When a company more than doubles its annual loan target in half the expected time it is safe to say they enter the new year on a roll.
Such is the case with Asset Avenue, an online peer-to-peer lending platform with a focus on commercial real estate.
Matching property owners and brokers’ need for quick capital with investors looking for fixed-income streams in real estate, Asset Avenue provides loans ranging between $100,000 and $20 million while offering investor access starting at $5,000.
Asset Avenue CEO David Manshoory recently spoke with Bankless Times about their great finish in 2014 and what could lie ahead in 2015.
“We blew past our second half target,” Mr. Manshoory acknowledged, while observing that the path Asset Avenue took to reach that level was similar to what other platforms experienced as real estate peer-to-peer lending evolved throughout 2014.
“A lot of people see crowdfunding platforms focused more on the investor side but in reality you have a borrower at the end of the day that needs to get funded,” Mr. Manshoory explained. “Especially in real estate people want to get funded as quickly as possible as there is a time sensitive issue around the asset and needing to close escrow.”
Partnerships forged with several institutional investors enabled Asset Avenue to grow at such a rapid pace.
“Last fourth quarter we had a handful of institutional investors across hedge funds, family offices and asset management companies start funding the loans on our platform and they are usually the much larger loans,” Mr. Manshoory said.
“In order to lend some of these larger amounts you need institutional investors that have much more capital to invest to fund these loans very quickly.”
Institutional loans average $4 million Mr. Manshoory said. When it comes to individual institutional preferences, they are as varied as the institutions themselves.
“We have institutions with completely different appetites across the spectrum in terms of return, geography, property type, loan amount, and also risk appetite. Some institutional investors participate in our whole loan program which means one investor per loan. They want to hold the entire loan on their balance sheet they don’t want to co-mingle with other investors.”
“One investor doesn’t want to look at anything under 10 million. They are a multi-billion-dollar asset management company and that is when it makes sense for them to start playing, they want to fund big deals. Others will say up to $10 million. There’s a lot of opportunity for a lot of institutional investors to participate where’s there simply no crossover for deals coming in.”
While institutional investments are the most efficient way to quickly grow the pool of capital, there are additional methods Asset Avenue is looking at, though the success they are enjoying attracting institutions means those other avenues are less of a priority for now, Mr. Manshoory offered.
“There are nine million accredited investors in United States, but the definition of accreditation only applies to you if you are a U.S. citizen. So if you’re a foreign investor there are fewer limitations from an SEC standpoint. Then it really becomes focusing on the regulations from the actual country the investor is pulling their money out of.”
“They are solvable if you really want to do it en masse. It is something we are looking at with a few target countries but it’s something we haven’t needed to push yet because there’s a lot of appetite from the institutional investor to fund a lot of deals.”
Asset Avenue debuted in the sphere after several other platforms, and in spite of the number of competitors, many are skewered to one side of the field.
“When we started most platforms were focused heavily on raising equity financing for real estate companies that needed help raising a portion of the equity down payment on a property,” Mr. Manshoory said. “Even now after more than a year we still see new platforms coming up, the majority of which are focused on equity. We decided to focus exclusively on lending and providing debt financing.”
Big shift coming
Don’t be surprised to see some of those equity-based platforms either shift their focus to debt or suffer through a lean period, Mr. Manshoory said. That will be one of the developments in 2015.
“You are going to see a big shift in terms of the actual capital dollars swinging into debt platforms more than equity platforms. The reason is because it is really difficult to get institutional capital to fund minority interests in equity deals in real estate.”
“The equity is more of a play surely for accredited investors and some platforms are focused on unaccredited investors and that makes sense. It just makes it difficult to hit large numbers and to serve a large enough subset of those who are seeking financing. You’re limited to accredited and unaccredited investors and by nature they don’t have the same type of capital as institutional investors. You have to turn down a lot of deals because it is a good one and you just don’t have enough money to put into the deal from your investors.”
Take the quick access to plenty of capital available from a group looking to invest and it only makes sense to go in their preferred direction, Mr. Manshoory said.
“Institutions love debt and it makes sense to them for a lot of reasons. That is why were were able to do more than $22 million in the fourth quarter, which was massive for only our second full quarter in business.”
Another reason for David Manshoory’s optimism is Asset Avenue’s expansion into more states in 2014. After beginning in California, Asset Avenue added New York, Texas, Florida, Illinois and Oregon to their list.
“Our company focuses on lending in primary and secondary markets in the most stable areas of the country and we want to lend in cities and communities investors want to lend in,” Mr. Manshoory explained.
Filling a void
Whether it be in the northwest of the southeast, there’s a similar void Asset Avenue seeks to fill, Mr. Manshoory said.
“On a national level there’s a real opportunity to serve what we believe is an under-served part of the market which is the small balance commercial real estate investment community, the borrower who needs up to $20 million and who has a real difficult time receiving financing in what should really be a smooth process.”
In this era of readily available technology, traditional lenders, with complacency built up through decades of limited competition, have opened the door for disruptors with a much greater understanding of how technology can simplify a lending process which is anything but simple.
“It’s really a friction-based, non-transparent, high-paperwork process,” Mr. Manshoory observed. “That is annoying for anyone looking for a loan, especially for those doing it every day, so by offering a better way Asset Avenue has attracted brokers who appreciate a more efficient way of obtaining financing.”
From the beginning Asset Avenue made their hay by providing an easier, quicker, and more efficient lending process. While the concept itself was conducive to a better experience, Asset Avenue is in a constant process of streamlining and improving their data analysis, Mr. Manshoory said.
“We have already invested a lot in technology. I don’t think you ever reach a point where you hit a plateau and you just stop. You’re constantly investing in your technology and pushing the envelope to boundaries no one ever thought possible.”
“We’re merging a lot of publicly available data over the internet to make better decisions in our underwriting process to assess the quality of loan and price a loan very quickly.”
“Next year tech developments which will evolve a very human-based, paper based, potentially antiquated underwriting model that really hasn’t evolved over the last few decades into one that is very technology driven and data driven.”
“We will be able to better underwrite and better price a loan, with data points that have never been leveraged by the lending community. That will build a lot of confidence in our investors that we are building a next generation pricing model that’s never been provided before, one that will allow us to respond more quickly to borrowers and brokers more quickly about what we are able to offer them.”
As their data analytics capability evolves, Asset Avenue is confident they will be able to do an even better job of serving those brokers partially responsible for the company’s growth.
“Brokers really love us because prior to Asset Avenue they had to go to three or four lenders in their community and try to get financing for their borrower. That’s three to four applications, processes, and lenders with different requirements and restrictions. There is not a lot of certainty.”
“Brokers do a really great job of knowing the investors in their community that need to seek financing on a repeat basis every year because they are actively investing in their backyard. And they need the types of loans we provide.”
In contrast to traditional lenders who seemingly lock the doors when John and Jane Smallbiz come a-knocking, brokers and individuals tend to have a different experience with a platform with the singular focus of actually lending money.
“We’re only really limited to lending relative to what our investor wants,” Mr. Manshoory explained. “Because we have so much capital right now we have the ability to say yes to a lot of loans.”
As the American economy regains its health the time for the first interest rate hike draws near, and David Manshoory is watching like everyone else, because it will affect his business to a point.
“In a rising interest rate market our rates are going to have to move north just like everyone else, but we’ll always be competitive and in line with market loans.”
Investors will not be affected as much, however.
“With investors there’s not a lot of duration risk because these are short-term loans between six months and three years with a sweet spot of one to two years. Investors appreciate they can turn over their money very quickly.”
This early in alternative finance’s evolution, platforms with distinct differences tend to get lumped together under the same umbrella. Mr. Manshoory is not surprised by that but one gets the sense he would not be upset by a wider understanding of the differences between the different sectors.
“We think there’s big difference between companies who are raising equity financing and those who are providing debt financing. Fortunately or unfortunately everybody’s called a crowdfunding platform when in reality as a pure debt platform we are really emulating the business model of other companies who are lending in other asset classes like the Lending Clubs, Prospers, Sofis and OnDecks.”
“You also behave differently as a company internally when you are purely focused on becoming a lending company versus raising equity capital for third parties.”
Those industry pioneers learned on the move, and Mr. Manshoory respects them for it, because he learned from watching them and applied those lessons to Asset Avenue’s business model.
“As a lending company we definitely benefit from coming in as a real estate platform behind these other asset classes and other asset platforms. I think it built a lot of credibility and validity on a national and global level that P2P and markeplace lenders are here to stay, are modernizing the industry and are creating a lot of value for everyone in the industry.”
“We get some benefit because if we were trying to do this five or six years ago, we would have been fighting a lot of the uphill battles that maybe Lending Club and Prosper had to do to really prove there is a place for them as an online lending platform.”
More people are hearing about peer-to-peer lending, but the industry is still tasked with educating those less familiar, whether it be investors, politicians or SME’s. Luckily, it is an easy sell, Mr. Manshoory said.
“I think a lot of people here see a light at the end of the tunnel, at least the ones who are familiar with P2P in general. They get it quickly, it takes two minutes to explain it to them. We will grow much more quickly because of it.”
As more people get acclimatized to the process, Mr. Manshoory fully expects many of them to want to get involved.
The introduction of institutional investors now allows Asset Avenue to fund most borrowers meeting their criteria, and it is not unforeseeable to see a complete reversal other sectors have seen where the available investment capital exceeds the demand, leaving platforms to increase their promotional efforts to educate the millions of companies and brokers about the alternative provided by platforms like Asset Avenue.
For now, the sides match up well, Mr. Manshoory said.
“We’re in a position right now where the odds of getting funding are extremely high for most borrowers, assuming they can provide us the information in a timely manner so we can get back to them quickly. We project we will be able to fund 10-15% of loans moving forward.”
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