Israelis looking for an alternative investment have an unusual and profitable option – making loans to Americans on online peer-to-peer platforms.
Three such funds, operated by the Investment houses IBI, Halman Aldubi and Meitav Dash, have a combined lending portfolio of 2.2 billion shekels ($640 million) and last year generated returns of between 5.4% and 6%. IBI pioneered the sector; its IBI Consumer Credit Fund launched six years ago has been generating returns of 5% to 8% annually.
The funds raise money from local investors, either institutions or private investors, and buy loans from U.S. online consumer lenders like Lending Club, Prosper Marketplace and Upstart. The IBI, Halman Aldubi and Meitav Dash funds offer Israelis a bridge to the U.S. market, which is not very accessible to them.
The work of assessing credit worthiness for borrowers for things like home renovations or college tuition lies with the U.S. companies – all the Israeli funds do is buy existing loans and collect the interest.
P2P lending has taken off over the last decade thanks to record low interest rates in the conventional markets and a lingering distrust of banks following the 2008 global financial crisis. Advances in fintech have made it easier to match borrowers and lenders. P2P platforms have lower costs but are subject to less financial regulation than banks.
Of course, P2P funds carry risks. The high returns indicate that their loan portfolios are relatively risky and their dollar loans expose investors to exchange rate risk.
Also, P2P lending hasn’t been around long enough for platforms to establish much of a track record, certainly not one that includes their ability to manage an economic downturn where default rates start rising sharply. All the Israeli funds have rules preventing investors from pulling out their money unless the funds’ liquidity position allow it; that is, until enough loans are coming due that they have the cash.
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Still, Noam Bracha, who heads Halman Aldubi’s fund management unit, said there are several advantages to investing in funds like his as against directly in a P2P lender in Israel like Tarya, Blender, BTB and Credit Plus.
One is that investors join a managed portfolio of loans that reduces the risk; they don’t have to wait to be matched up with a borrower, which can take weeks.
“The U.S. consumer credit market is the most developed in the world, which gives it a big advantage over local platforms, which only began operating in 2015,” Bracha said. In Israel, banks are granting loans at almost zero interest rates, making it hard for P2P platforms to compete, he added.
The U.S. market is subject to strong regulations, consumer lending is transparent and credit scoring is very sophisticated
Still, the strong shekel weighed on this sector last year; the funds are investing in dollar loans and the greenback lost nearly 8% versus the shekel. Thus the Israeli P2P funds’ returns of between 5% and 6% were less than the 8.6% rise in the Tel Aviv Stock Exchange’s Tel-Bond index. Also, lending rates have fallen amid stiff competition for borrowers.
But the previous year, the funds’ averaged a 6% return while the bond indexes in Israel and overseas fell between 5% and 8.7%. But with bond markets at record highs, the next few years are likely to see prices falling and investors seeking alternative investments.
Amir Golan, managing partner at IBI Consumer Credit Fund, or IBI CCF, said the advantage of P2P funds is to be a reliable component of an investment portfolio.
“While the capital market in 2019 enjoyed unusually sharp rises, the funds did exactly what they were supposed to do: To be disconnected from market performance for better or worse,” he said. “P2P funds are very steady performers.”
Last year, the Meitav Dash P2P fund was the top performer with a 6% return. It was formed three years ago and today has a loan portfolio of $100 million. It relies on a system developed by the Israeli startup Pagaya that uses big data to assess credit risk. Since its launch in May 2017 it has generated a dollar return of 20%.
Its returns are high compared to its rivals because it holds riskier loans: Its FICO risk assessment score is 690 versus as much as 850 for the two others. Higher-risk borrowers pay higher interest.
Meitav Dash is only open to institutional investors and any so-called qualified investor – an individual with at least 8 million shekels of financial assets and/or a minimum annual income of 1.2 million. The minimum amount that can be invested in the fund is 250,000 shekels for at least one year and only with a 90-day withdrawal notification. There’s also a 1% management fee and a 15% success fee.
IBI CCF isn’t only the oldest, it's also the biggest in the sector. It generated a 5.7% return last year and 45% all told since it was formed in March 2014. Unlike the other two, IBI CCF is a leveraged fund. Its investors include insurance companies like Harel and Menora as well as 40 kibbutzim and more than 20 investment funds.
Qualified investors must keep their money in at least 18 months or pay a 5% early-withdrawal charge. There’s also a 1% management fee and an 11.8% success fee.
Halman Aldubi’s fund has been growing the fastest. It raised $90 million last year to a total of $175 million, without any leveraging. Its portfolio at the end of 2019 contained about 14,000 loans with an average term of 1.7 years. Since it was formed in July 2017, it has generated a dollar return of 17%.
Unlike IBI and Meitav Dash, the Halman Aldubi fund is open to the general public. Still, the minimum investment is $50,000 and investors must keep their money in for at least nine months, with a 90-day withdrawal notification. Management fees range from 0.1% to 1% and the success fee is lower at between 10% and 12.5%.