Quantrom P2P Lending DAC

Transcription

1 Quantrom P2P Lending DAC

2 Memorandum on share offering in Quantrom P2P Lending DAC 2 Introduction Quantrom Limited is offering the possibility to invest in Quantrom P2P Lending DAC ( QP2PL ), a vehicle investing in a diversified portfolio of direct loans via a number of peer-to-peer lending platforms in the European Economic Area. Background Since the financial crisis in 2008, two trends have appeared in the financial market: yield on fixed income instruments has fallen to close to zero, and many borrowers have faced difficulties in obtaining loans from financial institutions due to, among other reasons, increased capital requirements. On a macroeconomic scale these trends continue to have a major impact on economic activity. Investors who are not receiving a return on their fixed income investment are insecure about their spending possibilities and have a tendency to increase their savings, despite negative interest rates. This lowers their consumption and the overall activity level in the economy. Many borrowers have difficulties obtaining credit due to increased capital requirements and a low risk appetite in the financial institutions. Borrowers still able to obtain a loan from a financial institution are quite often investors who have savings, but who prefer to borrow at low cost instead of utilizing their savings. The Internet has changed the way we purchase goods, hotel rooms and travel. These changes are also appearing in the financial and service sectors. Pricing is more transparent, and the market place is open to everybody via peer-to-peer transactions. In the USA, lending platforms like Lending Club have reached quite substantial volumes and there has been similar progress in the UK. In the rest of the European Economic Area, lending platforms are slowly building up volume, but the market is still very fragmented. Peer-to-Peer lending platforms have entered into this market segment and are starting to fill the gap that has been created by the traditional financial institutions, when they restrict lending to all but the highest rated clients. Borrowers will go to a loan originator instead of a traditional financial institution. They advise their client, and if a loan is granted it will be offered on a lending platform.

3 Memorandum on share offering in Quantrom P2P Lending DAC 3 Investors can purchase these loans on the lending platform directly or use an investment vehicle, which distributes the risk and creates a diversified portfolio. Quantrom P2P Lending DAC is such a vehicle. Macro trends The sharing economy and the direct access to suppliers has changed many business models. Dell was the first to offer their clients the possibility to order a computer directly from the production line. Various websites offer search facilities to find the cheapest travel and hotel options, helping the customer achieve a better price. AirBnB and Uber opened up the possibilities of the sharing economy by offering direct access to private rooms and cars. They have taken on a number of traditional and regulated markets. The younger generations are preferring to handle everything directly via their phone or tablet. They live online, they want answers here and now, they know how to find the best pricing for anything on the Internet and they do not have loyalty to financial institutions like previous generations. The younger generations cannot see the purpose of going to a bank to have a meeting and then wait 3-4 weeks for a response to a credit application or other financial service. These macro trends are only slowly bringing about changes in financial services, however many financial institutions are still living in the past. This is where peer-to-peer (P2P) lending offers new opportunities for lenders and borrowers. Asset class correlation Peer-to-peer lending is a new asset class for non-banks. This is to some extent correlated with the overall interest rate level in the economy, but the return mainly arises from the credit risk premium of lending to certain segments of borrowers. In the current interest environment, the risk premium on P2P loans is higher than the actual interest rates since investment in risk-free government bonds, for instance German Bunds, gives a negative yield for maturities of up to more than 5 years.

4 Memorandum on share offering in Quantrom P2P Lending DAC 4 The interest rate on P2P lending has fallen, but not to the same extent as other asset classes such as equities, which are more closely linked to overall interest rates. The ECB has identified this trend in their Financial Stability Review November : Risks of further asset price corrections remain high and may be amplified by high correlations between asset classes. Euro area and global bonds have been trading at low yield levels. Owing to the non-linear relationship between prices and interest rates (i.e. bond convexity), there is higher price sensitivity when interest rates are very low or negative. As a result, losses for investors highly exposed to low-yielding bonds with long maturities can be large even for relatively limited reversals of risk premia (see Chart 6). Furthermore, the possibility of herding behaviour (i.e. more investors chasing the same types of assets) has increased gradually, as investors are finding it more difficult to find assets generating sufficient returns. Increased correlations across asset classes provide indications that one-directional moves in asset classes have become more common in recent years (see Chart 7). Should market sentiment deteriorate, the high correlations between asset classes may act as an amplifier and, thereby, lead to an even stronger correction of asset prices This is some concern among investors, as there are not many alternatives to bonds and equities, the most commonly used assets. Referring to chart 6 in their report, the ECB calculates that if the yield increased with 2 percentage points the capital loss on a German 10 year bond would be close to 20%, while the same increase in yield on a French 50 year bond would give a capital loss of approximately 35%. Peer-to-peer lending offers an alternative to the common assets class, where interest rates of more than 10% per year on P2P loans provide a higher level of protection from capital losses. Peer-to-peer lending market Interest in the peer-to-peer (P2P) lending market is growing for a number of reasons. The application process to obtain a loan is simpler and faster on a P2P platform compared to the traditional financial institutions, and very often the interest rates are competitive for the borrower. 1 PP 8-9

5 Memorandum on share offering in Quantrom P2P Lending DAC 5 P2P lending is no longer limited to simple consumer loans, but has also developed into a variety of loan types with collateral. P2P lending is spreading into new areas such as mortgage loans, car loans and invoice financing, as well as business financing. In a study 2 from February 2015, the audit firm PWC calculated that the loan origination in the USA in 2014 from different P2P lending platforms was approximately 5.5 billion USD. Based on their analysis, PWC estimated that in 2025 this market could reach a total volume of 150 billion USD, almost 30 times the market volume in In Europe, the United Kingdom is by far the oldest and largest P2P lending market, but Brexit has created too much uncertainty for it to be an interesting investment opportunity at present. The University of Cambridge Centre of Alternative Finance has in a report from September calculated that the total volume of loan origination in Europe (ex UK) from consumers and business has increased from less than 200 million EUR in 2013 to more than 575 million EUR in The volume of loan origination in Europe is still only about one-tenth of the volume in the USA, but Europe is traditionally slower to adapt to new trends in the financial markets. Early indications suggest that the volume in 2016 was likely to be close to 1 billion EUR. On this basis, and assuming that Europe will be catching up with the USA, it is not unlikely that the P2P loan origination in 2025 could reach 50 billion EUR in volume. P2P lending is a market with a large potential for growth. Quantrom P2P Lending DAC the concept The individual investor faces numerous challenges when investing in peer-to-peer loans. Quantrom P2P Lending DAC (QP2PL) offers a solution to these challenges. 2 PWC: Peer pressure. How peer-to-peer lending platforms are transforming the consumer lending industry February University of Cambridge Judge Business School: Sustaining Momentum, The 2nd European Alternative Financial Industry Report. September 2016 p.33

6 Memorandum on share offering in Quantrom P2P Lending DAC 6 Lending platforms In Europe, more and more lending platforms are entering the market. Quantrom Limited has conducted due diligence on multiple platforms and has selected those that will fulfil the necessary requirements regarding information and procedures. Lending platforms cover different countries and types of P2P loans. For individual investors it is difficult to compare the platforms since they all have their unique setup and approach. Some platforms directly issue loans, while others source from different loan originators. The pricing of the services are therefore also different and professional managers with market knowledge can better negotiate fees so they are in line with market conditions. Becoming a shareholder in Quantrom P2P Lending DAC ensures that an investor will benefit from uniform market conditions. Diversification Using only one platform limits diversification opportunities; however, by using Quantrom P2P Lending Ltd. the investors get the advantage of investing in loans from a number of different platforms in one portfolio. A more diversified portfolio lowers the risk on the P2P loan portfolio. More platforms offer the possibility of sourcing loans that more precisely match the investor s requirements in several dimensions such as: yield, duration, loan type, country and a number of borrower specifications. Quantrom Limited will continue to add suitable platforms and thereby increase the diversification of the portfolios under management. P2P Loan profile P2P loans have a different pay back profile compared with bonds issued by the government or a mortgage institution. Using a normal 5 year government bond (a bullet loan) as an example, the investor will receive an interest payment annually or bi-annually and the principal at the maturity of the bond. The investor in a normal P2P loan will receive interest and a principal repayment each month. On a 5 year P2P loan the investor will already after 2.5 years have half of the invested amount repaid, making the duration of a 5 year P2P loan significantly lower than the duration of a 5 year government bond. Loan books A further advantage is that Quantrom Limited has access to the different platforms historical and present loan books.

7 Memorandum on share offering in Quantrom P2P Lending DAC 7 We have the capacity to analyse loan books, which can contain more than loans for a single lending platform. When combining several platforms loan books it is possible to analyse the data across countries, ratings and a number of other factors. This greatly facilitates the spotting of trends and tendencies that can be used to optimize loan selection. Interest rates Access to the different platforms loan books also provides the possibility to follow the development in yields over longer periods of time. The interest rates on P2P loans depend on several factors such as overall interest rate levels, credit risk, default risk and liquidity premium. The main factor is of course the credit worthiness of the borrower. Having the ability to analyse P2P interest rates over time gives a comparable advantage when investing in such loans. A recent study conducted in Deutsche Bundesbank shows that the interest rates on P2P loans, corrected for higher default risk, gives a slightly higher return than that received by banks on their loan book 4. Given the analysis conducted on the received loan books and a small sample portfolio, we estimate that it is possible to build a diversified portfolio that would have an average interest rate of 12% per year, based on 2016 conditions. Loan types QP2PL will invest in several types of loans to private and MSME (Micro, Small and Medium Enterprises) borrowers. We believe that lending to MSME companies will experience rapid growth in the coming years and might soon be larger than loans to private individuals. QP2PL can invest in normal business loans, mortgage loans and factoring. In lending to private individuals, QP2PL will be active in mortgage loans, car loan and normal consumer loans. QP2PL will NOT invest in pay-day loans or loans issued by institutions with payday loans as collateral. We find this sort of lending unethical and do not wish to be associated with this type of lending. 4 Deutsche Bundesbank: Discussion Paper No 30/2016: How do P2P Lending Fit Into the Consumer Credit Market.

8 Memorandum on share offering in Quantrom P2P Lending DAC 8 Loan portfolio optimization QP2PL will also be active in optimizing the P2P loan portfolio. Interest rates move, credit spreads likewise. The interest rates of P2P loans change over time as a function of market conditions and default rates. This creates the possibility to optimize the portfolio composition regarding loan type, loan duration and country exposure. Quantrom Limited is continuously optimizing the portfolio. Default and recovery rates The interest rate on P2P loans varies, mainly depending on the probability of default on the loans. The following estimates are related to the market conditions towards the end of In a large diversified portfolio defaults will occur, but the risk is partly or fully offset by higher interest rates. In the base scenario, we estimate that a diversified portfolio will give an average annual interest of 12% in We further estimate, based upon analysis of the received loan books, a default rate of 2.5% per year as of Default rates on loans of lower quality can be higher, but that will be reflected in a higher interest rate. From the analysis of the different loans we have had access to, we conservatively estimate that the recovery rate on defaulted loans will be approximately 60% on average. Loans with collateral, such as car or mortgage loans, are expected to have a higher recovery rate. In our budgeting, we expect that if a loan defaults it does so as soon as it is purchased. This is not very likely, since most P2P loans default between 3 and 24 months into the repayment period. During this period, parts of the loan have already been repaid, lowering the actual outstanding principal and defaulted amount. This is a very conservative approach and the actual losses could be smaller than in our estimations. However, losses will occur in a large portfolio of P2P loans. Loss deduction Losses in a large portfolio of P2P loans will occur on a regular basis. If a private investor invests in P2P loans, there is in many countries a mismatch in the taxation of gains and losses. Capital losses are not deductible from capital 5 It should be noted, that past performance is NO guarantee for future performance

9 Memorandum on share offering in Quantrom P2P Lending DAC 9 gains and therefore have a 100% impact on the return on investment. At the same time capital gains and/or interest income is taxed, creating asymmetric taxation. By investing in a vehicle like QP2PL, losses are deductible in the income statement and therefore offset in interest received. Quantrom P2P Lending DAC Quantrom P2P Lending DAC ( QP2PL ) is a company under establishment in Ireland. A DAC is a Designated Activity Company ( DAC ) under Irish company act of QP2PL is designated to invest and trade in fixed income instruments with a special focus on peer-to-peer lending. QP2PL may invest and trade in the P2P loans according to the statutes of the company. QP2PL may also issue notes to third parties based upon its portfolio of P2P loans. Quantrom P2P Lending DAC is managed by Quantrom Limited, Dublin, incorporated under the laws of Ireland. Nathan Trust, Dublin, has been chosen to act as company secretary and is responsible for the shareholder register. Quantrom P2P Lending DAC flows The following chart illustrates the flows between Investors, Quantrom P2P Lending DAC, the P2P Lending platforms and the role of Quantrom Limited as the manager and advisor.

10 Memorandum on share offering in Quantrom P2P Lending DAC 10 Investors Manager and Advisor: Quantrom Limited, Dublin Ireland P2P Pla4orms Investor 1 Investment in shares Acquiring of P2P loans Bondora Investor 2 Mintos Investor. Quantrom P2P Lending DAC Pla4orm X Investors. Pla4orm Y Investor n Return on investment Interest/Repayment Pla4orm Z Company Secretary and Shareholder register: Nathan Trust Dublin Risks Investing is always related to risk. Shareholders in Quantrom P2P Lending are exposed to a number of risk factors, such as interest rate risk, credit risk, default risk, liquidity risk, currency risk and event risk. Adverse moves can result in the loss of capital. It is important to point out that investments in P2P loans are a long-term commitment and therefore the value of loans will NOT be marked-to-market on each balance sheet day. Interest rate risk The return on a portfolio of P2P loans is affected by the development in the overall interest rates in the economy. Falling interest rates will lower the return on investments in P2P loans, while increases in the interest rate will give a higher return on new investments. Credit risk Credit risk is the risk associated with the development in the spread (difference in interest rate) between a risk-free investment, normally a government bond of high quality, and another fixed income instrument in this case a P2P loan.

11 Memorandum on share offering in Quantrom P2P Lending DAC 11 The higher the spread, the higher the credit risk on a certain instrument. P2P loans are risky and illiquid fixed income instruments and therefore have a high credit risk. In P2P lending, the credit risk is closely related to the default risk on the loan portfolio. Default risk Default is a major risk factor in P2P lending. When investing in P2P lending, the buyer of the loans makes a commitment for the entire duration for the loan. While a secondary market exists, the liquidity is rather low, please see Liquidity risk. On a P2P loan there is a default risk throughout the entire lifetime of the loan. Borrowers are usually not of the highest quality and defaults will occur in a large portfolio of P2P loans. When a default occurs on a loan in the portfolio, it will have an adverse effect on the value of shares in Quantrom P2P Lending DAC. Liquidity risk When investing in P2P loans, the investor commits to a long-term obligation. For P2P loans, there is NOT a market place, like a stock exchange, where assets can instantly be bought or sold. A P2P loan is a highly illiquid fixed income instrument and therefore there is a significant liquidity risk associated with such investment. A portfolio of P2P loans cannot be sold easily to a third party in a short time frame. While there are secondary markets, where it is possible to make arbitrage, it is only for smaller amounts and over time. A rapid closure of a portfolio of loans will result in a fall in the value of the shares in QP2PL. Currency risk Quantrom P2P Lending DAC will at the present time only invest in EUR, its functional currency. If QP2PL invests in loans denominated in the other currencies than its functional currency in the future, exchange rate fluctuations can have an adverse effect on the result of the company. If QP2PL in the future decides to invest in non-euro denominated loans the currency exposure will normally be fully hedged.

12 Memorandum on share offering in Quantrom P2P Lending DAC 12 Event risk Event risk, however unlikely, can occur. With investment in EUR denominated loans, one has to take into consideration the possibility of a break-up of the EURO. The P2P loans are denominated in the EUR and should continue to be repaid in EUR. However, it is possible that in an event such as a break-up of the EURO, a government can change the current laws and change the denomination of outstanding private debt into a new local currency. This could have an adverse effect on the result of Quantrom P2P Lending DAC. Risk on shares in Quantrom P2P Lending DAC Given the risk mentioned above, the long-term commitment when investing in the P2P loans and the lack of liquidity when trading P2P loans, shares in Quantrom P2P Lending DAC are by nature illiquid. Therefore, when investing in Quantrom P2P Lending DAC, there is lock in period of 12 months. A shareholder cannot redeem shares in QP2PL the first 12 months after the investment. Furthermore, if a shareholder wants to redeem some or all his shares, the management can restrict the pay out of the redemption to be effectuated over a period of time of up to 12 months in order to avoid an adverse impact on the other shareholders in the Quantrom P2P Lending DAC. Management Company Quantrom P2P Lending DAC is a special purpose vehicle (SPV) that only invests in the P2P lending. Quantrom P2P Lending DAC is managed and promoted by Quantrom Limited. Quantrom Limited is a Dublin-based company established in September 2016 with the purpose of offering financial advice, as well as promoting and initiating SPVs that invest in P2P lending. Quantrom Limited is fully owned by Mr. Gustav Jensen, Belgium. As Quantrom Limited is a small and newly established company it has been agreed with Nathan Trust, Dublin, Ireland, the administrator of Quantrom P2P Lending DAC, that in the unlikely case that Quantrom Limited is no longer capable of conducting the management of Quantrom P2P Lending DAC, they will manage the closing of the Company if that is the decision of the Directors. This will happen according to the instruction set out by Quantrom Limited in the contingency plans of Quantrom P2P Lending DAC.

13 Memorandum on share offering in Quantrom P2P Lending DAC 13 Administration and contingency plans Quantrom P2P Lending DAC has engaged with Nathan Trust, Dublin, Ireland, to handle all administration and accounting of the Company. Nathan Trust is also the company secretary. Furthermore, Nathan Trust will maintain the shareholder register of Quantrom P2P Lending DAC. All issuing and redemption of shares will be handled through Nathan Trust. Finally, Nathan Trust has accepted to act per the contingency plan put forward by Quantrom Ltd in the case that Quantrom Ltd can no longer manage Quantrom P2P Lending DAC. The contingency plan will be carried out according to the Directors of Quantrom P2P Lending DAC decision and instructions. Taxation and Common Reporting Standard Quantrom P2P Lending DAC is taxable under Irish law. The current corporate tax rate in Ireland is 12.5%. The Company will follow all requirements set out in the Common Reporting Standard by OECD and therefore all shareholders must give full disclosure, so the Company can be compliant. Shareholders must provide information such as TIN number (social security number), copy of passport and current utility bill. If this information is not provided, purchase of shares in the Company will not be accepted and funds will be returned. Potential shareholders are recommended to seek advice from their own tax advisors before subscribing to shares in Quantrom P2P Lending DAC. Expected returns and fees In calculating expected returns on the capital in Quantrom P2P Lending DAC, a number of assumptions must be made. From the end of May 2016 until the end of January 2017 a test portfolio has given a return of 7.93%, which equals an annual return of 12.1%. Currently the portfolio is yielding 12.8% per annum. The calculations in Table 1 below are therefore based upon an estimated average interest rate of 12% per year. The loss arising from defaults is estimated to 2.5% of the principal with a recovery percentage of 60%. Cost in Table 1 is related to accounting, administration and legal charges for operating a company in Ireland. Certain costs are fixed and therefore with more assets under management the return on capital increases.

14 Memorandum on share offering in Quantrom P2P Lending DAC 14 Quantrom Ltd is receiving a management fee of 1% of the capital under administration, as well as a performance fee of 10% of the return on capital above 7% or 700 bp. The performance fee is calculated with a high-water mark. The performance fee shall be paid to Quantrom Ltd as a share in the Quantrom P2P Lending with the same restrictions (lock-in period) as other shareholders. Quantrom Ltd can request up to 50% of the performance fee as cash settlement. Table 1 shows the return on capital given these conditions. With total assets under management of EUR the return on capital would be 8,49% per year rising to 8,71 % per year with EUR in assets under management. Returns are calculated after fees and tax. Table 1 Return calculation for total assets under management for Quantrom P2P Lending DAC 6 Return calculations with different levels of capital Amount in EUR Capital Income Interest received Expenditures Cost Management fee Profit before losses Estimated loss Profit before performance fee Performance fee Tax Net Profit after tax and fees Return on capital 8,49% 8,68% 8,71% 8,72% 6 Past performance is NO guarantee for future performance

15 Memorandum on share offering in Quantrom P2P Lending DAC 15 Become shareholder in Quantrom P2P Lending DAC The minimum subscription in Quantrom P2P Lending DAC is EUR. Thereafter, a subscription can be increased by a minimum of EUR. In order to become a shareholder in the Quantrom P2P Lending DAC please fill out the subscripton form on our website. Website: When the form is processed, you will receive an to confirm your subscription request. Instructions for transferring of funds will be included in this . You will have to sign and accept the subscription electronically and transfer the funds before the subscription can be executed. Scanned copies of you passport, ID card and utility bill not older than 3 months have to be upload to the webpage before you can sign the electronic document. Quantrom P2P Lending DAC will only accept transfers from regulated financial institutions. It is possible to subscribe to share in the Quantrom P2P Lending DAC monthly. Subscription requests must be received at least 5 business days before the end of the month and the required funds received at least 5 business days before the end of the month. Subscriptions can be limited, if loan generation is not sufficient. For further information please contact us on the following address: shareregister@quantrom.com Redemption of shares Quantrom P2P Lending DAC For any shareholder there is a lock up period of 12 months. For redemption of shares there is a notice period of one month. Request for redemption of shares shall be submitted at least 5 business days before the end of the month. Payment for the redeemed shares shall follow no later than 5 business days after the end of the following month. Shares will be redeemed at the price of the shares at the end of the following month. Quantrom P2P Lending DAC shall try to redeem the total amount of shares at the end of the month. However, the management company Quantrom Limited can decide to redeem the shares over a period of up to 12 months, if one or more redemption is having an adverse impact Quantrom P2P Lending DAC.

16 Memorandum on share offering in Quantrom P2P Lending DAC 16 Under special circumstances the Directors of Quantrom P2P Lending DAC can suspend redemption of shares for a period of up to 12 months if market conditions are such that liquidation of positions in the P2P loan market will cause a significant loss of capital. Please fill out the Redemption form on our website. Website: For further information please contact us on the following address: shareregister@quantrom.com Extraordinary redemption of shares Quantrom P2P Lending DAC A shareholder in the Quantrom P2P Lending DAC can request an extraordinary redemption of shares. Quantrom P2P Lending DAC is not obliged to fulfil such a request but can accept to do so. If the request is accepted, then 10% of the value of the shares will be deducted from the total value of the redemption. The remaining amount will be transferred to the account of the shareholder within 5 banking days. Contact information For further information please contact: Quantrom Limited Exchange Place 10/11, I.F.S.C. Dublin 1, Ireland Phone qmm@quantrom.com

17 Memorandum on share offering in Quantrom P2P Lending DAC 17 Appendix 1: Loan type per country Country Mortgage Loan Car Loan Personal Loan Business Loan Invoice Financing On Selected platforms: Bulgaria X Czech Republic X X Estonia X X X X Finland X Latvia X X X X X Lithuania X X X X X Poland X X Spain X On platforms under investigation: Germany X X The Netherlands X X