compelling, if not all that exciting. CEO Renaud Laplanche stepped down, stock price tanked, investors started running away — quickly — from the platform, and the negative returns on funds have started rolling in. There were some surprises. The rumors of Laplanche coming back to buy Lending Club remains a house favorite, but the high speed come apart in evidence right now could have been forecast from the initial set of headlines.

However contagious the troubles in marketplace lending would turn out to be, however, was perhaps less immediately guessable from the outset of the summer of the segment’s discontent. Rather than the fear of one firm as an outlier with unusual and circumstantial problems, there appears to be something more pervasive taking hold: the fear of the marketplace lending segment cratering and weighing down the future of the entire segment worldwide.

Which leads to Chicago’s Avant and its recent troubles.

More Cuts Coming

Avant is a marketplace lender that focuses on lending sums to those with less-than-stellar credit.

Until very recently, it was very popular.

A year ago the firm was valued at $2 billion by its VCs, a valuation built mostly on lending as much as $35,000 at a time for 2-5 years for consumers with low credit scores with tolerance for a high interest (limited at 36 percent). In two years the firm quickly wracked up $3.5 billion in total loan volume.

In May, Avant made a series of announcements that indicated the firm had hit some snags. Sixty people were to be laid off and its offerings were to be trimmed. Auto loans, for example, were tabled in favor of a tighter focus on the core business of personal loans.

Two months later the cuts are continuing. A voluntary severance earning is on the table for some employees as the firm looks to streamline staff further, and it is cutting its lending target by a lot — 50 percent to be exact, or around $100 million per month, according to reports in Bloomberg.

Avant has confirmed that reporting and noted that the cause is the rather treacherous terrain they find themselves operating in these days. The category is no longer a darling among investors so much as an area for concern, which has meant investment activity has become far less enthusiastic.

“As the lending industry faces continued uncertainty in the capital markets and volatility of the online lending category, we are moderating loan volume to focus on the immediate profitability of our core personal loan products,” the company said in a statement. “As such we have made the difficult decision to launch a voluntary severance offering to our employees. We believe Avant is well-positioned to emerge as the leader in the online lending industry over the long-term, but recognize there will be challenges ahead.”

The Asymmetrical Platform

Avant does not lack for people who wish to borrow money, and if Avant was a lender like a saving and loan of old, that would be terrific news. But Avant is not a savings and loan, and like all other marketplace lenders they are not really in the business of lending, so much as they are in the business of creating the marketplace that connects lenders and borrowers.

And Avant, like many other in its once popular market segment, doesn’t have enough lenders these days, because those lenders over the last several years have hedge funds and investors, institutional and otherwise, as bonded packages of loans originated on a marketplace were throwing off better than average returns.

Those returns, however, are easier to produce when the Fed is holding the interest rate at zero. Regulators are mostly giving the industry a wide berth and the loan packages perform as expected. Interest rates are going up, and the almost certain coming attentions of a variety of regulators and some underperformance were already cooling investor interest going into the year, and the extremely public and diverse list of problems that erupted from Lending Club further dropped the temperature in the segment.

Avant has been feeling the chill.

Without easy access to capital to underwrite those loans (from those necessary investors), growth has hit a wall and started to reverse. Loan volume was down 27 percent during Q1 when compared to Q4 2015 — that is the first quarter-to-quarter drop since the firm was founded in 2012.

Feels like deja vu all over again in this space.