Prosper’s Climb Back

Taking the top job is never an easy task. It’s even harder to take over at the top as a relative newcomer to the firm. And the hat trick of difficult transitions — taking over at the top as a newish member of the team of a firm that used to be very successful but is facing a number of stiff headwinds.

Such is the situation that Prosper Marketplace’s CFO — soon to be CEO — David Kimball faces as of December 1. He gets to take the helm at Prosper with a mission to steer toward one goal, and one goal only — turning around the drop in loan activity that has shellacked Proper’s bottom line.

It’s not an easy job — though in fairness to Prosper, their burden these days is not theirs alone. Marketplace lending on the whole has had a rough year — it faced a combination of changing market factors that have broadened investors’ options and the Lending Club meltdown during the spring and summer that has both shaken some confidence in the business model and drawn regulatory scrutiny.

However, while Prosper has not been uniquely hit, it has been very hard hit, and seen massive drops. During the third quarter of this year, Prosper extended $311.8 million in loans — its lowest level in more than two years, according to SEC filings from late last week. That is a drop of 30 percent from last quarter, and a drop of 71 percent from the same time in 2015. Net losses were also up — clocking in at $17.4 million for the third quarter, or over four times as large as the loss the company reported a year earlier.

In the filing last week, Prosper attributed the plunge in volume to “negative actions and publicity at competitors” and “our limited use of investor rebates, which have become more prevalent in the industry.”

The “competitor” in question likely Lending Club, which has extensively made use of investor rebates. According to their last earnings statement, the firm spent $11 million on cash incentives for money managers to buy its loans, though it also reports it stopped doing so in September.

Prosper, representatives have recently noted, is actively seeking to secure hedge fund loan purchasing partnerships, and has reported some progress in that direction.

But as for right now, the most prominent hedge fund/Prosper relationship is the $9 million it announced last week that it plans to pay to hedge fund Colchis Capital Management in the form of a settlement.

Colchis is one of the largest investors in online loans. It had $1.9 billion in regulatory assets under management as of April, according to securities filings.

That $9 million is being paid out over a loan sale dispute. Prosper will additionally give Colchis warrants to purchase shares worth 7 percent of the company.

Colchis filed a demand for arbitration with Prosper over “interpretive questions” related to the incentive agreement the two firms signed preceding Colchis’ purchase of a large parcel of Prosper Loans. Arbitration was meant to clarify whether the rights it received from Prosper extended beyond the term of the agreement.

Last month an arbitrator ruled in favor of Colchis, and the two sides reached a settlement on Thursday of last week.

So the billion dollar question is whether David Kimball, Prosper’s now incoming CEO, can get this ship sailing back on course. Not an impossible task — as marketplace lending has already demonstrated this year, reversals can creep up unexpectedly and fast (though it seems bad ones pull off that trick more often than good ones).

And now Prosper is hoping that a new year hits the marketplace lending reset button — and that the re-ascent will be faster than the descent.

We’ll keep you posted on how the climb back goes.