Perfect timing on both sides led to Brian Weinstein becoming Managing Partner for Blue Elephant Capital Management (BE).
Earlier this summer, Mr. Weinstein decided to leave BlackRock after 16 years to search for new opportunities, but that is not what brought him to BE.
“I knew (fellow BE Managing Partner) J.P. Marra for 15 years and his brother for 20,” Mr. Weinstein said. “I went to invest.”
While discussing investments, Mr. Weinstein was asked if he would be interested in joining BE.
“I am entrepreneurial and this fit well. It is a great opportunity.”
With BlackRock, Mr. Weinstein supervised 40 investors managing more than $300 billion in assets across short duration, financial institutions and multi-sector fixed-income portfolios.
While BE’s numbers are not yet in the billions, they do have a stated goal of having more than $300 million invested with six online lending platforms by the end of 2015, aggressive growth aims for a company with $50 million currently under management.
Three of those six companies are Prosper, Funding Circle and New Zealand-based Harmoney. The others will be announced early next year, and it is a good bet they will have an international flavor.
“There will be some announcements (in 2015) and we are working on companies in certain countries right now,” Mr. Weinstein offered. “The capital is close on one or two partners. We are trying to rotate in quality and geography.”
What will not change are the standards by which Blue Elephant vets potential partners.
“We get calls from lenders who want to capture valuations but who are less good at underwriting,” Mr. Weinstein said.
“We vetted 50 companies to get to six. We say no to some because their space looks too crowded,” he added. “In those cases it becomes a question of who will survive.”
Even as consolidation occurs, that does not necessarily mean the remaining players will get complacent, Mr. Weinstein believes.
Plus there will always be room for smaller entities, and those are the ones who will fuel future innovation in the space.
“Any large institution won’t move the needle,” Mr. Weinstein explained. “The big guys assume they can find a way in later.”
That way is often by purchasing a company doing novel things in the space, whose existence depends on carving out a unique niche in the marketplace, a path many giants find too risky to do on their own.
Look for Blue Elephant to, yes, grow but to also stay at a size which allows them to quickly adjust to new realities.
“We want to be small and nimble, to be able to get out of things that do not make sense,” Mr. Weinstein explained.
The many different global financial systems make it hard to operate internationally, so companies wishing to expand outside their borders should consider a select few in this environment, Mr. Weinstein advised.
“There’s not 40 countries out there where you can easily go in. Even Western Europe is hard.” New Zealand, Australia, The United Kingdom and Canada are four places which make sense, he added.
Shortly after Mr. Weinstein joined BE this summer, they unveiled their Offshore Consumer Fund. Early returns are positive.
“People love it. It provides good returns and does well in stress tests.”
Because it feeds into the main fund, it is a good way for new investors to access the markets, he added.
We are currently in a spot in the Presidential Cycle which historically leads to good returns in the ensuing quarters. Will we see a repeat this time?
“I am not sure, it will be interesting to watch,” Mr. Weinstein said.
Events outside our borders will have a big say, he expects.
“The ECB (European Central Bank) is nearing a point where they have to ask tough questions like what will the world look like, when banks have done all they can.”
The Bank of Japan’s surprise QE announcement will also have some influence.
One event that should not affect the markets are the midterm elections.
“I don’t think the markets will react strongly either way,” Weinstein said.
Like most people in P2P, Mr. Weinstein sees the upcoming lending Club IPO as nothing but positive.
“Most people have no idea what is going on in peer-to-peer lending, so this is great publicity,” he noted.
“Lending Club was very smart. they put their data out there so people could learn about them. Being publicly regulated and registered helps transparency. They will now have additional capital with which to innovate.”
Blue Elephant has recently said they expect some peer-to-peer yields to drop by up to 125 points.
“We are in a no default world with a huge demand for income where no one is moving money,” Mr. Weinstein observed. “Yields compress which forces people to become more aggressive in their search.”
Blue Elephant specifically targets lower-yielding but higher-quality paper.
“Being conservative will pay,” Mr. Weinstein said. “Even in 2008 stress test data revealed default rates did not move much (from better economic times). We were still getting good yields.”
When it soon comes time to reinvest a large part of the portfolio, Mr. Weinstein is not looking to capitalize on a large growth opportunity.
“The growth cycle is in its later stages. Take the yield where you can.”
Posting 10-12 per cent returns a year from now should keep most investors happy, Mr. Weinstein expects.
“That’s a good return for a lower risk situation. It often isn’t worth it to chase a couple of extra percentage points.”