Weekly Industry Update: SEC Focus on Capital Formation & Enforcement, and What it Means for Direct Lending
By Vy Phan
July 24, 2017
- Retail investors may have greater access to alternative investments typically reserved for accredited investors. For instance, Piwowar questioned the premise of a distinction between accredited vs. non-accredited investors.
- Small businesses may see a reduction in disclosure obligations to encourage small businesses to tap the public capital markets. SEC Chair Clayton identified the reduction of US IPOs (in the wake of SOX and post-Enron regulations) as a serious issue.
- ABS investors may have a reduction in the disclosure and liability requirements for publicly registered securitizations. ABS issuance has shifted to Rule 144A private placements – in fact 100% of deals in the marketplace lending market are privately placed – in part, due to the higher disclosure and attestation burdens for public deals.
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Below we share below our principles for valuation:
Direct lending offers an incredible opportunity for investors to achieve their return objectives in a low-rate environment. At the same time, the low liquidity in direct lending exposes the asset class to heightened risks – particularly in valuation and performance presentation.
Investment managers and LPs should demand a higher standard of rigor to promote the responsible growth of this new asset class. Feel free to reach out to PeerIQ to learn more about our valuation methodologies.
Industry Update:
- Transparency: A well-documented valuation methodology, with clear exposition of prepayment, default, credit spread, and other assumptions.
- Auditable: A repeatable and testable valuation framework.
- Fair value: Fair value based on a consistent modeling framework that factors in both unobservable and observable valuation inputs from similar assets or adjacent capital markets.
- Accounts for major risk factors: The pricing framework accounts for risk factors including default risk, prepayment risk, and credit spread risk.
- Forward looking: Loan valuations must be driven off of expected future cashflows, where cashflows are a function of the borrower’s current credit attributes, macro conditions, payment performance, and seasoning.
- Loan-level: The pricing framework operates on a loan-level to address granularity in credit risk of loan rather than coarse replines.
- U.S. Banking Regulator Supports Giving National Licenses to Financial-Technology Firms (WSJ, 7/19/17) The Trump administration supports giving national banking licenses to firms in the emerging financial-technology industry.
- SoFi's Bank Bid Faces Uphill Battle as Opponents Unite (American Banker, 7/19/17) In contrast with comments that Acting Comptroller Keith Noreika made Wednesday at the Exchequer Club in Washington, SoFi received negative feedback on its charter application from progressive groups and community banks.
- Goldman’s Traders Turn In Worst First Half of Blankfein’s Reign (Bloomberg, 7/18/17) Despite a 10% decline in Goldman Sachs trading, every other major business beat analyst estimates; of note, revenue from the investing and lending segment, rose 42% to $1.58 Bn.
- LendKey Announces Series C Funding (LendKey, 7/20/17 ) LendKey announced $13 Mn in Series C funding, with North Atlantic Capita leading the round and participation from existing investors including DFJ, Updata Partners, Gotham Ventures, and TTV Capital.
- As Paperwork Goes Missing, Private Student Loan Debts May Be Wiped Away (NYTimes, 7/17/17) The National Collegiate Student Loan Trusts is at the center of a wider trend in deeply flawed collection cases, with incomplete ownership records and mass-produced documentation.
- Renaud Laplanche Shares His Vision for Online Lending 2.0 at Lang Di Fintech (Lend Academy, 7/17/17) Renaud Laplanche gave the keynote speech at the Lang Di Fintech Conference, outlining in his Online Lending 2.0 presentation which described the dramatic expansion of data into the underwriting process (specifically location data and free cash flow analysis) and new and better tools available to analyze this data.
- SoFi, Navient Kick Off Second Quarter Student Loan ABS Issuance (Asset Securitization Report) Navient and Social Finance are kicking off what’s expected to be a busy second half for student loan securitization with two deals totaling nearly $1.5 Bn.
- On The Prospects For Higher Economic Growth (John F. Cogan, Glenn Hubbard, John B. Taylor, and Kevin Warsh, 7/17) Hoover and AEI economists release white paper on comprehensive economic policy reforms to achieve 3% growth.
Lighter Fare:
- China Plans to Use AI to Gain Global Dominance by 2030 (MIT Technology Review, 7/23/17). “I, for one, welcome our new AI overlords.”