[Updated 12/2/15 11:09 am. to clarify LGI’s business model.] A Milwaukee-based startup known for lending money to individuals and small businesses made a sale Tuesday. The product? Itself.
Looking Glass Investments (LGI) uses popular peer-to-peer lending websites such as Lending Club (NYSE: [[ticker:LC]]) to find and evaluate loan-seekers. The company sold some of its own shares to Houston-based Main Street Capital Corporation, LGI president and chief operating officer Matthew O’Malley told Xconomy Tuesday.
Main Street (NYSE: [[ticker:MAIN]]), which invests in lower middle and middle market companies, is also an investor in the $6.7 million LGI raised for a new fund, according to a document filed with the SEC Wednesday. The issuer on the filing is LGI Predictive Analytics, which O’Malley says is an LGI-managed entity.
O’Malley declined to share financial terms of the deal beyond saying that Main Street will own a “minority stake” in LGI going forward.
The peer-to-peer lending industry has seen explosive growth in the past decade. O’Malley says two San Francisco-based firms lead the pack: Lending Club, which had a successful IPO in 2014, and Prosper Marketplace, which the Wall Street Journal reported earlier this year was valued at $1.9 billion. However, he says, there are other competing sites, like New York-based Peerform and UK-based Funding Circle.
According to a report prepared by the Federal Reserve Bank of Cleveland last year, since 2007 peer-to-peer lending has grown on average 84 percent a quarter. Most of the loans are used to consolidate credit card debt, which “may be explained by the fact that interest rates on peer-to-peer loans have been lower than those on credit cards since 2010,” according to the report.
LGI does not typically buy loans from Lending Club and its ilk. Instead, LGI deploys its proprietary mathematical algorithms across the lending sites’ platforms and evaluates prospects on hundreds of metrics to forecast which people and businesses have the lowest chances of defaulting. LGI pays loan origination and service fees to the sites, but they’re more or less portals through which LGI vets applications, makes loans, and collects payments and interest.
“We’re not buying the loan,” O’Malley says. “We are the funding source before the loan originates.”
O’Malley says “background firms” like LGI are invisible to loan recipients; as far as they know, the money comes from Lending Club or whichever site they’re using.
LGI is not the only offshoot riding the wave of marketplace lending. For instance, New York-based PeerIQ, which analyzes risk in the market and sells the data it gathers to investors, raised $8.5 in seed funding this year.
O’Malley co-founded LGI in 2006 but says the group did not begin investing until 2012. In its early years, it concentrated mostly on developing sophisticated predictive models, he says. LGI now has about $16 million under management, up from $3.1 million at year-end 2013.
The new capital from Main Street will support research and development of LGI’s underwriting technology and data management tools, according to a press release announcing the deal.
“It’s continued development,” O’Malley says. “We have a great deal of time and money invested in the technology at this point. It’s an ongoing cost and it’s part of what we do.”
Some of the latest financing may also go toward adding personnel. O’Malley says the startup currently has two full-time employees and about a dozen consultants, all of whom are also shareholders. He says there are plans to hire one more full-time staffer by next March. “There’s no question that as we continue to grow, we’ll continue to bring on additional assistance,” he says.
